Examining Lateral Movements and Liability

This outcome reinforces the observation made in our November column that claims of this type have real “legs.” If a hiring firm actively assists in practices that are unlawful on the part of the departing lawyer(s), the hiring firm must also face the potential that it may share liability for the adverse consequences suffered by the aggrieved firm. Because this case, like the others discussed in November, rests on two well-established theories — tortious interference with business opportunity, and breach of fiduciary duty — there is good reason to suppose that, on similar facts, New York law would produce a similar outcome.

FALL 2004

Interestingly, Fall 2004 also saw continuing development of the law and ethics of lateral movement in the direction of support for the countervailing principle that lawyers’ freedom of movement may not be unduly curtailed. The District of Columbia bar’s Ethics Committee concluded in an October opinion that it is unethical for law partners about to merge with another firm to agree that each partner’s right to a share of fees to be received in the future for work completed before the merger will be conditioned on the partner’s staying with the post-merger firm (District of Columbia Bar Legal Ethics Comm., Op. 325, October 2004).

The committee determined that such an agreement violates District of Columbia Rule of Professional Conduct 5.6(a), which addresses agreements to restrict practice in that it creates a financial disincentive for partners to leave the merged firm and practice elsewhere. That rule is the functional equivalent of Disciplinary Rule (DR) 2-108 in the New York Lawyers’ Code of Professional Responsibility (the code). The exception in Rule 5.6(a), which also mirrors DR 2-108, for an agreement relating to retirement benefits applies only to the type of retirement typical at the end of a career and not to all departures from a firm, the committee said. The opinion is persuasive in New York because both the ethics rules and case law are essentially identical to the code and cases in New York. It focuses on a form of restraint on the lateral movement of lawyers that has not been directly addressed in previous opinions or cases in either the District of Columbia or New York.

The opinion recites the following facts:

The inquirer was a partner in a Law Firm, which merged with another firm to become Merged Law Firm. Before the merger, the Law Firm was owed fees by some clients for work that had already been completed. These fee payments were to be made over time, but the Law Firm needed to do nothing further to be entitled to them. Anticipating the merger, the partners of Law Firm assigned the future right to receive these fees to a new entity, Receivables LLC. Under the agreement of those partners that created this LLC, each Law Firm partner was entitled to a fixed and specifically stated percentage share of the LLC’s receivables equal to that partner’s share of Law Firm profits. This was called a Management share. In addition, those partners who were regarded as having originated client business that led to the receivables were entitled to a further specifically enumerated percentage of the receivables, called an Originator’s share. The inquirer was an Originator and thus was entitled both to a Management share representing his share of the pre-merger Law Firm’s profits, plus an Originator’s share.

Under the documents creating Receivables LLC, the partners’ rights to receive Management and Originator’s shares were not unconditional. The agreement creating the LLC provides that if any partner of the pre-merger Law Firm who is a member of Receivables LLC leaves the Merged Law Firm before December 31 of the year following the year of the merger (a period of two years from the effective date of the merger), that partner’s Management share in Receivables LLC ceases at that time � does not vest in the terminology of the agreement � and the payments stop, unless the departure within that period from the Merged Law Firm is attributable to death, illness, or retirement from the practice of law, in which case the payments do not stop with the departure from the Merged Law Firm. If the partner leaves the Merged Law Firm after two years have elapsed since the merger, then the payments continue despite the departure. In addition, if any partner who is also an Originator, like inquirer, leaves the Merged Law Firm at any time and for any reason, then that Originator’s share becomes void and the payments of the Originator’s share stops. Thus, documents creating Receivables LLC condition the right to receive sums owed to the pre-merger Law Firm in such a way as to create incentives to partners of the former Law Firm to continue practicing with the Merged Law Firm.

The inquirer reported that he was effectively compelled to move before the end of the two-year period because of the new firm’s decision to take on clients that created conflicts of interest with the inquirer’s own clients.

HISTORY OF RELEVANT RULES

The opinion then reviews the history of the relevant ethics rules and the case law that has developed in support. The opinion cites the U.S. Court of Appeals for the District of Columbia holding that Rule 5.6 “is a mechanism to protect the ability of clients to obtain lawyers of their own choosing and to enable lawyers to advance their careers Neuman v. Akman, 715 A2d 127, 131 (D.C. 1998).”

That case in essence tracks and reaches the same conclusion as (and cites) Cohen v. Lord, Day and Lord, 75 NY2d 95, 551 N.Y.S.2d 157 (1989), the leading New York case that held that lawyers and law firms may not put economic restrictions in the way of other lawyers seeking to leave law firms.

The opinion then reviews the committee’s own prior opinions relating to the rule:

In Opinion No. 65 (1979) the Committee concluded that an agreement violated DR 2-108(a) because ‘[i]ts effect is to impose a barrier to the creation of a lawyer/client relationship between the departing lawyer and the clients of his former firm.’�Opinion No. 241 (1991) concluded that an agreement created a financial disincentive on a departed lawyer’s competition with the lawyer’s former firm. There, a law firm’s partnership agreement provided for the repayment of a partner’s capital account over a period of five years, except that where after departure a partner practiced law in the District of Columbia, the repayments were delayed for five years or until the departing partner had reached the age of 65 or stopped practicing in the District of Columbia. The Committee concluded that the agreement violated Rule 5.6(a) because ‘the financial penalties imposed on a departing lawyer serve no other purpose than restricting practice and insulating the firm from potential competition.’