Arthur J. Ciampi
Today, the topic of "lawyer mobility" is boring. Twenty-five years ago, when this author began representing lawyers and law firms, the concept of lawyer mobility was novel, if not revolutionary. The norm was for lawyers to begin and end their careers at the same firm, and law firms rarely asked partners to leave.
Today, the pendulum has swung to the other extreme. Lawyers routinely move firms to benefit their careers and provide better services to their clients. In addition, law firms, for good or bad, are run more like businesses (well, sort of) and partners who are perceived as unproductive or whose practices are deemed not to be compatible with their current firms are often asked to leave.
The bottom line is that lawyers change firms with regularity. Just like partners who are planning on sticking together should have a solid partnership agreement to govern them, partners who are moving on should have a solid separation agreement to govern their departures.
While there is no one-size-fits-all separation agreement, this article will discuss the topic of separation agreements and analyze and suggest some worthwhile provisions that should be included in an agreement.
Exit Compensation
Often the most contentious and important issue to negotiate in a separation agreement is exit compensation. The time of year, the circumstances surrounding the departure and the type of practice often determine the complexity of the agreement and the difficulty of the negotiation in this regard.
Partners who leave a firm voluntarily often do so after a bonus is paid. In those cases, they are determining their own departure date and are not leaving much behind.
Partners who leave prior to receiving their bonuses are often concerned that they will be deprived of a share of firm profits earned from their efforts in the year to date. Firms often take the position that such amounts are not owed to partners unless they have spent the full year as partners. A fair compromise, which is often reached, is to pay the departing partner a pro rata share of firm profits. This amount is often calculated by multiplying the partner's percentage share by the firm's annual profit and a fraction, the numerator of which is the last day of the year in which the partner was a partner and the denominator of which is 365. The resulting payment is then paid when the remaining partners receive their bonuses.
The above compromise, however, does not fairly compensate a departing partner or his or her firm in all circumstances. For example, a partner who departs a firm whose fees are based upon a contingency, such as plaintiffs personal injury or plaintiffs class action firms, are not fairly compensated by limiting their pay-out to a single year. This is the case because in such firms the partners have, in essence, financed the firm's contingency cases and upon their departure should be entitled, assuming the cases stay with the firm, to be paid a share of the fees when earned by the firm for the work they financed.
Conversely, if the partner leaves with cases, the firm's remaining partners should be paid from a share of the fees ultimately earned by their former partner. In such circumstances, the firm and departing partner often negotiate and include in a separation agreement a schedule of such cases that include a percentage allocation of attorney fees. The allocation is typically based upon the work done and anticipated to be done on the cases in question with the majority share going to the party who is required to do most of the remaining or more meaningful work.
Return of Capital
A related issue is the return of capital. A partner's capital account in a law firm is either the amount contributed by the partner as cash from initial or periodic capital contributions or is a partner's accumulation of yearly undistributed earnings. Taxes are paid on these contributions and accordingly the return of capital to a partner is tax-free and the loss of capital is therefore the loss of tax-free money, which should be avoided.
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