Speaking of Ethics: Firm Mergers, Lawyer Departures, and Rule 5.6
From Washington Lawyer, March 2005
By Lisa Y. Weatherspoon
In today’s mobile society, it is not at all uncommon for lawyers to move from one firm to another for a number of reasons. Sometimes law firms attempt to create employment or partnership agreements that limit a lawyer’s professional movement. This month’s column addresses these issues and takes a look at Ethics Opinion 325 (2004).
The question presented in Opinion 325 is whether a law firm, about to merge with another, may effect an agreement that distributes already earned profits only to partners who continue to practice with the newly merged firm without violating Rule 5.6(a) of the D.C. Rules of Professional Conduct.
The agreement in question provided that each partner was entitled to a specific share of receivables for work completed prior to the merger. Pursuant to the vesting provision of the agreement, a partner must remain, except for illness, death, or retirement, with the postmerger firm for a period of two years in order to receive the full “management share.” Partners who were considered to have originated client business that resulted in fees were entitled to an “originator’s share.” This share would stop if the partner ever left the firm for any reason.
The D.C. Bar Legal Ethics Committee found that the management share portion of the agreement violates Rule 5.6(a) because it creates financial disincentives that restrict a partner’s right to practice law in other firms. The agreement does not violate the rule where the affected lawyer is retiring because it does not interfere with the lawyer’s choice of law firms or insulate the former firm from competition.
The origination share of the agreement posed a greater question. However, the committee ultimately found that it too violated Rule 5.6(a) because the clear effect of the nonvesting portion of the agreement was to discourage partners from voluntarily leaving the newly merged firm. The committee acknowledged that “the simple existence of an economic cost to leave a firm does not necessarily mean that Rule 5.6(a) has been violated. To constitute a violation, an agreement must effectively ‘restrict the rights of a lawyer to practice after termination of the relationship.’”
The committee emphasized that compensation agreements that stop after separation from an ongoing firm do not necessarily violate Rule 5.6(a). The origination share portion of the agreement violated Rule 5.6(a) because the firm had “wound up its affairs and distributed its assets to the partners,” while attempting to retain some control over those assets after distribution for years into the future and conditioning future entitlement upon continued work for the firm. The committee specifically noted that an ongoing firm with a current compensation plan that considers the contributions of partners in previous years does not necessarily violate the Rules of Professional Conduct when a partner who departs for any reason is cut off from ongoing compensation.
Rule 5.6(a) provides that “[a] lawyer shall not participate in offering or making a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.” The purpose of the rule is to enable lawyers to move freely between law firms and other work settings. The underlying thought is that clients benefit when lawyers are free to make choices about career advancement and work environments. As such, agreements that place restrictions on a lawyer’s right to practice after terminating a relationship with a firm are prohibited. Retirement is the one exception to this general rule.
An agreement need not expressly restrict a lawyer’s right to practice in order to violate the rule. Agreements that create financial disincentives to departing lawyers may violate Rule 5.6 as well. Rule 5.6(a) is violated when the financial penalties, imposed on departing lawyers, function solely to restrict lawyers’ rights to practice and protect firms from potential competition. D.C. Ethics Op. 241 (1993).
The Legal Ethics Committee has opined on several arrangements that violate Rule 5.6(a) for these reasons. In Opinion 65 (1979), for example, an agreement that required a lawyer to pay 40 percent of any fees received from a client of the lawyer’s former firm if earned within two years following the lawyer’s separation from the former firm was found to violate Disciplinary Rule 2-108(a), the predecessor to Rule 5.6(a). In this opinion the committee specifically noted that the agreement inhibited clients’ choice of lawyer, as affected lawyers might be reluctant to work with clients of the former firm, given the negative financial consequences. This restriction on the departing lawyer’s right to practice violated the rule.
In Opinion 241 the firm’s partnership agreement provided that a partner’s capital account would be paid over a period of five years unless the departing lawyer practiced in the District of Columbia, in which case repayment would be delayed for five years or until the former partner reached age 65. The sole function of this type of agreement was found not only to restrict a departing partner’s right to practice, but to insulate the former firm from competition after a lawyer’s departure. The agreement violated Rule 5.6 because its effect limited competition.
In summation, Rule 5.6(a) extends the right to freely practice law to members of the District of Columbia Bar. An agreement that expressly or effectively restricts a lawyer’s right to practice law and/or seeks to insulate a firm from competition from its former affiliates violates the rule.
Legal ethics counsel Ernest T. Lindberg and Lisa Weatherspoon are available for telephone inquiries at 202-737-4700, ext. 231 or 232, or by e-mail at email@example.com.