Ethics Articles: Break Away Lawyers
Break Away Lawyers
By Angus G. Goetz Jr.
MBJ October 1998
The difference between what is ethically right and wrong when lawyers prepare to leave and start their own law firm is not always easy to distinguish. However, it is safe to conclude that lawyers who scheme in secret to steal away the firm's clients before leaving are asking for trouble, which can result in an action by the firm for breach of a fiduciary duty.1 This article will attempt to point out some of the ethical pitfalls and provide guidelines for lawyers intent uponc breaking away.
Notice of Departure
Law firm breakups and dissolution are often accompanied by acrimonious disputes over financial issues, particularly when the departing lawyers leave to form a new law firm as opposed to leaving to join an established firm. A new law firm's immediate needs for cash flow to pay rent, wages and other operating costs, gives departing lawyers an incentive to raid the firm's clients and expropriate unto themselves business opportunities belonging to their principal. In this context, it is appropriate to think of the clients as property of the firm and unless the law firm agreement provides that a particular client or type of client is the client of a specific lawyer, clients are considered to be clients of the law firm and not clients of any individual members of the law firm. Lawyers intent upon exiting a firm cannot, without impunity, solicit law firm's business on "company time" and use law firm resources to establish a competing enterprise, at least not until the departing lawyers give notice to the firm of their withdrawal and departure.
When lawyers reach a decision to relocate, the departing lawyers must give timely notice to the lawyer's current firm or employer as soon as reasonable under the circumstances in order to minimize harm to the lawyer's current firm arising from the firm's reliance on the lawyer's continuance with the firm. Lawyers having management responsibilities should avoid decision making that may impact negatively on the firm were the lawyer to leave the firm. Serious consideration should be given to resigning management responsibilities once a lawyer becomes serious about departure.
The Michigan Rules of Professional Conduct (MRPC) does not have a rule that expressly provides direction to lawyers who are considering changing their professional relationship, or to the firm from which the lawyers are leaving, with regard to their obligations to each other and their clients. However, common sense tells us that departing lawyers should not notify clients of their impending departure or ask firm clients to follow them to a new law firm before the lawyers notify the current firm of their intent to depart. Concomitant with this duty to notify the firm of impending departure is the admonition that the current firm not interfere with the continuing practice of law by lawyers who have announced an intention to leave, or from interfering with the client's rights to be represented by the departing lawyers. MRPC 5.62 prohibits most restrictions on lawyers' rights to practice because restrictions on a lawyer's rights to practice on leaving a firm "not only limits the lawyer's professional autonomy, but also limits the freedom of clients to choose a lawyer."3
Once notice of withdrawal has been given by the departing lawyers to the firm and its members, the clients must be advised how the client matter will be handled and by whom. MRPC 1.4 and 1.16. Both the departing lawyers and the law firm are entitled to advise clients of their willingness to continue the representation. Earlier authorities said that it was unprofessional or unethical for departing lawyers to seek the business of clients for whom the lawyer had formerly worked.
However, following decisions in Ohralik v Ohio State Bar Association, 436 US 447 (1987) and Shapiro v Kentucky Bar Association, 486 US 466 (1988) resulting in amendments to MRPC 7.2 and 7.3, it seems clear that targeted mailings are now acceptable and even in-person communications are not improper so long as the lawyer has had a "prior professional relationship" with the client. However, any such communication must clearly state the client's right to choose the law firm, the departing lawyers or any other lawyer of the client's choosing.
When the lawyer's association with the law firm has terminated, his or her contact with the former firm's clients is permissible under MRPC 7.2 (regulating advertising) only if the lawyer making the contact can fairly demonstrate having personally provided legal services to the clients in question. In RI-49 (May 1990), the State Bar of Michigan Ethics Committee opined that a salaried associate lawyer upon leaving the firm could ethically mail announcements, which provides no information other than the lawyer's new location and professional relationship, to clients whom the lawyer considered to be his or her own clients but whom the lawyer's firm also considered to be its clients. The committee said:
"It appears that under MRPC 7.1 and 7.3, a departing lawyer, whether associate or partner, may advise a client by phone, in-person, or in writing, that the lawyer is leaving a firm, if there is no solicitation. The content of the announcement must comply with MRPC 7.1, and may not be false, fraudulent, deceptive, misleading, compare lawyer services, or give an unreasonable expectation of results that may be achieved. Such a statement, whether written or verbal, as long as it does not ask the client to hire, fire, or make a decision, constitutes permissible advertising under MRPC 7.1."
One should keep in mind that unauthorized and/or unethical contact may constitute tortuous interference with the former firm's business subjecting the offending lawyers to a civil action for tortuous interference with another's contract. Disciplinary proceedings for unethical conduct must also be considered a likely possibility.
Continuing Fiduciary Duties
The MRPC requires lawyers to be competent, diligent and to communicate regularly with clients. MRPC 1.1, 1.3 and 1.4. Following dissolutions, lawyers may violate these continuing ethics obligations through neglect by some oversight attributable to the turmoil often encountered in law firm break ups. What happens if a member of the firm neglects a client matter? The general rule is that the client is the client of the law firm and each member has an obligation to perform the contract and is responsible for another member's failure in that respect.
The prevailing view is that lawyers are not immediately discharged of these obligations on dissolution. Rather, duties owed to clients continue during the winding up process until the law firm is terminated by filing the appropriate dissolution (termination) certificate. For withdrawing lawyers to be relieved of the ongoing responsibility to complete client matters, the old firm must be discharged of the responsibility by the client, and the tribunal in litigation matters, and new counsel substituted. MRPC 1.16.
Furthermore, the MRPC requires that the firm have in place reasonable measures to ensure that all firm lawyers conform to ethics requirements. Therefore, it is important that the firm have procedures to ensure that all law firm clients are competently represented. MRPC 5.14
The representation file belongs to the client. The MRPC is clear concerning the lawyer's obligation to turn over the client's file, and any other property belonging to the client, to the client or to successor counsel at the request of the client. MRPC 1.16(d) says:
"(d) Upon termination of representation, a lawyer should take reasonable steps to protect a clients interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled, and refunding any advance payment of fee that has not been earned. The lawyer may retain papers relating to the client to the extent permitted by law." Emphasis added.
This duty to surrender the file to the client or newly selected substitute counsel includes the benefit of the lawyer's "work product" including but not limited to all "file interview notes," "research notes," and "unfiled but personal pleadings" with the possible exception of the "lawyer's personal observations, notes or memoranda with respect to the client's character or competency traits, particularly if and when negative." See Informal Opinions CI-716, CI-722, CI-743, CI-758, CI-766 and RI-203. Transfer of the file must be made in such a way as to protect client confidences and secrets. Hand delivery is preferred. MRPC 1.6.
Fundamental to the client-lawyer relationship is the requirement that the lawyer maintain confidentiality relating to client confidences and secrets. A "confidence" is information protected by the attorney-client privilege and "secret" refers to other information gained in the professional relationship that the client has asked the lawyer not to reveal or the disclosure of which would be embarrassing or detrimental to the client. MRPC 1.6. The rule also admonishes lawyers not to use a client confidence or secret to the disadvantage of the client or for the advantage of the lawyer or a third person unless the (former) client consents following a full disclosure of the consequences in language the client can reasonably understand in order to make an informed decision on the matter. Disclosure without client consent is authorized under some other circumstances enumerated in MRPC 1.6(c) or required by MRPC 3.3(a) incident to client perjury. Lawyers must remember that MRPC 1.6(b) prohibits disclosure of a client's confidences and secrets even after the termination of the client-lawyer relationship. MRPC 1.9(c)(1) also forbids use of such information to the disadvantage of a former client. RI-248 (1995).
Ethics rules contain provisions detailing how lawyers are to handle client property, including funds. MRPC 1.15(a) requires lawyers to identify and safeguard client property and prohibits commingling.5 Supervisory lawyers must exercise close supervision over subordinates and nonlawyers to ensure that all fiduciary obligations are fulfilled, the breach of which likely would lead to a malpractice action.
Lipton v Boesky, 110 Mich App 589, 313 NW2d 163 (1981) says that a lawyer's violation of the ethical duties of communication and diligence raises a rebuttable presumption of malpractice under the former Code of Professional Responsibility.6 Preservation of accurate and complete records pertaining to client funds and other property five years following termination of the client-lawyer representation is required by MRPC 1.15. Other factors beyond ethics such as tax record-keeping regulations or the substantive law relating to specific practice areas must also be considered.
When the withdrawing lawyers are members of a firm that will continue after their departure, they have a duty to make certain that the former firm's record retention plan meets ethical and other legal requirements. Every retention plan must, at a minimum include:
- Information concerning the establishment of retention periods;
- Information concerning the location of storage facilities and the form of retention (i.e. file, computer disc, microfilm, etc.);
- Methods for disposition of client records and files (i.e. consent);
- Instructions to lawyer and nonlawyer personnel concerning their duties, including confidentiality; and
- A system for monitoring compliance with the plan. See Formal Opinion R-5 (1989).
If the firm will not continue following the dissolution, the lawyers will need to contact each and every client for whom the lawyer holds documents, files or other property to inquire about their disposition. Representation files closed before October 1, 1988 cannot be destroyed without reasonable notice to the client. Notice of the disposition of client files after October 1, 1988 must be given to the client either at the inception of the client-lawyer relationship or at the conclusion of the matter. Even when the client consents to the firm's disposal of client property (files for example), the lawyers must examine the property to determine if there are documents or other information that is not readily available which may be needed by a client at some future time before discarding that property.
In such cases, lawyers must take reasonable steps to locate the client by regular and certified mail, addressed to the client at the client's last known address. If the former client cannot be located, or fails to respond, the documents may be microfilmed and after a reasonable time disposed of, assuming that the lawyer determines the proposed destruction will not prejudice client interests. For a discussion of ethical issues relating to the retention and eventual disposition of former client files and other property, see Formal Opinion R-12 (1991).
The lawyers right to exercise a retaining lien for the payment of cost advances and unpaid attorney fees is a question of law. MRPC 1.8(j)(I) and Kysor Industrial Corporation VDM Liquidating Co, 11 Mich App 438 (1968). It should be clear that unauthorized removal of client files by departing lawyers is a breach of the lawyer's fiduciary duty to the firm and/or employer. Fear that the former firm will refuse to turn over the files at the client's request does not make removal proper. Rather, unconsented removal is uniformly condemned as ethically improper.
Once the client has transferred the representation from the former firm to an attorney of the former firm, the firm is obligated to surrender the client's papers and may assert a lien that it may have against the proceeds of pending litigation. MRPC 1.16(d), 1.8(j)(I). However, ethics opinions unanimously hold that a lawyer may not exercise a retaining lien on any client property to pursue files or otherwise if the client or successor counsel needs the property to pursue the client's rights or when a refusal to turn over would prejudice the client's matter. CI-623 and RI-203.
Winding Up After Departure
A law firm does not terminate on the departure of a member. Rather, the firm undertakes the winding up phase, during which the members of the firm complete the firm's business, liquidate assets, pay creditors and distribute any residual sums to those persons entitled to the residue. Liabilities incurred in the winding up phase are the responsibility of the firm and its members�past and present. When the firm continues because the agreement provides for continuation, or a new law firm is formed by the remaining members who expressly assume the business of the former firm (subject to client approval), the work of the original firm is completed as the work of the new firm continues.
When a successor firm is created to continue the business of the original firm, there is still a need to wind up the business of the original firm, because the withdrawal does not end the liability of the firm, its continuing members or its departing lawyers.
Concluding the work of a law firm may take years, particularly with respect to litigation matters. Departing lawyers usually do not participate in the winding up process since they physically leave the firm and some or all of its work behind. Thus the departing lawyers may have little contact with the former firm and little or no opportunity to supervise the work product of the remaining lawyers and vice versa.
Because the responsibility for winding up a certain client matter is not generally shared, the departing lawyers frequently feel that the responsibility follows the file and therefore decline to supervise the completion of client matters, only years later, to find themselves respondents to a legal malpractice case concerning a former law firm client matter they know little or nothing about. Because of this vicarious liability, lawyers changing firms must seriously consider insuring the risks by purchasing prior-acts malpractice coverage under the new firm's policy or tail coverage under the former firm's malpractice policy.
Sharing the post-dissolution income, generated either by the departing lawyers or the remaining lawyers, in completing the business of the former firm seems appropriate. MRPC 1.5(e) says that a division of fees may be made between lawyers who are not in the same firm only if the client is advised and does not object, and the total fee is reasonable. RI-305 (1998) holds that law firms may formulate agreements setting forth reasonable conditions incident to a lawyers departure, including a requirement that the departing member pay the continuing firm a percentage of the net attorney fee received in a contingency case from a client who elects to continue the representation with the departing lawyer provided the requirements of MRPC 1.5(e) are complied with before the division of fees between lawyers who are not in the same firm.
Alternate Dispute Resolution
Law firm dissolutions may create difficulties. For the sake of the lawyers, the clients, the courts and the public, controversies should be resolved quickly, quietly and privately. External disputes only lessen the quality of life within the firm and diminish the community's at large image of lawyers. Alternatives to public litigation include mediation and arbitration. The State Bar of Michigan Standing Committee on Arbitration of Disputes Between Attorneys is an alternative to court litigation. The program currently provides for binding arbitration designed to expedite the resolution of problems and thereby minimize possible neglect of client matters. There is currently a pending proposal to broaden the program to include traditional mediation services.
- Carefully examine the law firm agreements, minutes of meetings and any decisions of committees that may be relevant to departure before withdrawal;
- Lawyers having management responsibilities must avoid decision making that may impact adversely on the firm if the lawyer were to leave. Serious consideration should be given to resigning from management once a lawyer becomes serious about departure;
- Give advance written notice of withdrawal and departure to the law firm and all members before notification to clients. Be aware that on receipt of notice, the firm or employer may terminate a lawyer's employment or expel a member if such action is otherwise proper. Notice should be reasonable in time and content;
- If withdrawal terminates the firm (partnership), give written notice to all known trade creditors. Publish notice of dissolution in a newspaper of general circulation in the county in which the firm conducts business;
- Give written notice of dissolution to all law firm clients. Ethics rules require lawyers to keep clients reasonably informed about representation and lawyers must explain matters in sufficient detail to enable clients to make informed decisions. MRPC 1.4, 1.16(d).
Notice to Clients Should at a Minimum Include
- an explanation for the lawyer's withdrawal and possible future unavailability;
- The time frame after which the departing lawyer will no longer be available;
- Status of client matter;
- Client's right to choice of counsel, i.e. former firm, new firm, other counsel. Obtain client written consent to successor counsel;
- Identity of person to contact regarding client file;
- Accounting for client property in the firm's possession, whether received directly from clients or third persons; and
- Status of fees earned and amounts owed.
- Make sure that all communications, written or verbal, concerning availability of lawyer's services are truthful, that is not false, fraudulent, misleading or deceptive and otherwise comply with MRPC 7.1.
A Communication Shall Not
- Contain a misrepresentation of fact or law, or omit something that makes the statement misleading or deceptive;
- Tend to exaggerate or create unjustified expectations in the minds of others about the results the lawyer can achieve;
- Compare lawyer services with other lawyer services, unless the comparison can be proven. This is a very difficult task; and
- Retain a copy or recording of all communications for at least two years after dissemination with a record of when and where it was used.
- Give notice of change in status to all tribunals (courts, arbitration panels, administrative agencies, etc.) in which client matters are pending. The attorney for the firm who first files a pleading (appearance, motion or other paper) is the appearance of the individual attorney. That attorney's appearance continues until an order of substitution or withdrawal is entered by the tribunal. Moreover, the appearance of an attorney is the appearance of every member of the law firm. MCR 2.117;
- Notify clients whose matters are closed regarding the client's right to the file and other property in cases where the client has not previously been notified with regard to the firm's record retention policy. All clients are entitled to an accounting of money belonging to them in the firm's possession;
- Store client files and firm business files that are to be preserved in a storage place which protects client confidentiality, safeguards the property and complies with record keeping requirements of ethics rules and substantive law;
- Incinerate or shred files that are to be destroyed;
- Open post dissolution trust accounts for deposit or receipts and payment of expenses of the former firm during winding up process;
- Select representatives to conduct the winding up of the firm. These individuals should be seasoned and highly respected lawyers and should be given authority to make decisions on behalf of their constituents to facilitate matters;
- Consult with insurance carriers about obtaining prior-acts malpractice coverage under the new firm's policy or tail coverage under the former firm's policy;
- Set up client conflict-screening mechanisms to ensure that future client representation is not adverse to clients of former firm;
- Establish a new law firm ethics committee to educate lawyers and nonlawyer assistants and take reasonable steps to ensure that all law firm personnel conform to conduct compatible with the MRPC;
- Make certain all state and federal tax returns and reports to administrative agencies are prepared and filed; and
- Prepare internal final accounting of assets/liabilities and income/disbursements for distribution to the former firm members.
The guidelines summarize ethical concerns confronting lawyers when law firms break apart, or some lawyers leave to start a new firm. Lawyers must carefully consider before, and after leaving the firm, what measures may be taken to minimize neglect of client matters and chances of malpractice claims, disciplinary action and/or a potential suit by former firm members for tortuous interference with the firm's business. Remember, when in doubt, it is better to err on the side of caution than to engage in ethical misconduct.7
1. Dowd & Dowd Ltd v Gleason, Illinois Supreme Court, No. 82347, March 19, 1998 holding that the lawyers' predeparture activities breached their fiduciary duties to the law firm.
2. Rule 5.6 Restrictions on Right to Practice.
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 termination; 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.
3. Michigan Informal Ethics Opinion RI-100 (Sept. 1991).
4. Rule 5.1 Responsibilities of a Partner or Supervisory Lawyer.
a) A partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct;
b) A lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct;
c) A lawyer shall be responsible for another lawyer's violation of the Rules of Professional conduct if:
(1) The lawyer orders or, with knowledge of the relevant facts and the specific conduct, ratifies the conduct involved; or
(2) The lawyer is a partner in the law firm in which the other lawyer practices or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.
5. Rule 1.15 SAFEKEEPING PROPERTY
(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. All funds of the client paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in an interest-bearing account in one or more identifiable banks, savings and loan associations, or credit unions maintained in the state in which the law office is situated, and no funds belonging to the lawyer or the law firm shall be deposited therein except as provided in this rule. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.
6. Replaced by the MRPC, effective October 1, 1988. However, violations of the MRPC are still evidence of a breach of the standard of care. Centra, Inc v Jaffee, Raitt, Heuer & Weiss PC, Michigan Court of Appeals Unpublished Opinion No 181803, LC NO. 93-327681-NZ (Sept. 6, 1996) citing to Hooper v Hill Lewis, 191 Mich App 312, 316; 477 NW2d 114 (1991). See also Sawabini v Desenberg, 143 Mich App 373, 385; 372 NW2d 559 (1985).
7. This article benefited by the ideas and comments of earlier writers. Johnson, Solicitation of Law Firm Clients By Departing Partners and Associates: Tort, Fiduciary and Disciplinary Liability, 50 Univ. Pitts L.R.I.(1998); Hillman, Law Firms and Their Partners: The Law and Ethics of Grabbing and Leaving, 67 Texas L.R.I. (Nov. 1988); Terry, Ethical Pitfalls and Malpractice Consequences of Law Firm Breakups, 61 Temple L.R. 1056 (1988).
Angus G. Goetz Jr. is in private practice in Bloomfield Hills, specializing in business law and professional ethics. He is currently a member of the State Bar of Michigan Professional and Judicial Ethics Committee and served as its chair from 1977 to 1983 and again from 1988 to 1994. He is a former member of the American Bar Association Standing Committee on Professional Ethics and a past chair of the Michigan Attorney Grievance Commission and State Bar of Michigan Representative Assembly. He currently serves as an Attorney Discipline Board adjudicator and member of the State Bar Committee on Arbitration of Disputes Between Attorneys and the Client Protection Fund.