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.
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.
The U.S. District Court for the Northern District of California reversed, holding that “a law firm does not own new client matters taken on by other firms.” The trustee appealed to the U.S. Court of Appeals for the Ninth Circuit, which concluded that the case turned on questions of D.C. partnership law, and certified several questions to the District of Columbia Court of Appeals, the territory’s highest court.
D.C.’s high court concluded that a law firm has no property interest in hourly-billed client matters because clients have the right to control their own representation. Though a departing partner owes a duty of loyalty to account for fees from hourly-billed work performed prior to leaving a firm, he or she is not required to remit profits earned on those matters following departure. The court noted that fees for contingency matters might merit different treatment because those fees are not paid until a settlement or judgment is reached.
In so holding, the court relied on D.C. partnership law, and decisions from the Court of Appeals of New York and the Supreme Court of California which concluded that hourly-billed matters were not the property of the law firm because only clients own their legal matters. It also cited two decisions by the D.C. Legal Ethics Committee that similarly found that “the clients do not belong either to the law firm or its members,” and that it is the client’s decision “whether it wants to continue the representation by the departing lawyer.”
Litigation Section leaders believe Howrey may affect a partner’s decision to leave a law firm. “This decision should make it easier for lawyers to switch firms without fearing disputes with their previous firm regarding fees,” notes Merri A. Baldwin, San Francisco, CA, cochair of the Attorney Liability Subcommittee of the Section’s Professional Liability Litigation Committee.
“The decision provides comfort to lawyers considering moving to a new law firm,” agrees Kevin J. McEleney, Hartford, CT, cochair of the Bankruptcy and Creditors Rights Litigation Subcommittee of the Section’s Commercial & Business Litigation Committee. “This case is important because now, courts in three large legal markets—New York, California, and the District of Columbia—have reached the same conclusion,” he continues. “It’s a well-reasoned opinion that is consistent with the Rules of Professional Conduct,” he adds. “This is a good capper to a series of cases that in my view held the right way. Now, the weight of authority is even more clear,” Baldwin notes.
At least one case appears to depart from the trend, notes Laura K. Lin, San Francisco, CA, cochair of the Section’s Ethics & Professionalism Committee. In LaFond v. Sweeney, the Colorado Supreme Court considered issued a quantum meruit judgment in favor of the dissolved firm in an analogous situation. “While LaFond is arguably distinguishable on the grounds that it involved contingency fees,” Lin explains, “the court doesn’t appear to have viewed the payment structure as a decisive factor. And because partnership is an issue covered by state statute, courts in different jurisdictions may reach different conclusions.”
Other Section leaders believe the distinction is clear. “It’s important to remember that hourly billed matters are viewed very differently from contingency cases,” opines Siobhan Briley, Coralville, IA, cochair of the Bankruptcy and Creditors Rights Litigation Subcommittee of the Section’s Commercial & Business Litigation Committee. Baldwin agrees. “The unfinished business doctrine is alive and well when it comes to contingency fee cases,” she says.
Lin sees some practical implications for attorneys. “First, attorneys should focus on timely billing, to clarify what work was done pre- and post-departure,” she advises. “Second, they should be certain to sign a new engagement letter with the client at the new firm. This is strictly required under the D.C. Circuit’s approach, but good practice nonetheless.”
“Firms should make sure their partnership agreement is clear about the distribution of earned fees among the partners,” Briley adds. “And every firm should have a Jewel waiver to clarify this issue in advance of dissolution, should the partners vote to dissolve.”
