Don't sign away your right to practice law
By Charles A. Lamberton
For The Lawyers Journal
Many lawyers go to work each
day, are happy, and have every
intention of remaining with their current firm until retirement. Others
go to work each day, are happy, and do not think about where they will be
employed five years down the road, preferring instead to concentrate on
short-term goals. Still others go to work each day, are not happy, and know
they will make a move as soon as the right opportunity presents itself.
Whichever category you fit into, statistics show that the overwhelming majority
of lawyers change employers at least once before retiring from the practice of
law. A lawyer's move from one firm to the next often marks the end of
friendships and the beginning of litigation, particularly if clients elect to
switch to the lawyer's new firm.
Because such moves can be life-changing events with serious financial and
emotional consequences, it is important to have a basic knowledge of the rules
of ethics and law that govern attorney departures. This article discusses those
rules. Its purpose is to help Pittsburgh lawyers and law firms avoid
unnecessary conflict, and instead preserve the collegiality, professionalism
and integrity that has distinguished the practice of law in Allegheny County
for decades.
Before we begin, let's take a simple test. Suppose a lawyer joins a law firm
where she is required to sign a written employment contract. The lawyer is told
the contract is standard procedure. The lawyer is concerned mostly about the
salary she will be paid, and is satisfied with the firm's offer. The other
terms look like boilerplate, so she signs the deal. Several years pass during
which the lawyer builds close relationships with many clients. Eventually, the
firm terminates the lawyer's employment. After learning of the termination,
several clients want to retain the lawyer for continued representation. Of the
selections below, what is most likely to happen next?
(A) The lawyer politely declines the clients' requests for representation on
grounds their cases belong to the firm.
(B) The firm politely agrees to transfer the clients' files to the lawyer
without fuss or protest.
(C) The firm accuses the lawyer of illegally soliciting the firm's clients and
interfering with its business relationships. The firm points to Article VII,
C(2)(iii) of the lawyer's employment contract, which it has marked with yellow
highlighter. The lawyer stares at the sub-sub-sub-section, and realizes for the
first time the contract requires her to pay a monetary penalty if she agrees to
represent any of the firm's clients after her departure. The lawyer responds
that post-departure restrictions on an attorney's right to practice law are
unethical under the Rules of Professional Conduct. The firm says, "Yeah, that's
nice. Now pay us." The lawyer tells the firm to pound salt, and the parties
spend the next 18 months in litigation.
If you answered C, you passed. C is not the right answer because the laws of
nature so dictate, or because lawyers are required by statute to fight over
clients. It is the right answer only because it describes a recurring fact
pattern. Fortunately, the facts are within our control. We can change them so
that the correct answer is no longer C, but instead D:
(D) Both the firm and departing lawyer respect each client's choice regarding
continued representation. For clients who choose to be represented by the
departing lawyer, she agrees to reimburse the firm for its time in the event
she recovers an attorney fee. The firm and lawyer shake hands, wish each other
well and part ways.
The Golden Rule:
The Client Always Gets to Decide
When a lawyer moves from one firm to another, the decision is entirely up to
the client as to who will continue the representation. See, Joint Opinion
99-100 of the Pennsylvania Bar Association Committee on Legal Ethics and
Professional Responsibility and Philadelphia Bar Association Professional
Guidance Committee (April, 1999) at p. 1, (hereinafter JO 99-100). This rule
derives from the client's absolute legal right to discharge a lawyer at any
time. Id., citing In re Cooperman, 633 N.E.2d 1069, 1072 (N.Y. 1994).
Who Tells the Client
Rule 1.4 of the Pennsylvania Rules of Professional Conduct requires a lawyer to
keep a client informed about the
status of its matter and to promptly
comply with reasonable requests for
information. In the context of an attorney departure, Rule 1.4 requires a
departing lawyer to notify a client if
her employment relationship changes or terminates. Prompt notice of the
lawyer's departure is necessary to
enable the client to deliberate and make an intelligent decision regarding
future representation. JO 99-100 at pp. 2-3. The departing lawyer is not
required to
obtain permission from the firm before notifying clients. Id.
When the Departing Lawyer
Should Tell the Client
The timing of notice is not covered by the Rules of Professional Conduct. A
departing lawyer's duty of loyalty to her firm suggests she should refrain from
communicating her decision to depart until after she has notified the firm.
However, the lawyer's duty of loyalty to the client, as well as RPC 1.4,
suggest she ought to immediately notify the client so as to provide as much
time as possible for thought and deliberation. JO 99-100 strikes a balance
between these competing duties by providing that "absent circumstances that
would compromise the interests of the client, - the departing lawyer should not
notify clients of an impending departure until the firm has been informed of
the lawyer's intention to leave the firm." Id. at 2.
How the Departing Lawyer
Should Tell the Client
All notices should be in writing.
What the Departing Lawyer
Should Tell the Client
JO 99-100 requires the departing lawyer to carefully limit the scope of the
notice. Clients should be told they have the right to remain with the firm, as
well as the right to switch lawyers and be represented by the departing lawyer
or by a new lawyer. They should not be urged either to remain with the firm or
to go with the departing lawyer. Rather, the letter should simply state the
willingness of the departing lawyer or the firm to handle the client's matters.
No disparaging remarks should be made about the firm or the departing lawyer,
and the notice should not contain comparisons between the firm and the
departing lawyer. The notice should also be brief and dignified.
Post-Departure Restrictions
Post-departure restrictions on a lawyer's ability to practice are unethical. An
example illustrates why. Assume a lawyer's employment contract includes the
following language:
1. If either the attorney or firm terminate the attorney's employment, then the
attorney shall be designated as a "departing attorney."
2. In the event of the attorney's departure, all files and cases originated or
worked on by the attorney shall belong to the firm. Upon the written request of
an hourly fee client, and upon receipt of all earned fees and costs advanced,
the firm shall transfer the file and case of said client to the departing
attorney. The firm shall transfer the file of a contingent fee client to the
departing attorney upon the client's written request and upon payment of all
costs advanced to the date of the client's written request. If the departing
attorney earns a fee on such contingent fee case at any time after departure,
the departing attorney shall pay the firm a sum equal to:
a. The total number of hours spent by all firm employees on the case prior to
departure, multiplied by the hourly rates charged by the firm for each
employee, AND,
b. 50 percent of the balance of the contingent fee remaining, if any, after
payment of the amount above.
3. The departing attorney shall not contact any client of the firm, or advise
any client of the firm that her employment has terminated or is about to be
terminated. The departing attorney's covenants hereunder shall continue for one
year following termination of the departing attorney's employment.
Let's start with the third part of the contract. It contains a gag clause and a
covenant not to compete. These clauses are designed to prevent the departing
lawyer from notifying clients that the lawyer's employment has ended. They are
unethical under RPC 7.2 and 7.3 (right to advertise services) and 1.4 (duty to
notify client). They are also unethical under RPC 5.6. Rule 5.6 provides that
"a lawyer shall not participate in offering or making an - employment agreement
that restricts the rights of a lawyer to practice after termination of the
relationship." By prohibiting the departing lawyer from contacting any of the
firm's clients for a period of one year after departure, the third part of the
contract restricts the departing lawyer's post-employment right to practice.
The third part of the contract is also invalid under Pennsylvania's substantive
law. First, it does not meet the standards for an enforceable restrictive
covenant. In Pennsylvania, a restrictive covenant must be "reasonably
necessary" and "limited as to - time and territory." Capozzi v. Latsha &
Capozzi, P.C., 797 A.2d 314 (Pa.Super. 2002). The third part places no
territorial limit on the restriction of the attorney's right to practice, and
is not necessary to establish an employment relationship. Second, the third
part of the contract prohibits the departing attorney from complying with her
duties of loyalty and candor to the client, which require the departing
attorney to act solely in the client's interest and to provide the client with
all information necessary for informed decisions regarding representation.
The second part of the contract (b) requires the departing lawyer to pay a
financial penalty to the firm in the event she later recovers a fee in any case
she accepts for continued representation. Specifically, 50 percent of any fee
remaining after the lawyer reimburses the firm for its time, at its hourly
rates, is automatically forfeited to the firm. The disincentive this forfeiture
creates to accepting requests for continued representation is obvious.
By rigging the contract so that departing counsel assumes the entire risk of
loss on a case, but must pay the bulk of the attorney fee to the firm if there
is a recovery, the firm creates a win-win
situation for itself at both the departed lawyer and client's expense. If
departing counsel declines a request for representation, the firm keeps the
client (contrary to the client's preference) and the entire fee. If departing
counsel accepts the case and obtains a recovery, the firm gets paid the bulk of
the fee (and possibly all of it) without carrying any risk.
As the second part (b) of our example illustrates, penalty clauses can injure
clients by depriving them of the lawyer of their choice. This was one of the
matters discussed by the Supreme Court of New Jersey in Jacob v. Norris,
McLaughlin & Marcus, 607 A.2d 142 (N.J. 1992). The court wrote:
"Indirect restrictions on the practice of law, such as the financial
disincentives at issue in this case - violate both the language and the spirit
of RPC 5.6. Any provision penalizing an attorney for undertaking certain
representation 'restricts the right of a lawyer to practice law' within the
meaning of the RPC."
"By forcing lawyers to choose between (abandoning their clients or paying a
penalty), financial-disincentive provisions may encourage lawyers to give up
their clients, thereby interfering with the lawyer-client relationship and,
more importantly, with clients' free choice of counsel. Those provisions thus
cause indirectly the same objectionable restraints on the free practice of law
as more direct restrictive covenants."
"Because the client's freedom of choice is the paramount interest to be served
by the RPC, a disincentive provision is as detrimental to the public
interest as an outright prohibition. Moreover, if we were to prohibit direct
restraints on practice but permit indirect restraints, law firms would quickly
move to undermine RPC 5.6 through indirect means. (In addition), the case law
almost uniformly holds that financial disincentive provisions, like direct
prohibitions, are unenforceable as against
public policy. (Moreover), the ethics committees of many state bars have also
held that financial disincentives violate the disciplinary rules."
Other courts have reached similar conclusions. For instance, in Denberg v.
Parker Chapin Flattau & Klimpl, 624 N.E.2d 995, 1993 N.Y. 54849
www.versuslaw.com (N.Y. 1993), New York's highest appellate court wrote:
"Restrictions on the practice of law, which include 'financial disincentives'
against competition as well as outright prohibitions, are objectionable
primarily because they interfere with the client's choice of counsel: a clause
that penalizes a competing attorney by requiring forfeiture of income could
'functionally and realistically discourage' a withdrawing partner (or
associate) from serving clients who might wish to be represented by that
lawyer."
Law firms' arguments regarding the necessity of penalty clauses in attorney
employment contracts are mostly unpersuasive. In our hypothetical, the penalty
clause cannot be justified on grounds it is necessary for the firm to recover
the value of its time. This is because the departing lawyer has already paid
that sum by the time the forfeiture occurs. Neither can the forfeiture be
explained on grounds it protects the firm's expectation of earning a large
contingent fee. This is because the firm had no legally recognizable fee
expectation. Its retainer agreement with the client was terminable at will, and
the client could have terminated the firm's representation at any time.
Penalty clauses thus represent one of the worst parts of the business of law.
They are always unethical. They always harm the departing lawyer, and very
often harm our clients. They are motivated by greed, and they demean our
profession. With the exception of misappropriating client funds, there is
nothing more deserving of opprobrium than the use of penalty clauses in
attorney employment contracts.
Unfortunately, many law firms use penalty clauses and other post-departure
restrictions to maintain an unethical hold on their client base. n
Lamberton is the president of the Lamberton Law Firm, LLC. For more
information, please visit www.lambertonlaw.com.