Articles Posted in Law Firms

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It’s a decision involving a law firm partnership that, if widely followed, will likely have a sweeping effect on the interpretation of the statutory requirement for unanimity in adopting critical agreements that govern partnerships and liited liability companies.Lerner-David

Attorney Andrew Zidel, an attorney who left prominent intellectual property boutique firm Lerner David in Westfield, failed in his attempt to use a minority veto to block the adoption of a law firm partnership agreement that treated retiring partners differently than withdrawing partners.

The trial court finessed the unanimity requirement found in the partnership statute, and was affirmed in an unreported decision of the appellate division.

Court Discounts Literal Language of Partnership Statute; Implies Consent to Adopt Partnership Agreement

The reason for Zidel’s failure to rely on the language of the statute was that the law firm had, for many years, operated without a formal partnership agreement. Therefore, the trial court found that the written formal agreement would be considered an amendment to the existing partnership agreement, and, under the partnership’s prior practices, it did not require a unanimous agreement.

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  • An agreement that barred a lawyer from soliciting clients within a geographic area was unenforceable after the lawyer left the firm under the rules governing the professional conduct of attorneys.

  • An agreement prohibiting a former associate attorney from soliciting clients of the firm after his resignation may be enforceable in New York, thus a case alleging a breach of that agreement could proceed to trial.

  • Attorney Rule of Professional Conduct 5.1 that prohibits restrictions on the practice of law is unlikely to shield non-attorneys who act on behalf of a lawyer from liability.

Can a lawyer be prohibited from soliciting the clients of his former firm? The general rule is that restrictions on the practice of law, including any non-competition agreements, are void and unenforceable.

It came as a surprise to me, therefore, that the appellate division in the first department in New York had affirmed the trial court’s decision that let a case go to trial alleging the breach of a non-solicitation agreement signed by a former lawyer.

The case is Feiner & Lavy v. Zohar. Here are the three most important holdings in the decision. First, an agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable. Continue reading

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  • An agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable.

  • Solicitation of the clients of a law firm by a former associate may be actionable, even if a potential restriction on practice, in limited circumstances.

  • The rule of professional conduct that precludes restrictions on practice will not bar a claim against a former non-lawyer employee.

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  • A charging lien protects the interest of a lawyer in fee that is to be paid from a contingent-fee recovery.  A statutory lien may be enforced through a petition filed in an underlying action.

  • The amount of a charging lien, and the lawyer’s compensation, is determined using principles of quantum meruit, or “so much as he deserves.  Quantum meruit creates an implied contract to pay an amount based on the contribution of the former lawyer to the ultimate result.

  • A charging lien claim is subject to the general requirements for trial by jury.  Once a jury trial is demanded by either party, it can be waived only with consent.  Whether a party is entitled to trial by jury depends on whether a jury trial is available in the underlying action.

New Jersey’s attorney charging lien statute (N.J.S.A. 2A:13-5) permits a discharged attorney to file a lien petition in a matter makes clear that the trial court has the authority, in the first instance, to establish and enforce the charging lien, but it is silent on the issue of whether a jury trial is required to determine the ultimate outcome.jury-box

When is a Charing Lien Subject to Trial by Jury?

That question – jury trial or not – is likely to turn on where the case was pending at the time the lien was asserted, according to a decision of the Appellate Division of Superior Court in Toscano Law Firm v. Haroldson (opinion here).  The appellate reversed the trial court’s decision in a long-running fee dispute, made without a jury, and remanded the dispute for a new trial.

Thus, although discharged attorneys in  contingent-fee matters are generally compensated under principles of quantum meruit, an implied contractual theory that is equitable in nature, the parties may have a right to trial by jury.  In the Toscano, litigation, the Appellate Division held, the trial court had confused the equitable nature of a quantum meruit claim with the fact that it is a legal remedy.  (The quantum meruit claim is one that results in money damages payable to the successful charging lien petitioner.) Continue reading

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  • Attorney separation agreements may require that a lawyer give reasonable notice to his firm before resignation, reducing conflict with departing lawyers.

  • Lawyers may agree in advance how they will handle such issues as billing, transfer of file responsibilities and return of equipment.

  • Joint notice to clients by the law firm and the departing lawyer is the preferred method of advising clients of an attorney’s departure from the firm.

Attorney separation agreements that contain provisions for a minimum notice period before an attorney’s resignation and other terms for notice, transfer of files and billing should be common.  They are not, and it is likely bad for the clients and the firm.Canva-Two-Person-Shake-Hands-683x1024

The free-for-all that may follow a resignation is something that can be avoided, and a recent opinion of the ABA’s standing committee holds that the minimum notice requirement is ethical as long as it does not restrict competition by the departing lawyer or limit the client’s ability to choose counsel.

Separation Agreements to Manage Lawyer Resignations

What would such an agreement look like?  We suggest that the following issues should be addressed whether dealing with withdrawing principals or resigning attorneys.

Minimum Notice to Law Firm of Intended Departure

In many circumstances the withdrawal of a senior lawyer from a law firm for another practice is a process that is implemented over weeks or months.  The orderly transition of files by a process that is mutually acceptable to everyone involved serves a number of interests held by all involved, particularly the clients. Continue reading

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  • Law firms may not limit the ability of lawyers to resign, solicit clients and compete with the firm, but they may contract for a reasonable notice period necessary for the orderly transfer of client matters.

  • Both the departing lawyer and the law firm share an ethical obligation to assure the client of continued competent representation during the transition period before the lawyer’s departure.

  • The notice requirement cannot act as a financial disincentive to competition and the departing lawyer’s willingness to cooperate in the transfer of matters and post-departure billing is a factor in determining whether the notice period is reasonably imposed.

There are some very good reasons for lawyer firm management to fear the “grab and go.”  A key lawyer resigns with little or no notice and immediately begins to solicit clients.  In some instances, the result can devastate the fortunes of a law firm, drawing out cash flow and personnel, but leaving the firm to continue to carry the same level of expenses.

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The Law Firm Grab and Go

It’s sometimes known as the “grab and go.” It occurs when one or more lawyers resign without notice while simultaneously soliciting the firm’s clients to follow them.   In some cases, the grad and go will strip a small firm of a substantial portion of its revenue while leaving it with large liabilities such as leases, advanced expenses and personal financial exposure for the remaining principals.  Can a law firm contract with its principals and attorneys to prevent the grab and go? Continue reading

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  • Law firms should recognize that lawyer resignations and the loss of clients are inevitable in the modern law practice due to prohibitions on agreements that restrict competition.

  • Law firms can protect the interests of clients and the firm by adopting best practices that govern lawyer resignations.

  • Law firms should recognize the investments made in the firm’s intellectual property and adopt policies that limit misappropriation.

Law firms must survive in a world in which key employees are free to leave at any time and to take as much of the firm’s business with them as they can.  Many lawyers, motivated by the financial incentives that are part of their separation,  believe that there are no rules limiting their solicitation of clients, copying of key documents and compensation for their old firm.  This view may be mistaken, but sorting it out after the resignation or withdrawal is expensive, time-consuming football-1717630_1280-1024x682and threatens to draw off the time and attention of key managers.

The grab and go is the unexpected resignation without notice combined with the immediate unilateral solicitation of clients. Its corollary is the law firm lockout, in which a lawyer that has indicated his or her intention to leave is locked out of the firm and cut off from clients while the clients are intensely solicited by the firm.

Best Practices to Manage Lawer Resignations

Here is a list of some of 10 policies that a law firm should have in place before a key lawyer decides to move his or her practice.  But first, the reality check.  Lawyers will leave and lawyers will take clients.  Not only that, but lawyers have a right to leave and take clients.  The only issue on the table is managing the process.

Law firms, the individual lawyers that work there and the clients that we serve are better served by articulating a clear set of rules beforehand, by adopting key internal policies and by recognizing that resignation need not equate with conflict.  Lawyers and their former law firms should remember that life goes on after the departure.  But when one side tries to gain an unfair advantage over the other, however, life gets complicated and messy. Continue reading

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  • Courts determine whether an individual has an equity interest in a law firm partnership by examining the financial investment and risk taken by the claimed owner, such as payment of capital and guarantees of obligations.

  • The rise of the non-equity partner in law firms management has changed the status associated with the title partner.  Nearly half of all law firm partners are now classified as non-equity or limited equity.

  • The way in which the firm reports the income of a partner to the IRS in its tax filings are evidence of an equity interest in many cases, but describing an individual as an equity owner may not be conclusive.

The last refuge of the general partnership may be the law firm.  However, the term “partner” in a law firm can have a number of different meanings and it often does not identify only the traditional equity owner of the enterprise.  In many circumstances, “partner” is a title that indicates a senior attorney, usually at the top of the firm’s professional structure.  It does not, however, provide a particularly reliable indication of either management responsibilities or a financial interest in the firm.partnership-526413_1280-1024x562

Not all partners are created equally.  In fact, the rise of non-equity partner, those that do not share in the profits or capital of the law firm, is rising rapidly.  Only 56 percent of the partners in law firms in 2018 were equity partners.  (Above the Law, 3 Reasons to Embrace the Rise of Non-Equity Partners).  That trend is a 250 percent increase over the past two decades. In 1999 the figure was 17.1 %.(Altman Weil, Inc. What Should Law Firms Do about Non-Equity Partnership).

Not surprisingly, the existence of an equity interest, or not, is not an uncommon area for dispute.  In this post we consider here involving the effect of tax documents on the claim of an attorney that he held an equity interest in a well-known personal injury firm.  Treatment for income tax purposes is invariably a key component of holding equity.  Is it dispositive?  In this case, no. Continue reading

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  • Attorneys have common law and statutory security interests in the proceeds of recoveries of their clients, generally referred to as charging liens.

  • A statutory lien is created when a lawyer files a pleading with an affirmative claim for recovery and may be enforced by filing a petition in the underlying action.

  • Clients have an interest in the assertion of an attorney charging lien and must be notified of their right to have the amount of the fee determined by arbitration.

Attorneys that provide services to clients with that yields a financial recovery to the client will typically have a security interest in that recovery to secure their fee.  The lien may be statutory or, in some cases, the attorney may have a lien that is enforceable in equity.  These two types of liens, statutory and equitable, have significant differences, but both types of liens provide the lawyer with a security interest in the proceeds of the case.Law Firm Business Divorce Attorneys

In this article, we will take a look at some of the mechanics of asserting and enforcing a lien.  In a subsequent post, we will examine the manner in which courts have allocated competing claims for fees.

The Attorney Charging Lien

A lien is more than just a claim for fees.  It is a secured interest in the recovery that a client achieves – through the lawyer’s efforts, of course — for the satisfaction of the debt.  It may be asserted over all of the recovery and, therefore, even against the client.  As a practical matter, liens are asserted when a lawyer is replaced or in rare instances when a client fires the lawyer in an attempt to avoid paying a fee. Continue reading

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  • Business divorce disputes among lawyers will often require the division of contingent fees realized after the parties have separated their business interests.

  • An agreement between lawyers in a firm to divide fees in the event of their separation cannot function as a restriction on a lawyers right to practice and to compete with a former firm, but otherwise is generally enforceable.

  • Courts also use principles of quantum merit — ‘as much as he deserves – to allocate contingent fees between lawyers who once practiced togther.

The division of fees, in particular contingent fees earned after a firm is dissolved or the resignation of a rainmaker, are the catalyst for business divorce disputes in law firm breakups.  These disputes involve some key issues:business-861325_1280-1024x768

  • Is there an agreement in place covering the division of fees?
  • If there is an agreement, is it enforceable?
  • If there is no agreement, how will a court divide the fees?

Agreements to Divide Fees

Lawyers practicing together in a firm frequently make agreements on how fees will be divided after the withdrawal of a lawyer.  These agreements may be part of the firm’s partnership, operating agreement or corporation bylaws, or embodied in an employment contract or separation agreement.  These types of agreements are generally, but not always, enforceable.

Getting the client’s consent to such a division is also a good practice and, in at least one jurisdiction, may be required.

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Jay R. McDaniel, Esq.
(973) 602-3915
Weiner Law Group LLP
New Jersey Office
629 Parsippany Road
Parsippany, NJ 07054
New York City Office
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New York, NY 10004
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