Our last column, on March 5, 2012, left off with a discussion of the recruitment and pre-departure obligations of an attorney moving laterally to another firm. This article picks up with the recruitment and pre-departure obligations of the departing lawyer’s current and new firms.
Current Firm. Be aware of the ethics rules and case law that prohibit entering into a contract forbidding departing lawyers from competing with the firm or soliciting clients after leaving the firm.
Under RPC 5.6(a), except in connection with retirement benefits, firms are not permitted to offer or make an “agreement that restricts the right of a lawyer to practice after termination of the relationship.”1 Clearly, firms may not enforce a contract provision that forbids departing lawyers from competing with the firm or soliciting clients after leaving the firm. Further, indirect restraints on a lawyer’s right to practice, such as imposition of negative financial consequences on lawyers who leave and compete with the firm, have been held to violate this rule.
In Cohen v. Lord, Day & Lord, the firm’s partnership agreement purported to deny payouts of a lawyer’s share of profits collected post-departure to a withdrawing partner who joined a competing firm in a contiguous jurisdiction.2 The New York Court of Appeals declared that provision of the partnership agreement void because it violated Disciplinary Rule 2-108(A) of the former New York Lawyer’s Code of Professional Responsibility, which is virtually identical to the current Rule 5.6. According to the Court, in addition to restricting a lawyer’s right to practice law by exacting a “significant monetary penalty,” the provision at issue restricted the client’s choice of counsel.3
For both reasons, courts in New York and the overwhelming majority of other jurisdictions refuse to enforce even indirect restraints on competition. Recently, the New York Supreme Court, Erie County, cited Cohen and subsequent cases in determining that portions of an associate employment agreement were unenforceable as a matter of public policy. In Becker v. Cellino & Barnes, the associate signed an employment contract mandating in relevant part that: (1) the employee would not initiate contact with any client or prospective client of the firm after he gave notice that he was leaving the firm; and, (2) if any client decides to contact the employee and continue to retain him, the firm is entitled to 43.56 percent of any fee earned, which represents firm overhead costs.4 The Supreme Court invalidated the non-compete provision as violative of RPC 5.6 and governing case law.5 With respect to firm overhead, which was an issue of first impression, the court found that the penalty served as a strong disincentive for the employee to represent any client who wished to follow him, and invalidated the provision on that ground.6
One area that remains uncertain is the enforceability of extended “notice” periods. Some partnership agreements require lawyers who have announced their intention to depart to stay at the current firm until the expiration of some period of time—or risk forfeiture of benefits or suits for breach of fiduciary duty. While a reasonable period to complete billing duties, or hand off matters that will not move with the lawyer, is appropriate, periods of longer than a month may be susceptible to challenge. Guidance on what is, and is not permissible in terms of a notice period, either from an ethics committee or a court, would help avoid the potential for disputes.
Recruitment and Conflicts
New Firm. Be aware of the risks of assisting the incoming attorney in attempting to lure away from the former firm associates or personnel during the pre-departure time period.
As with improper solicitation of clients, a hiring firm that in any way collaborates with or assists incoming counsel in recruiting employees of their prior firm during the period before the departing lawyers make the lateral move risks exposure for aiding and abetting breach of fiduciary duty or tortious interference with business relations. The hiring firm should have no contact with employees of the prior firm until after the departing lawyers have made the lateral move.
When checking for conflicts of interest, be mindful of the risks of possible disclosure of confidential client information.
While a conflict check is necessary to protect the hiring firm and its clients, requesting the information necessary to perform the check creates the potential for improper disclosure or receipt of client information. The identity of a client is generally not attorney-client privileged, but may nonetheless be confidential. To best ensure that both clients and the hiring firm are protected, the departing lawyer and the hiring firm should consider agreeing (1) that the hiring firm will treat as confidential all information produced for conflict checking purposes, (2) that the hiring firm will use such information solely for the purpose of checking conflicts, and (3) that the hiring firm will return or destroy all such information in the event the hiring does not proceed or the client in question decides not to retain the new firm. In addition, the hiring firm may find it prudent to set up a mechanism so that as few as possible of its lawyers or employees review the client list in order to be able to demonstrate, if later challenged, that prior to the actual arrival of the lateral hire, the firm’s activities in connection with client-specific information were limited to checking conflicts.
Formal Opinion 2003-03 of the New York City Bar cites case law and other ethics opinions holding that, because a lateral hire’s prior clients are potential sources of conflict for the new law firm, the hiring firm must include in its conflict-checking system a means for determining which clients the lateral lawyer personally represented while at his former firm. American Bar Association Formal Op. 09-455 notes the tension between confidentiality and conflicts analysis, and emphasizes that any disclosure should be no greater than reasonably necessary to accomplish the conflict check.
Information and Property
Departing Lawyer. Be aware of the risks concerning the removal or destruction of property, including digitally stored information, that belongs to the current firm.
Courts have held that lawyers planning to make lateral moves to new law firms must avoid any misuse, removal or destruction of the former firm’s property or confidential or proprietary information.7
Lawyers moving laterally between firms often seek to take with them their contact information, calendars, “chronology” files, forms, and precedents developed in the course of their practices, as well as information about clients and former clients whom they have served. The digitization of information and the ability of a departing lawyer to access and copy vast amounts of data has only exacerbated the grounds for disputes when lawyers make lateral moves, and the ethics rules and current case law leave largely unresolved the question of who owns the intellectual property in forms and precedents created by lawyers but accessible to both lawyers and their firms.
A few guidelines may be garnered from existing law. First, “it seems clear that if lawyers are free to move among firms, and to communicate with clients they have served once they announce to their current firms their intent to depart, then they must be entitled to take their personal contact information, in digital form, just as once they would have taken their ‘Rolodex.’”8 Second, there are cases suggesting that lawyers are entitled to their personal “chronology” files—again, presumably, in digital as well as hard copy form.9 It is an open question whether a departing attorney is entitled to the contents of his or her e-mail inbox.
In the absence of a written agreement or policy, it is unclear who has the right to confidential information, whether client- or firm-related, created while lawyers are working at a firm. Except in limited circumstances, the majority view is that work product that lawyers create on behalf of clients largely belongs to the client.10 But non-client information, including precedents that lawyers worked to create, when expunged of client specific information, is arguably proprietary to the law firm. Laterally moving lawyers therefore open themselves up to future challenges or lawsuits by attempting to remove such information. However, because these rights and responsibilities are not spelled out in the ethics rules or case law, and the facts of each case differ widely, it cannot be predicted which side will prevail should a dispute arise. The best advice is simply to proceed cautiously when it comes to removal of information, in hard copy or electronic form, from former firms. If at all possible, departing lawyers should try to come to an agreement with their firms concerning what may be taken.
Before removing client files or information, obtain the clients’ instruction, in writing, to transfer files to the new firm.
Client files are considered client property, not property of either the lawyer or law firm working on a client’s matter, and should only move from one firm to another pursuant to the client’s written instruction.11 Any other transport or discarding of the client file is ethically impermissible.
Current Firm. Review and consider revising the firm’s partnership or shareholder agreement and the firm’s policies and procedures manual as needed in order to clarify the firm’s lawyers’ obligations with respect to client- and firm-related information.
Many firms include in their partnership or shareholder agreements broad language asserting that the firm, and not individual partners or shareholders, “own” all confidential information of any kind—whether client- or firm-related—created while lawyers are working at the firm. Such language is designed to establish grounds for firms to claim that when departing lawyers take any information—or at least information that is not client-specific that is transferred at the express direction of a client—the lawyers are “stealing” that information and are thereby breaching their fiduciary duties to their former firms. However, it is important, if such language is not to be susceptible to attack as over-extensive, that the agreement carves out, and permits, removal of those items that the courts expressly authorize. As discussed above, at a minimum this includes a lawyer’s personal calendar, contact information, “chronology file” and perhaps e-mail inbox.
Improper removal of a law firm’s proprietary information may be used by the former firm to ground claims that the departing partners forfeit their right to some or all of whatever the firm may owe to them in the way of capital or undistributed income. Further, if or when the information is then transferred to the lawyers’ new firm, a claim may be asserted that the hiring firm aided and abetted the lawyers’ malfeasance, arguably subjecting the hiring firm to allegations of tortious interference or aiding and abetting breach of contract or breach of fiduciary duty. Here, too, whenever feasible, firms should try to come to an agreement with departing lawyers concerning what may be taken.
New Firm. Consider developing policies and procedures that permit the acceptance of electronic data from an incoming lateral hire only relating to client matters where clients have given authority or where the prior firm has agreed to the transfer by the new attorney.
Firms hiring laterally should take great care before accepting data “dumps” by new lateral hires when they arrive at the firm. As noted above, particularly in cases where the former firm’s partnership or shareholder agreement expressly prohibits departing attorneys from taking such information with them, the hiring firm may be drawn into a dispute and may face allegations of tortious interference or of aiding and abetting the moving lawyers’ breach of contract or breach of fiduciary duty.
Some larger firms have recently adopted protocols for their IT departments to assess the content of information that the newly arriving lawyers seek to import.12 In the absence of clear guidance in the ethics rules and case law, this approach is sensible risk management, and we recommend that firms consider it.
We conclude by addressing some additional risk management considerations in the context of lateral movement. These considerations may not be strictly tied to the ethical rules, but we nonetheless recommend that lawyers and law firms consider whether they may be helpful in seeking to minimize the potential for disputes arising out of lateral moves. New law is being made all the time in the area of lateral attorney movement, but no lawyer (or law firm) wants to be the test case.
Departing Lawyer. Consider resigning from managerial positions, and avoiding participation in managerial decisions that will affect the firm after withdrawal from the current firm, while negotiating to move.
If a lawyer participates in or makes management decisions in which there is an implied assumption that the lawyer will be remaining at the firm, the lawyer may face allegations that she engaged in dishonesty or misrepresentation, or breached her fiduciary duty to the firm and former partners.
If it is not feasible to resign, at the very least it is advisable to try to avoid making or participating in any significant management decisions that imply that the lawyer will be remaining at the firm. Common law claims such as breach of fiduciary duty often turn on notions of fairness, so activities just prior to departure, such as attendance at management committee meetings or votes on hiring decisions, are likely to be subjected to microscopic scrutiny.
Current Firm. Review and consider revising the firm’s partnership (or operating) agreement, and the policy and procedures manual, as needed, in order to spell out the terms on which lawyers may depart, and are expected to behave prior to announcing their departure and prior to actual withdrawal.
This is largely self-explanatory, but the idea is twofold: By dealing with these issues up front in the partnership or shareholder agreement, and policies and procedures manual, everyone involved will have a better sense of their respective obligations, and individuals are more likely to comply. However, to reiterate, under RPC 5.6 and the Cohen line of cases, the firm may not include any provisions that operate as a direct or indirect restraint on an attorney’s right to practice after leaving the firm.
New Firm. Review existing hiring practices and consider adopting a protocol designed to make sure that the firm undertakes appropriate due diligence relating to the incoming lawyer.
A hiring firm should never assume that a lateral attorney comes to the firm with an unblemished past. Before extending an offer of partnership or employment, a firm should gather all non-proprietary information appropriate for making a hiring decision. At an absolute minimum, this should include confirming the lawyer’s admission and current good standing in every jurisdiction where he is admitted, and determining whether the prospective hire has ever been sued by a client or disciplined. Any claims outstanding at the time of hire become the problem of the hiring firm as well as the individual attorney.
With respect to outstanding or potential malpractice claims that may be instituted based on the lawyer’s prior conduct, the firm should consider the liability insurance implications of hiring laterally, and decide whether and to what extent the firm would benefit from or be harmed by providing prior acts coverage for the lateral hire.13 In addition, extra due diligence may be warranted to identify and, to the extent possible, avoid the potentially serious economic implications both for the firm and laterally hired lawyers if the firm from which the individual lawyer is withdrawing subsequently dissolves.14 Issues relating to lateral attorney movement in the context of law firm dissolution will be discussed in detail in a subsequent article.
Anthony E. Davis is a partner and Katie M. Lachter is a senior associate in the New York office of Hinshaw & Culbertson.
1. See also Restatement (Third) of the Law Governing Lawyers §13(1)(2000).
2. 75 N.Y.2d 95 (1989).
3. Id. at 98.
4. 602107/2011, Sup. Ct. Erie Cty., Slip. Op. Dec. 20, 2011, at 5, 7.
5. Id. at 22.
6. Id. at 20.
7. Gibbs v. Breed, Abbott & Morgan, 271 A.D.2d 180, 185-86 (1st Dept. 2000); see also Restatement (Third) of the Law Governing Lawyers §9 comment i (2000).
8. Anthony E. Davis, “Legal Ethics in a Digital Age,” New York Law Journal, March 7, 2011, p. 3.
9. Gibbs, supra note 7, at 185.
10. Robert W. Hillman and Allison D. Rhodes, “Client Files and Digital Law Practices: Rethinking Old Concepts in an Era of Lawyer Mobility,” 43 Suffolk U. L. Rev. 897 (2010).
11. See Hillman on Lawyer Mobility, Ch. 2, §2.3.2 “Files as Property of the Client.”
12. Davis, supra note 8.
13. Many firms decline to provide prior acts coverage on the ground that claims relating to acts or omissions of laterals before they joined the firm put the firm’s policy at risk for matters for which the firm derived no benefit.
14. Jewel v. Boxer, 156 Cal.App.3d 171 (1 Dist. 1984).