Succession Planning and Ethics Issues

We attorneys are a privileged bunch, holding a special position at the intersection of public service as stewards of the legal system as well as well-remunerated private enterprises. The flip side is that we are self-governed by our rules of professional conduct, which affect every aspect of our practice, even how we wind down our careers. How do you leave your law firm while keeping your clients? How do you merge with another firm? How do you wind down your practice? This article is intended to highlight some of the key ethics issues as you consider your succession planning.

The Golden Rule of any succession plan is that you must treat your clients fairly. In the words of Comment [1] to American Bar Association (ABA) Model Rule of Professional Conduct 1.17, “Clients are not commodities that can be purchased and sold at will.” As we dig into the ethics of succession planning, this principle can be found at the heart of each ethics rule. Because this article is intended for a readership spanning every jurisdiction, it will cite to the ABA Model Rules of Professional Conduct (Model Rules). In undertaking your own planning succession, you should consult your jurisdiction’s rules of professional conduct as well as the local case law, as they may deviate from the Model Rules or the examples in this article.

Departing Your Current Firm for Another Firm

Maybe you have been practicing at an intense level for decades, and your firm is now run by a new generation of ambitious, driven partners. But you would like to slow down and enjoy life more, and you have found another firm that will provide a more balanced lifestyle approach to practice, or you’ve decided to set up your own shop where you will slow down. How do you ethically leave your firm?

You need to look to your jurisdiction for case law on your obligations to your clients and partners when you depart your current firm. In Massachusetts, for example, Meehan v. Shaughnessey, 404 Mass. 419 (1989), is the governing decision. Meehan stands for two propositions: (1) you must treat your clients fairly, and (2) you must treat your partners fairly.

What obligations do you owe to your current firm? According to Meehan, a departing attorney owes her current firm a fiduciary duty so that she cannot do anything that harms the firm or her partners. While the departing lawyer can take steps to set up a new firm and the departure, she cannot lie or make misrepresentations to partners if asked direct questions, nor can she withhold information about her departure. She certainly cannot unilaterally contact clients to set up her departure or steer the firm’s work to herself or other departing attorneys. The departing attorney is not, however, required to take affirmative steps to warn her partners of her imminent departure.

What can you disclose to the new firm prior to moving your practice? In terms of disclosures to an attorney’s new firm, under Model Rule 1.6(b)(7), an attorney may disclose enough information to his new firm for conflicts checks. The Rule provides:

(b) A lawyer may reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary:

. . . .

(7) to detect and resolve conflicts of interest arising from the lawyer’s change of employment or from changes in the composition or ownership of a firm, but only if the revealed information would not compromise the attorney-client privilege or otherwise prejudice the client.

There are limits. These limited disclosures can occur only after there have been substantive discussions between an attorney and a prospective firm. For detailed disclosures, the attorney must first secure the client’s consent. Moreover, the attorney cannot compromise the attorney-client privilege and cannot prejudice the client’s interests by disclosure. An example is a divorce attorney retained by a prominent public figure, where the fact of the engagement—not even any attorney-client communications—can become grist for the media mill if disclosed.

How do you disclose the departure to your clients? In Massachusetts, a joint letter is required under Meehan to ensure fairness to both clients and soon-to-be former partners. The letter should inform the client of the departure, provide contact information, inform the client that they have a choice of counsel, and avoid urging the client to stay or leave. The letter certainly should not disparage either the departing attorney or the firms involved. Then it is a race to the phones straight out of the movie Jerry Maguire.

ABA Formal Opinion 489 (Dec. 4, 2019) addresses this issue a little differently. While it urges a departing attorney to work with the firm to issue a joint letter to clients, if agreement cannot be reached, a departing attorney can unilaterally move forward with notifying clients of departure. Indeed, if the departing lawyer wants to play hardball, he can simultaneously inform clients and the firm of his departure:

Under the Model Rules, departing lawyers need not wait to inform clients of the fact of their impending departure, provided that the firm is informed contemporaneously.

You can imagine the chaos that ensues thereafter. Each state, however, has its own approach. Massachusetts, for example, has not adopted the approach articulated in Formal Opinion 489.

To whom do you send the letter? An interesting question is to whom a departing attorney and firm sends the letter. According to the ABA Standing Committee on Ethics and Professional Responsibility, in Informal Opinion 1457 (Apr. 29, 1980), letters go to clients with whom the departing attorney had an active relationship for open matters and where the attorney had direct professional responsibility to the client before the attorney’s departure.

As clients decide whether to stay with the original firm or follow the departing attorney, the best practice is to send new or confirmatory engagement letters, especially for contingency fee matters. Departures are not the time for a departing attorney to solicit firm clients that the lawyer has not previously worked with.

Selling or Merging Your Practice

Maybe you are a solo practitioner, or you are the sole business generator at your small firm, so you are not as much leaving your firm as you are thinking about how to effectively sell your practice to another firm. The business structure of such a deal would be the topic of another article, but there are ethical considerations for selling or merging your firm with another.

Any attorney contemplating retirement or a wind-down of her practice should consider selling the practice. This can be achieved through an outright sale or through a merger. Model Rule 1.17 (Sale of Law Practice) governs the sale of a practice. It is lengthy, so, in summary, the rule requires that: the seller stops private practice or stops practicing in the geographical area; the entire practice, or the entire area of practice, is sold to one or more lawyers or firms; and the seller gives written notice to each of the seller’s clients regarding the proposed sale, the client’s right to retain other counsel or to take possession of the file, and the fact that the client’s consent to the transfer will be presumed if there is no objection within 90 days. Model Rule 1.17(d) states that fees cannot be increased per se.

Based on my discussions with consultants, however, it appears that attorneys rarely undertake the sale of a practice under Model Rule 1.17 because a merger is an alternative and less burdensome way of structuring the deal. First, the seller is permitted to continue practicing, though under the new firm post-merger. Second, the tone of the letter to clients is different. In a merger, Model Rule 1.4 certainly requires the disclosure and explanation of the change in firm name/address. But the requirement of neutrally reminding clients of their choice of counsel is not required under Model Rule 1.17 because it is not the sale of a firm, nor do the Meehan-type requirements apply because the attorney is not leaving the firm. Note that the Model Rule 1.6 limitations to conflicts disclosures as discussed above also apply in the context of a merger.

Retiring/Winding Down

You are now ready to retire and head off into the sunset. This does not mean the end of your income stream. Model Rule 1.5 applies in all fee-sharing situations. So long as notice has been given to the client, the client gives permission, and the total fee is reasonable, then separation or retirement agreements are permitted. Comment [8] (Division of Fee) to Model Rule 1.5 states that:

[8] Paragraph (e) does not prohibit or regulate division of fees to be received in the future for work done when lawyers were previously associated in a law firm.

Some jurisdictions have incorporated this comment into the body of the rule, such as in Massachusetts Rule 1.5(e):

A division of a fee (including a referral fee) between lawyers who are not in the same firm may be made only if the client is notified before or at the time the client enters into a fee agreement for the matter that a division of fees will be made and consents to the joint participation in writing and the total fee is reasonable. This limitation does not prohibit payment to a former partner or associate pursuant to a separation or retirement agreement. (Emphasis added.)

Payments can continue even after an attorney has passed away. Model Rule 5.4(a) provides that a lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(1) an agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer’s death, to the lawyer’s estate or to one or more specified persons.

One important concept is that when you give up your license to practice in connection with retirement, you are now considered a “nonlawyer,” so a different set of rules applies with respect to fee sharing. A retired attorney can share fees for existing work but probably cannot share fees for new work that comes into the firm after his retirement. You could, however, try to work out something under Model Rule 5.4(a)(3) for nonlawyer employees if you remain on the payroll after you resign from the bar. Model Rule 5.4(a)(3) provides that:

a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.

Per Model Rule 1.5, you can share fees for existing work at the time that you retire. Accordingly, the best practice is to maintain your bar status even after you stop practicing so you can continue receiving your share of fees for the cases with the firm up to the date of your retirement.

What if a lawyer at the new firm takes your clients? If what you’re selling is not only yourself but also your book of business, how do you keep it from being eroded by attorneys departing from the new firm? With great difficulty. Model Rule 5.6 provides:

A lawyer shall not participate in offering or making:

(a) a partnership, . . . employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement. . . .

Simply put, a firm cannot restrict attorneys from taking clients with them because the rules exist primarily to protect the interests of clients, not lawyers. Accordingly, a retired or retiring attorney is vulnerable to losing clients and matters because she is winding down her practice. So, the better practice is to continue your practice for a while after a merger and think ahead—cement the relationship with the new firm and secure credit for the originations.

Conclusion

When you undertake your succession planning, remember the Golden Rule: You must treat clients fairly. After all, “clients are not commodities that can be purchased and sold at will.”