Ethics Opinion 294
Sale of Law Practice by Retiring Lawyer
* [NOTE: See how Opinion 294 has been substantively affected by the amendments to the D.C. Rules of Professional Conduct that became effective on February 1, 2007]
It is not unethical for a retiring lawyer (i.e., a lawyer withdrawing from the private practice of law in the locale in which the lawyer had been practicing) to sell his law practice to another lawyer, provided that he is able to terminate the representation of his clients in a manner consistent with Rule 1.16(d), that clients are suitably informed of the sale transaction and agree to the new representation, and that client confidences and secrets are preserved while negotiating the sale of the practice. Additionally, the purchasing lawyer may not charge a discriminatory fee to the retiring lawyer’s clients.
- Rule 1.5(a) (Reasonableness of lawyer’s fee)
- Rule 1.5(e) (Division of Fees Between Lawyers Not in the Same Firm)
- Rule 1.6 (Confidentiality of Information)
- Rule 1.7 (Conflicts of Interest)
- Rule 1.16 (Declining or Terminating Representation)
We have been asked to advise on the propriety, under the District of Columbia Rules of Professional Conduct, of the sale of a law practice incident to the retirement of a lawyer. The only specific facts we have been given are that the inquirer, a solo practitioner, is planning to retire and is contemplating the sale of his law practice to another lawyer. We are assuming that the sale price does not include any physical assets, and that it is predicated essentially on the so-called “goodwill” value of the retiring lawyer’s practice.1 For the purpose of this Opinion, we are also assuming that the retiring lawyer is 1 selling his entire practice and that payment for the sale will be made in a lump sum or in installments.
This Opinion is limited to the sale of an entire law practice to another lawyer upon the retirement of a lawyer. By “retirement,” we mean the withdrawal of a lawyer from the private practice of law in the locale in which the lawyer had been practicing. Such retirement could occur when the lawyer decides to stop working because of age, disability, family responsibilities or other reasons; when the lawyer continues to practice law, but in a capacity in which he/she does not serve private clients (such as government service or as in-house counsel to a corporation); or when the lawyer relocates to another geographic locale. Nothing we say here should be taken as having any relevance whatever to attempted transfers of clients or a law practice under any other circumstances. We also do not address the ethics of the sale of a law firm name, the use of which is governed by Rule 7.5. See also D.C. Bar Op. 277 (Nov. 19, 1997).
The retirement of a member of a law firm usually does not produce any discontinuity in client representation. In all likelihood, the firm’s partnership or shareholder agreement or other formal or informal understandings will address transfer of responsibility for the client’s matters to another lawyer in the firm. Fee-sharing concerns under Rule 1.5, confidentiality concerns under Rule 1.6 and conflict of interest concerns under Rule 1.7 do not exist when a lawyer transfers work to another lawyer in the same firm.
But for a solo practitioner, the situation is different. There is no law firm to continue representation of the lawyer’s clients after his retirement, and there is no person or entity to pay the lawyer for his investment (in capital and in years of effort) in the law practice or for any goodwill associated with his practice. Thus, a solo practitioner does not have the means available to a lawyer practicing in a law firm to realize some value from a law practice which, handled by another lawyer, could continue after the lawyer’s retirement.
- Sale of a Law Practice Under the Code of Professional Responsibility
While there is no mention in the District of Columbia Rules of Professional Conduct of the ethical implications of the sale of a law practice, the subject is not novel. Under the predecessor Code of Professional Responsibility, a non-binding Ethical Consideration (EC 4-6) stated that “a lawyer should not attempt to sell a law practice as a going business because, among other reasons, to do so would involve the disclosure of confidences and secrets.”2 Under the Code, however, no specific disciplinary rule prohibited the sale of a law practice.
There is authority in other jurisdictions that, under the Code of Professional Responsibility, the sale of a law practice was unethical. In Raphael v. Shapiro, 587 N.Y.S.2d 68, 72 (N.Y. Sup. Ct. 1992), for example, the court held that such a transaction was “void and unenforceable under Code of Professional Responsibility EC 4-6 . . . .” See also Geffen v. Moss, 125 Cal. Rptr. 687, 693 (1975).
Decisions in other contexts reached similar results. For example, in Dugan v. Dugan, 457 A.2d 1 (N.J. 1983), the court was asked to place a value on the goodwill of a sole practitioner’s law practice for the purpose of an equitable distribution of property pursuant to a divorce. Citing the Code of Professional Responsibility, a state ethics opinion and various treatises and case law, the court explained that a sole practitioner was prohibited from selling his practice, and concluded that this prohibition had “an adverse effect” on the value of the practice’s goodwill. Id. at 8-9.
- Sale of a Law Practice in the Era of the Model Rules of Professional Conduct
While the American Bar Association’s original 1983 Model Rules of Professional Conduct did not address the sale of a law practice, a 1990 amendment, Model Rule 1.17, did so.3 The Model Rule, which has not been adopted in the District of Columbia or considered by the Court of Appeals, would permit a retiring lawyer to sell his law practice if the practice is sold in its entirety to another lawyer or law firm, notification and certain disclosures are made to the affected clients,4 and the transferee lawyer does not increase fees to be paid by the affected clients.
At least twenty-one jurisdictions have adopted Model Rule 1.17 (or a variation of it) and thus permit the sale of a law practice when accomplished according to its conditions and requirements.5 Two other jurisdictions (Kansas and Washington) that have not adopted Model Rule 1.17 have nevertheless approved the sale of a law practice, subject to the satisfaction of conditions imposed under the general ethical rules in effect in those jurisdictions. See Washington Ethics Op. 192 (May 3, 1996); Kansas Ethics Op. 93-14 (Dec. 8, 1993).
At least one jurisdiction appears to adhere to the more traditional view that a sale of a law practice, under any circumstances, is unethical. See Arizona Ethics Op. 92-8 (June 22, 1992) (concluding that a sole practitioner cannot sell or lease the goodwill of his law practice). Maryland is also in this category (Prahanski v. Prahanski, 582 A.2d 784, 790-91 (Md. 1990)), but its law will change in January, 2000 when it adopts a version of ABA Model Rule 1.17.
We are aware of no decisions in the District of Columbia on this subject.
- Sale of a Law Practice in the District of Columbia
In addressing the sale of a law practice under the District of Columbia Rules of Professional Conduct, we act against a background of mixed opinions and conclusions elsewhere. We begin our analysis with the observation that our Rules do not directly address the sale of a law practice. Since no Rule directly addresses the subject, its ethical status depends on an analysis under the Rules of Professional Conduct of the conduct of which it is comprised. This conduct includes:
a. termination of the representation of clients by the retiring lawyer
b. communication with clients by the retiring and transferee lawyers
c. transfer of responsibility for client matters to another lawyer
d. transfer of client information and files to another lawyer; and
e. receipt of funds by the retiring lawyer from the purchasing lawyer.
These types of activities are addressed in the Rules, and we discuss them below in the context of the sale of a law practice.
- Termination of the Representation of a Client
A lawyer, even a retiring lawyer, may not terminate a representation without proper regard for his client’s interests. Absent “cause” for termination (such as a physical or mental condition that impairs the lawyer’s ability to represent the client, see Rule 1.16(a)(2), or certain client misconduct, see Rule 1.16(b)), a lawyer may terminate a client representation only “if withdrawal can be accomplished without material adverse effect on the interests of the client . . . .” Id. The termination must be accomplished in a manner that does not prejudice the client’s interests. See Rule 1.16(d).
The retiring lawyer who plans to sell his law practice will be making a wholesale termination of all of his client representations. That there may be another lawyer (the proposed transferee of the practice) available to continue the retiring lawyer’s work does not diminish the retiring lawyer’s responsibilities under Rule 1.16(b), because his clients are not obliged to accept representation by the transferee lawyer. Thus, merely making another lawyer available to a client does not satisfy the lawyer’s responsibilities under Rule 1.16. Cf. D.C. Bar Op. 273 (Sept. 17, 1997); D.C. Op. 270 (March 19, 1997); D.C. Op. 266 (June 19, 1996). If the retiring lawyer’s clients do not specifically agree to representation by the proposed transferee lawyer, the retiring lawyer will have to seek other ways of satisfying his continuing obligations to his current clients, such as by completing the representations himself, identifying another lawyer acceptable to these clients, or giving the client sufficient advance notice of his retirement to allow the client to himself obtain successor counsel. See Rule 1.16(d).6
- Client Communications
An obvious premise of any sale of a law practice is the transferee lawyer’s access to the retiring lawyer’s practice, i.e., his client relationships. But those relationships (unlike many ordinary commercial contract relationships) cannot be sold or assigned by the retiring lawyer, because they are personal and terminable at will by the client. (See, e.g., Rule 1.16 cmt. ). So, to facilitate a transfer of the retiring lawyer’s practice, the transferee lawyer might require as part of the transaction that the retiring lawyer make a suitable introduction of his clients to the transferee lawyer. Such a referral might take the form of a personalized or general mailing or other communication by the retiring lawyer to his clients announcing his intention to retire and introducing the transferee lawyer to the addressee clients.
That conduct by the retiring lawyer, which is really an effort by that lawyer to persuade his clients to agree to terminate their relationship with him and to retain another lawyer, is fraught with ethical concerns. For one, the effort presents a significant conflict of interest on the part of the retiring lawyer. In communicating with current clients, asking them to transfer their legal work from him to another lawyer, the retiring lawyer is promoting his personal financial and other interests, in addition to his clients’ interests in an orderly and competent continuation of their legal representation. The conflict is one described in Rule 1.7(b)(4), where “the lawyer’s professional judgment on behalf of the client will be or reasonably may be adversely affected by . . . the lawyer’s own financial, business, property or personal interests.”
Such a communication does not appear to be anywhere prohibited in the Rules, but it must be accompanied by a disclosure (preferably in writing; see Comment  to Rule 1.7) that meets the requirements of Rule 1.7(c), so the client is aware of the lawyer’s financial interest in seeking the client’s agreement to terminate the representation and to be represented by another lawyer, so that the client can give an informed consent to such action, and so that the client understands that he is not obliged to accept representation by the proposed transferee lawyer and may select his own lawyer. Such a disclosure would, at a minimum, have to include the following:
- notification that the proposed transfer is pursuant to the lawyer’s decision to retire;
- a description of the business arrangement between the retiring and transferee lawyers sufficient to inform the client of the retiring lawyer’s financial interest in the requested transfer of the matter to the new lawyer;
- a description of the proposed transferee lawyer’s experience and ability to represent the client, including any reasons why the client might be less favorably represented by the new lawyer; and a notification that the client is not obliged to accept the proposed transfer and that, if he does not, the retiring lawyer may withdraw from the representation (if that can be ethically accomplished under Rule 1.16).
The retiring lawyer, while still representing his clients, is obliged under Rule 1.1 to provide competent representation to them. In the context of a recommendation of another lawyer to his clients, Rule 1.1 would require the retiring lawyer to act competently in selecting a transferee lawyer.
The proposed transferee lawyer may also wish to communicate with the clients proposed for transfer. Before providing client identifying information (e.g., names and addresses) to the transferee lawyer, the retiring lawyer should determine whether it is ethical to disclose such information to the transferee lawyer. (See discussion below concerning the confidentiality of client identities.) Such a communication by the transferee lawyer is not unethical in the District of Columbia so long as it is not false or misleading and does not violate any other general regulation of contacts with prospective clients under Rule 7.1(b). See D.C. Bar Op. 249 (July 19, 1994).
- Transfer of Responsibility for the Representation
If the client agrees to the new representation by the proposed transferee lawyer, the retiring lawyer will have all of the responsibilities of a lawyer terminating a representation.7 That lawyer will need to return to the client any property he holds (including any advances of fees and/or expenses) (Rules 1.15(b), 1.16(d)), and will need to transfer files to the transferee lawyer and take such other steps as will facilitate an orderly transfer of responsibility to the transferee lawyer.8
The transferee lawyer should treat the transferred client as he would any new client, by investigating whether any conflict of interest might affect the new representation and taking steps to disclose the conflict and seek the client’s consent to the representation, all as provided under Rule 1.7. The fee communication required under Rule 1.5(b) is also necessary.
- The Transfer of Client Information and Files to Another Lawyer
During the course of the retiring lawyer’s discussions/negotiations with the prospective purchaser of his practice, questions about the nature of the retiring lawyer’s practice, clientele and perhaps individual client matters will surely be asked, or such information may be volunteered by the retiring lawyer. Rule 1.6 (Confidentiality) provides guidance on what client-related information the retiring lawyer can use or reveal under these circumstances.
Rule 1.6(a) defines the information to be protected by a lawyer as client confidences and secrets. “Confidences” are that information protected under the common law attorney-client privilege, and “secrets” include all information gained in the course of the representation, whether from the client or from another source, “that the client has requested be held inviolate, or the disclosure of which would be embarrassing or would be likely to be detrimental to the client.” Rule 1.6, cmt. . Under Rule 1.6 (b), such information may only be used by the lawyer for the benefit of the client. Since the retiring lawyer’s efforts to sell his law practice are primarily for the lawyer’s benefit, and not the client’s, no information protected by Rule 1.6(a) may be disclosed by the retiring lawyer in this activity without the affected clients’ informed consent.
Nevertheless, some information about the retiring lawyer’s practice can be discussed with the prospective purchaser without the consent of the affected clients. Some of such information is clearly not confidential and some may not be secret, depending on the circumstances. The number of clients proposed for transfer, the retiring lawyer’s aggregate billing, receivables and income history, and general descriptions of the nature of the retiring lawyer’s cases usually can be disclosed without risk of violating Rule 1.6. No confidential or secret information would likely be contained in this information. If it does not reveal information about specific clients, the retiring lawyer also may be able to provide some information about specific cases, such as the claims or areas of advice or consultation involved and the billing history of the matter.
Disclosure of specific client and adverse party identities is more problematic. It may be that, in some settings, the identity of a client and an adverse party will not be confidential or secret, as when these names are mentioned in a public document, such as a complaint or answer. But even if included in a public document, the names could be a secret. As we noted in D.C. Bar Op. 124 (March 22, 1983), “even if the fact of representation were known by someone other than the attorney or the client, thereby destroying the confidentiality necessary to the attorney-client privilege, the fact of the representation could still constitute a ‘secret’ if the avoidance of additional disclosure was, nevertheless, desirable.” (See also D.C. Bar Op. 246 (Revised) (Oct. 18, 1994) for a further discussion of the application of Rule 1.6 to information that has appeared in publicly filed documents.) In many settings, particularly in a counseling (as distinct from a litigation) practice, the fact that a person has sought legal advice by a lawyer may be confidential. See, e.g., D.C. Bar Op. 124 (opining that the identities of clients who sought tax advice, including several members of Congress, should be protected under Rule 1.6).
Substantive information about a specific representation is most likely to be confidential, and so not disclosable by the retiring lawyer without client consent.
- Fees to be Paid to the Retiring Lawyer
There are many different methods by which the transferee lawyer could pay the retiring lawyer for the transfer of the latter’s law practice. These would include a lump sum payment at the time of sale, installment payments not tied to the fees earned from the clients transferred to the purchasing lawyer, and periodic payments related in some way to the fees earned from such clients.
Where the payment (lump sum or installment) to the retiring lawyer is unrelated to the fees to be earned by the purchasing lawyer, we see no ethical concern for the retiring lawyer. For the transferee lawyer, Model Rule 1.17(d) requires that “[t]he fees charged clients shall not be increased by reason of the sale,” although it would permit the transferee lawyer to charge higher fees “at a rate not exceeding the fees charged by the purchaser for rendering substantially similar services prior to the initiation of the purchase negotiations.” We observe only that, under Rule 1.5(a), the fees charged by the transferee lawyer to transferred clients must be “reasonable.”9
Where the payment to the retiring lawyer is tied to the receipt of fees by the purchasing lawyer, Rule 1.5 (e) is implicated. That Rule prohibits the sharing of legal fees with a lawyer not practicing in the same firm as the lawyer receiving the fees unless the division is in proportion to the services rendered by each lawyer or the lawyers assume joint responsibility for the representation; the client is informed of, and consents to, the division of fees; and the total fee is reasonable. In D.C. Bar Op. 286 (Nov. 17, 1998), we held that a payment of something of value to someone which is tied to the receipt of legal fees is a form of fee-sharing subject to Rule 1.5(e). In the situation before us, the payments to the retiring lawyer, if tied to the receipt of fees from the transferred clients, would be a form of fee-sharing. Unless the arrangement met the conditions of Rule 1.5(e), this form of payment for the transfer of a retiring lawyer’s practice would be unethical.
- Termination of the Representation of a Client
- Sale of a Law Practice in the District of Columbia
1. Goodwill has been described as “the value assigned to Detroit Bank & Trust Co. v Cooper, 287 N.W.2d 266, the expectation of future business.” 268 (Mich. Ct. App. 1979), or “the probability that old customers of a concern will continue their custom and recommend it to others.” O’Hara v. Ahlgren, Blumenfeld and Kempster, 537 N.E.2d 730 (Ill. 1989) (internal quotations and citations omitted).
2. The Code of Professional Responsibility was in effect in the District of Columbia between 1972 and 1990.
3. The text of ABA Model Rule 1.17 reads as follows:
A lawyer or a law firm may sell or purchase a law practice, including goodwill, if the following conditions are satisfied:
(a) The seller ceases to engage in the private practice of law [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the practice has been conducted.
(b) The practice is sold as an entirety to another lawyer or law firm;
(c) Actual written notice is given to each of the seller’s clients regarding:
(1) the proposed sale;
(2) the terms of any proposed change in the fee arrangement authorized by paragraph (d);
(3) the client’s right to retain other counsel or to take possession of the file; and
(4) the fact that the client’s consent to the sale will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.
If a client cannot be given notice, the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction. The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.
(d) The fees charged clients shall not be increased by reason of the sale. The purchaser may, however, refuse to undertake the representation unless the client consents to pay the purchaser fees at a rate not exceeding the fees charged by the purchaser for rendering substantially similar services prior to the initiation of the purchase negotiations.
4. We have been advised that ABA Model Rule 1.17 has been before the District of Columbia Bar’s Rules Revision Committee, but has not received substantive evaluation by the Committee.
5. These jurisdictions are: Alaska, Colorado, Florida, Hawaii, Indiana, Iowa, Maryland (effective January, 2000), Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Oregon, South Carolina, Virginia (effective January, 2000), West Virginia, and Wisconsin.
6. There may be some circumstances, perhaps not unique in retirement, in which a lawyer seeking to withdraw from a representation, through no fault of the lawyer, is unable to communicate with his client or receives no communication from his client in response to a notification of withdrawal. Where, for whatever reason, the withdrawal is ethically correct and must occur notwithstanding such inability to communicate, it may be proper for the retiring lawyer to transfer responsibility for the representation to another lawyer for the limited purpose of preventing the occurrence of an event (such as the passage of a limitations period or the date of a mandatory governmental filing) which might prejudice the client. Exactly how the retiring lawyer should proceed under these circumstances would depend on the facts, including the nature of the anticipated prejudice to the client and the confidential or secret information that would have to be disclosed to the transferee lawyer to allow that lawyer to protect the client’s interest.
7.There is no requirement in the Rules that the termination and transfer agreement be in writing, but the interests of both the retiring lawyer and the client would be better served by a written agreement.
8. Rule 1.15(a) also requires a lawyer to preserve records of client funds and property for five years after termination of the representation. As regard the disposition of files of a former representation, see D.C. Bar Op. 283 (July 15, 1998).
9. Rule 1.5(a) lists the following as factors to be considered in evaluating the reasonableness of a lawyer’s fee:
(1) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) The fee customarily charged in the locality for similar legal services;
(4) The amount involved and the results obtained;
(5) The time limitations imposed by the client or by the circumstances;
(6) The nature and length of the professional relationship with the client;
(7) The experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) Whether the fee is fixed or contingent.