This opinion has been questioned and modified in ethics opinion R-19, effective August 4, 2000.
November 15, 1995
A law firm practicing as a professional corporation may not require firm lawyers to execute an employment agreement providing that, if the lawyer leaves the corporation and begins servicing clients of the corporation as the lawyer's own clients, the lawyer shall pay a portion of all billed and collected fees from the client to the corporation for a four year period.
References: MRPC 1.15(a), 1.16(d), 1.17, 5.6; RI-86; CI-495, CI-722, CI-743, CI-766, CI-1145; McCrosky, Feldman, Cochrane & Brock PC v. Waters, 197 Mich App 282 (1992).
A lawyer shareholder in a professional corporation asks whether the law firm may require lawyer employees to agree to the following:
"The employee acknowledges that the clients serviced by the employee are clients of the corporation and are not the employee's clients. In the event of the employee's employment termination, and subsequent servicing of clients of the corporation as personal clients or as clients of a law firm of which the employee is a partner, employee, shareholder, of counsel or independent contractor, then in that event the employee promises to the corporation one-third of all fees billed and collected ("the collections"), partnership, or the employer for a four year period commencing on the termination date of employment with the corporation. The payments due under this provision do not represent a penalty, but rather is fair and equitable compensation to the corporation for the loss of its good will associated with clients, and adequate and fair compensation for lost future profits of the corporation. Payments due under this provision shall be made to the corporation on the 5th day of each month during the four year plus one month period in amounts equal to one-third of the collections made in the previous calendar month period. This section shall not apply to an employee who is terminated by the corporation without cause."
MRPC 5.6 states:
"A lawyer shall not participate in offering or making:
"(a) a partnership or employment agreement that restricts the right of a lawyer to practice after the termination of the relationship, except an agreement concerning benefits on retirement or as permitted in Rule 1.17; or
"(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a controversy between private parties."
There is no question raised concerning a lawyer's retirement from practice, nor is there any issue relating to the sale of a law practice in MRPC 1.17. The only issue here is whether this agreement restricts the right of a lawyer to practice after termination of the employment relationship.
The agreement begins with an acknowledgment that the clients belong to the corporation and not to any individual lawyer. This assumption underlies the entire agreement. The assumption that clients are somehow property of the firm is incorrect. The correct starting point is that the affected clients have a right to decide for themselves which lawyer or lawyers they wish to handle their affairs. While waiting for the client's decision, however, who has responsibility for seeing through the client's case, and the concurrent responsibility for maintaining client property and the representation file? Rather than viewing the departing lawyer as "raiding" the firms clients, it is a case of the original law firm imposing an "exit duty." The Law of Lawyering, § 5.6:202, P. 824.4. The provision has the effect of implying that the client's files are the property of the firm. A declaration that the client's files are property of the firm does not recognize that the file actually belongs to the client, MRPC 1.15(a), 1.16(d); CI-743, CI-766, CI-722, CI-495, who has the right to direct and determine who has custody. RI-86.
In RI-86, the Committee examined numerous provisions in an employment agreement concerning the rights of a departing lawyer to continue to serve clients which the lawyer served while at the firm. Many of the contract terms were found to be unethical. As stated in RI-86, the purpose of MRPC 5.6(a) is:
"The rule protects future clients against having a restricted pool of lawyers from which to choose and protects lawyers from bargaining away the right to open their own offices. An agreement which acknowledges a departing lawyer's right to continue to practice but which imposes burdens which make it difficult, if not impossible, for the departing lawyer to represent certain clients, also violates the spirit of the ethics rule."
The language in the proposed contract acknowledges a departing lawyer's right to continue to practice and represent former clients of the firm. The proposed agreement, however, imposes a burden on the departing lawyer which makes it difficult, if not impossible, for that lawyer to represent former clients of the firm. Under the contract provision, the departing lawyer would be required to pay one-third of all fees billed and collected from former clients of the firm for a period of four years. The agreement further purports to state that this payment does not represent a penalty, but rather is fair compensation for the loss of good will and future profits. A disclaimer that this does not represent a penalty to the contrary, its obvious intent is to make it difficult, if not impossible, for the departing lawyer to represent clients of the lawyer's former law firm. The impact of the agreement is that the departing lawyer in representing former clients will either operate at a financial detriment or be placed at a competitive disadvantage because the lawyer will have to charge higher fees in order to absorb the payment to the law firm.
In CI-1145, an opinion decided under former Michigan Code of Professional Responsibility DR 2-108(A) which is almost identical to MRPC 5.6(a), we determined that ethics rules preclude lawyers from entering into contracts of employment which contain provisions that, upon the termination of employment, the departing lawyer is obligated to pay "liquidated damages" to the former law firm to recover the "good will" of clients who choose to continue a relationship with the departing lawyer. On its face, the proposed agreement states that its purpose is to recover good will and lost future profits. Since this is a blanket provision without deviation or gradation, the payment proposed in the agreement constitutes a form "liquidated damages." The only reasonable interpretation of the provision is that it is designed to discourage lawyers who leave the firm from representing clients of their former firm.
We note further that under the contract provision, the departing lawyer would be required to pay one-third of all fees billed and collected from former clients of the firm for a period of four years, even though the law firm performs none of that work. This is "a division of fees between lawyers who are not in the same firm," and may be made only in accordance with MRPC 1.5(e). Since the proposed arrangement makes no provision for advising the client and affording an opportunity to object, the proposed arrangement violates MRPC 1.5(e)(1).
Law firms are entitled to offer and formulate agreements which set forth reasonable conditions affecting a lawyer's departure from the firm. RI-86. In McCrosky, Feldman, Cochrane & Brock PC v. Waters, 197 Mich App 282 (1992), the court determined that a departure agreement which merely calculates the division of fees between the departing lawyer and the law firm for work performed prior to departure is not violative of MRPC 5.6(a).
In summary, clients do not in any sense belong to a firm, and each client has the right to decide for themselves which lawyer or lawyers they wish to handle their affairs. The contract in question imposes a burden on departing lawyers which makes it difficult, if not impossible, for them to represent former clients of the firm. The provision requiring a departed lawyer to pay one-third of all fees collected from former clients of the firm for four years constitutes a penalty and creates unfair competition between the departed lawyer and the former firm. Therefore, on the basis of the information presented, the agreement discussed is improper.