Randy Evans and Shari Klevens, Dentons partners.
Randy Evans and Shari Klevens, Dentons partners. ()

The past several years in the legal industry have been marked by unprecedented movement by attorneys and entire practice groups from one firm to another. Partners and practice groups are regularly lured by rival firms eager to gain a foothold in a new city or to bolster their profile in a certain practice area.

In response to the constant movement, firms are searching for ways to protect their practices and meet two goals. First, many firms want to maximize their investment in partners, whether new to the firm or otherwise. Second, ethical rules and existing law that may govern the situation. Most firms want to avoid having an attorney or practice group leave after the firm made significant investments to acquire and build a practice.

Of course, in an ideal world, attorneys may be deterred from leaving their home firms if the firm takes steps to create a strong economic and cultural environment so that attorneys have little desire or incentive to change firms. Yet, no matter how strong a firm may be, lateral movement is an unavoidable reality in today’s world, and thus firms can consider ways to prepare for the inevitable loss of attorneys to other firms.

A law firm’s options can be limited, however, due to the unique rules that apply to the practice of law. As a result, many tactics used by businesses in other professions cannot be used by law firms. Nonetheless, a law firm can take steps to protect itself.

Below are several options that a firm may consider in such circumstances. These are not always “one-size-fits-all” solutions, however. Firms may want to consider their current stance on these issues and the benefits associated with strengthening protections against the loss of attorneys or practice groups.

Provisions in the Partnership Agreement

Outside of the legal profession, companies commonly use noncompete agreements to protect themselves and to dissuade employees from joining rival companies. A typical noncompete agreement will provide that the employee cannot compete against the employer for a prescribed amount of time and often within an identified geographical location. Such provisions can include restrictions against working for specific competitors or taking or soliciting business upon leaving.

The enforceability of noncompete provisions raises complex issues and can be fraught with unpredictability. However, in the legal profession, the issues may be especially complex. Notably, contrary to many attorneys’ beliefs, there may be certain circumstances in which attorneys may contract to limit behavior associated with moving to a new firm or practice.

Courts and bar associations generally view noncompete clauses for attorneys with strong disfavor because such clauses are viewed as infringing upon the personal nature of an attorney-client relationship and limiting the client’s ability to choose their representation. As a result, many state bars and courts simply refuse to permit the use of such clauses. For example, California Rule of Professional Conduct 1-500 prohibits an attorney from entering an agreement that “restricts the right of a member to practice law” unless the agreement “[i]s a part of an employment, shareholders’, or partnership agreement among members provided the restrictive agreement does not survive the termination of the employment, shareholder, or partnership relationship.” Many other states have similar rules.

However, not all states interpret this rule in the same manner. Indeed, in Howard v. Babcock, 6 Cal. 4th 409, 863 P.2d 150 (1993), the California Supreme Court held that Rule 1-500 did not prohibit a contract provision that imposed a reasonable cost on a partner who decided to compete against former partners. The court explained that the provision did not restrict the practice of law but rather only created an economic consequence for the attorney’s decision to practice in a certain manner.

Other courts have held that financial disincentives that in effect restrict the practice of law interfere with a client’s choice of counsel and are improper. Thus, the enforceability of such provisions may vary from state to state.

Law firms also may be able to use other tools to protect themselves. For example, “collars” or “golden handcuffs” can be similar to noncompete agreements. These consist of financial disincentives or incentives that are structured to entice an attorney or practice group to stay at a firm.

Collars typically involve a provision in the partnership agreement that provides that if a partner leaves with other partners in a group, then certain financial consequences attach. These can include either forfeiture of capital contributions, delay of the return of such contributions or payment in receivables rather than cash.

Golden handcuffs can refer to bonuses or other financial incentives that have to be returned if an attorney leaves. Like other industries, where these incentives typically take the form of stock options, golden handcuffs require partners to remain at the firm to vest or become eligible for financial incentives in the future.

Separately, partners who leave firms and solicit their employees or clients to join them must follow the applicable rules of professional conduct. In addition to violating ethical obligations, such activity may violate an attorney’s fiduciary duty to his or her firm partners.

Jewel Waivers

Another provision that can dissuade partners from leaving is the absence of the so-called Jewel waiver in the partnership agreement. The Jewel doctrine provides that partners who leave a firm that subsequently dissolves must return fees to the firm earned from cases started prior to their departure. However, law firms can choose to forego the right to collect such fees through the use of a Jewel waiver.

Whether to include a Jewel waiver depends on whether the firm is most interested in protecting the partnership or protecting the partners—a distinction with a difference. Jewel waivers maximize mobility, as partners and practice groups can then leave without fear that the firm will seek to recover lost profits later. Consequently, a waiver protects the individual partner’s interest to the detriment of the partnership.

In contrast, law firms focused on protecting the partnership may not find a Jewel waiver to be advantageous. In deciding whether to include a Jewel waiver, firms should carefully consider their financial position and goals.

The key for Jewel waivers and the other options discussed above is to determine the approach that best balances the firm’s interests and the interests of the individual partners. By achieving a proper balance, a firm can create a positive environment for its attorneys while protecting the firm’s long-term stability.

The past several years in the legal industry have been marked by unprecedented movement by attorneys and entire practice groups from one firm to another. Partners and practice groups are regularly lured by rival firms eager to gain a foothold in a new city or to bolster their profile in a certain practice area.

In response to the constant movement, firms are searching for ways to protect their practices and meet two goals. First, many firms want to maximize their investment in partners, whether new to the firm or otherwise. Second, ethical rules and existing law that may govern the situation. Most firms want to avoid having an attorney or practice group leave after the firm made significant investments to acquire and build a practice.

Of course, in an ideal world, attorneys may be deterred from leaving their home firms if the firm takes steps to create a strong economic and cultural environment so that attorneys have little desire or incentive to change firms. Yet, no matter how strong a firm may be, lateral movement is an unavoidable reality in today’s world, and thus firms can consider ways to prepare for the inevitable loss of attorneys to other firms.

A law firm’s options can be limited, however, due to the unique rules that apply to the practice of law. As a result, many tactics used by businesses in other professions cannot be used by law firms. Nonetheless, a law firm can take steps to protect itself.

Below are several options that a firm may consider in such circumstances. These are not always “one-size-fits-all” solutions, however. Firms may want to consider their current stance on these issues and the benefits associated with strengthening protections against the loss of attorneys or practice groups.

Provisions in the Partnership Agreement

Outside of the legal profession, companies commonly use noncompete agreements to protect themselves and to dissuade employees from joining rival companies. A typical noncompete agreement will provide that the employee cannot compete against the employer for a prescribed amount of time and often within an identified geographical location. Such provisions can include restrictions against working for specific competitors or taking or soliciting business upon leaving.

The enforceability of noncompete provisions raises complex issues and can be fraught with unpredictability. However, in the legal profession, the issues may be especially complex. Notably, contrary to many attorneys’ beliefs, there may be certain circumstances in which attorneys may contract to limit behavior associated with moving to a new firm or practice.

Courts and bar associations generally view noncompete clauses for attorneys with strong disfavor because such clauses are viewed as infringing upon the personal nature of an attorney-client relationship and limiting the client’s ability to choose their representation. As a result, many state bars and courts simply refuse to permit the use of such clauses. For example, California Rule of Professional Conduct 1-500 prohibits an attorney from entering an agreement that “restricts the right of a member to practice law” unless the agreement “[i]s a part of an employment, shareholders’, or partnership agreement among members provided the restrictive agreement does not survive the termination of the employment, shareholder, or partnership relationship.” Many other states have similar rules.

However, not all states interpret this rule in the same manner. Indeed, in Howard v. Babcock , 6 Cal. 4th 409 , 863 P.2d 150 ( 1993 ) , the California Supreme Court held that Rule 1-500 did not prohibit a contract provision that imposed a reasonable cost on a partner who decided to compete against former partners. The court explained that the provision did not restrict the practice of law but rather only created an economic consequence for the attorney’s decision to practice in a certain manner.

Other courts have held that financial disincentives that in effect restrict the practice of law interfere with a client’s choice of counsel and are improper. Thus, the enforceability of such provisions may vary from state to state.

Law firms also may be able to use other tools to protect themselves. For example, “collars” or “golden handcuffs” can be similar to noncompete agreements. These consist of financial disincentives or incentives that are structured to entice an attorney or practice group to stay at a firm.

Collars typically involve a provision in the partnership agreement that provides that if a partner leaves with other partners in a group, then certain financial consequences attach. These can include either forfeiture of capital contributions, delay of the return of such contributions or payment in receivables rather than cash.

Golden handcuffs can refer to bonuses or other financial incentives that have to be returned if an attorney leaves. Like other industries, where these incentives typically take the form of stock options, golden handcuffs require partners to remain at the firm to vest or become eligible for financial incentives in the future.

Separately, partners who leave firms and solicit their employees or clients to join them must follow the applicable rules of professional conduct. In addition to violating ethical obligations, such activity may violate an attorney’s fiduciary duty to his or her firm partners.

Jewel Waivers

Another provision that can dissuade partners from leaving is the absence of the so-called Jewel waiver in the partnership agreement. The Jewel doctrine provides that partners who leave a firm that subsequently dissolves must return fees to the firm earned from cases started prior to their departure. However, law firms can choose to forego the right to collect such fees through the use of a Jewel waiver.

Whether to include a Jewel waiver depends on whether the firm is most interested in protecting the partnership or protecting the partners—a distinction with a difference. Jewel waivers maximize mobility, as partners and practice groups can then leave without fear that the firm will seek to recover lost profits later. Consequently, a waiver protects the individual partner’s interest to the detriment of the partnership.

In contrast, law firms focused on protecting the partnership may not find a Jewel waiver to be advantageous. In deciding whether to include a Jewel waiver, firms should carefully consider their financial position and goals.

The key for Jewel waivers and the other options discussed above is to determine the approach that best balances the firm’s interests and the interests of the individual partners. By achieving a proper balance, a firm can create a positive environment for its attorneys while protecting the firm’s long-term stability.