Selling a Law Practice Under ABA Model Rule 1.17

Vol. 2 Issue 2

By

Michael Downey is an attorney at Downey Law Group LLC, a law firm devoted to legal ethics. 

Photo of Michael DowneyIf you are considering leaving the practice of law, or if you are just tired of a particular type of practice, you may want to sell some or all of your law practice.

Many lawyers sell their practice under the framework established by ABA Model Rule of Professional Conduct 1.17, a special rule designed specifically to facilitate law firm sales.

Rule 1.17 states:

A lawyer or a law firm may sell or purchase a law practice, or an area of law practice, including good will, if the following conditions are satisfied:

(a) The seller ceases to engage in the private practice of law, or in the area of practice that has been sold, [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the practice has been conducted;

(b) The entire practice, or the entire area of practice, is sold to one or more lawyers or law firms;

(c) The seller gives written notice to each of the seller's clients regarding:

  1. the proposed sale;
  2. the client's right to retain other counsel or to take possession of the file; and
  3. the fact that the client's consent to the transfer of the client's files will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.

If a client cannot be given notice, the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction. The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.

(d) The fees charged clients shall not be increased by reason of the sale.

Read the entire rule

Rule 1.17 does not establish the only method for transferring a law practice for compensation. A lawyer may "sell" a law firm to the lawyers' partners, a method for transferring a law practice that generally falls outside the legal ethics rules. A lawyer may also "sell" a law practice by transferring matters on a case-by-case basis, complying with Rule 1.5(e) to the extent the lawyer wants to share fees with the lawyer taking over the case.

In this article I will not discuss transferring a practice at length, but instead will focus on the requirements as well as practical guidance for selling a law practice under Rule 1.17.

The Requirements of Rule 1.17

Rule 1.17 provides a significant benefit to lawyers looking to buy or sell a practice, because it allows the lawyers to assume they have a client's consent to transfer the client's files, as long as proper notice is given. To effect a Rule 1.17 practice transfer, however, the buyer and seller must satisfy four requirements in Rule 1.17.

First, the seller must sell an intact portion of the law practice to the buyer or buyers. Rule 1.17(a) requires a lawyer to purchase another lawyer's entire practice, or an intact portion of the practice – a particular "area of practice" for all jurisdictions or for a specific jurisdiction.

Thus, if a lawyer practices in multiple jurisdictions, the lawyer may sell one or both practice areas, in one or more jurisdictions. If the selling lawyer practices two areas of law (litigation and corporate law) in two states (State A and State B), the selling lawyer may sell (1) the entire practice (all litigation and corporate work in both State A and State B); (2) the entire practice in a single state (all litigation and corporate work, but only in State A); (3) a single practice area (all litigation) in both states; or (4) a single practice area in a single state (litigation in State A only).

This portion of Rule 1.17(a) is intended to ensure the purchaser does not try to skim off the best clients, and leave the less desirable clients without legal representation.

Second, the seller must cease practice in the area of law sold. Rule 1.17 does not specify how quickly the seller must cease that practice. ABA Formal Ethics Opinion 468 (2014) addresses this omission, explaining, "the transition of pending or active client matters from a selling lawyer or firm to a purchasing lawyer or firm need not be immediate or abrupt. [Rather, a selling lawyer may] for a reasonable period of time after the closing of the sale, [] assist in the transition of active client matters." Such assistance from the seller should help the buyer maximize retention of clients – and thus also maximize the value of the practice being sold.

Rule 1.17 comment [2] notes that an unanticipated return to practice does not necessarily constitute a violation of Rule 1.17. That said, this is a risk the parties should probably address in the documents memorializing the practice sale.

Third, under Rule 1.17(c), the seller must give written notice to the seller's clients of (a) the proposed sale; (b) the client's (continuing) right to choose legal counsel, including a lawyer other than the purchaser; and (c) the fact consent to transfer will be presumed if the client remains quiet for a period, under Rule 1.17(b)(3), of ninety days. Rule 1.17(c) also provides a means for the seller to circumvent the notice requirement by obtaining court approval when a client cannot be given notice.

Fourth, Rule 1.17 states that the fees charged to the client may not be increased "by reason of the sale." Generally, the buyer must honor existing fee arrangements.

In addition, ABA Formal Opinion 468 warns that neither the buyer nor the seller should "bill clients for time spent on transition activity that does not advance the representation or directly benefit the client."

These four requirements should be carefully addressed. Failure to do so may leave the lawyers, and perhaps even the clients, in a state of limbo. If a client does not receive proper notice and does not consent to the file transfer, for example, it is unclear whether the buying or selling lawyer would be responsible for that client's representation.

Practical advice on a Rule 1.17 sale

Rule 1.6(b)(7) permits limited disclosure of client confidences in the context of a law practice sale, as long as the disclosures do not compromise the attorney-client privilege or otherwise prejudice the client's interests.

The easiest way to satisfy this requirement often involves engaging in a multi-stage process. A selling lawyer identifies a potential buyer. The buyer and seller then enter into a non-disclosure agreement, where the buyer promises to maintain confidentiality of information shared. Rule 1.17 does not specifically address whether the seller may also require the buyer to enter a non-solicitation agreement, promising not to try to use the seller's information to acquire the seller's employees and clients. As a practical matter, however, such agreements are sometimes used.

Once the non-disclosure and, if applicable, non-solicitation agreements are in place, the seller will disclose a limited amount of client and firm information. The client information may be the names of major clients and nature of services provided. Firm information may include information about revenues, rates and billing practices, client concentration, and major expenses.

The buyer then investigates potential conflicts, and evaluates whether discussions about the potential practice sale should continue. If the buyer does want to proceed, the seller then provides further information, including financial reports and perhaps tax returns and bank statements, as well as a list of client matters that indicates the nature of representation and adverse parties.

The buyer reviews this information and evaluates possible conflicts of interest that may derail the transaction. If the parties then decide to proceed with the transaction, disclosure and evaluation process continues possibly through one or more additional rounds of disclosure and evaluation, until – at or right before closing on the sale – the seller gives the buyer significant access to the client files, including client and financial information.

Meanwhile, the parties prepare a term sheet for the sale, which they formalize into a full agreement memorializing the terms of the law practice acquisition.

Lawyers preparing a purchase agreement may want to give significant attention to eight aspects of the purchase agreement that may not appear in agreements governing other types of business sales:

  1. Warranties by both parties of key facts upon which the parties are relying, such as the revenues produced by the practice, the absence of known malpractice claims, and the licensure and relevant experience of the purchaser;
  2. The purchase price, including whether the buyer will pay a lump sum or share a portion of the fees generated from the client-matters acquired;
  3. Adjustments that may be made depending upon how revenues generated by the acquired client-matters;
  4. Obligations to obtain and maintain legal malpractice insurance;
  5. Indemnification provisions, should one lawyer's work result in claims against the other lawyer;
  6. Non-compete and non-solicitation provisions consistent with Rules 1.17 and 5.6;
  7. Provisions addressing responsibility for and the handling of closed client files and the acquired firm's trust account; and
  8. Dispute resolution provisions that ensure the parties have a clean, quick way to resolve any disagreements over the practice acquisition.

Finally, a lawyer buying or selling a law practice should live by the premise, "Trust but verify." Conduct adequate due diligence of the entire transaction. If the other party will not agree to undergo the diligence you consider appropriate, or you start finding things that make you question the honesty of the other party or the wisdom of the deal, be ready and willing to walk away. It is far better to avoid a perilous transaction than to try unwinding one after you realize your concerns were valid.

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