Law Firm Cannot Claw Back Fees of Departed Partners

A firm cannot seek profits from departed partners for work performed on matters they take with them, according to the court in Diamond, Trustee of Howrey LLP v. Hogan Lovells LLP, et al. There, the court determined that clients have an “almost unfettered right to choose or discharge counsel,” and a partner may take client matters to another firm. This decision highlights an emerging trend that may make departure easier for partners, ABA Litigation Section leaders say.

Bankruptcy Trustee Seeks to Claw Back Departing Partners’ Earnings

After the 2008 financial crisis, the partners of law firm Howrey LLP voted to dissolve and amend its partnership agreement to clarify that Howrey had no claim on any work or clients that had originated prior to the former partners’ departure or the dissolution of the firm, whichever was earlier. The arrangement is commonly known as a “Jewel waiver,” named for Jewel v. Boxer, a California decision which held that income generated by partners winding up unfinished cases should be allocated to the former partners unless otherwise decided by the partnership. Jewel also gave rise to the “unfinished business doctrine,” which holds that a dissolved partnership continues to exist until the “winding up” of its unfinished business is completed.

In 2013, the bankruptcy trustee for Howrey’s estate sued eight law firms that had hired former partners in the U.S. Bankruptcy Court for the Northern District of California. The trustee sought profits from client matters that had originated at Howrey, contending that the Jewel waiver constituted a fraudulent transfer of firm assets. The bankruptcy court denied the law firms’ motions to dismiss, holding that under District of Columbia law, which governed the partnership agreement, “new retention agreements” signed by former clients did not preclude enforcement of the unfinished business doctrine.