Ethics Opinion 221
Law Firm Employment AgreementAn employment agreement allocating contingent fees on a percentage basis between a firm and a departing attorney who takes a firm client may be determined according to the amount of time the case was with the firm and the amount of time it was with the departing lawyer before the fee was realized. It may not include a provision restricting the attorney's right to send an announcement notifying clients of his or her departure, nor prohibit discussion of the departure should the client initiate the contact with the attorney.
- Rule 1.4 (Communication)
- Rule 5.6(a) (Restrictions on Right to Practice)
- Rule 7.1 (Communications Concerning a Lawyer's Services)
The inquirer asks about the propriety of several provisions of a law firm's employment agreement. Paragraph 5 of the agreement addresses the division of contingent fees between the firm and a lawyer who departs the firm and takes a firm client. It provides a sliding chart whereby the fee will be divided between the departed attorney and the firm based on a combination of length of time the case was with the firm before the attorney left and length of time it is with the attorney before the fee is realized. For example, if the firm was retained prior to two years before the attorney left the firm and the fee is realized within one year after the attorney's departure, the firm is entitled to 75% of the fee. The lowest percentage taken by the firm is 55% for cases in which the firm was retained within one year of the attorney's departure and where the fee is not realized until two to three years after the departure date.
Paragraph 3 of the agreement concerns notification to clients that a lawyer has left or will be leaving the firm. Under this provision, the firm agrees to send a standardized letter to the departing lawyer's clients not later than 3 days after the lawyer's departure. This letter gives the client the option of remaining with the firm or going with the departing lawyer. In return, the lawyer agrees not to contact the client or discuss his/her departure until after the firm has received the client's response.
Division of Fees
The Committee concludes that the fee provisions of paragraph five of the employment agreement do not violate the Rules of Professional Conduct. This agreement differs from others considered and rejected by the Committee since it seeks compensation for work already performed for the client. Rejections have generally been based on DR 2-108(A), predecessor to Rule 5.6(a), which provides:
A lawyer shall not participate in offering or making: (a) A partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship....Opinion 65 rejected an agreement which required 40% of an attorney's net billings to any client of his former firm be paid to the firm for two years after termination. The Committee decided that this "economic disincentive," though not a direct prohibition on representation, was "nonetheless a restriction on the right of a lawyer to practice," in violation of DR 2-108(A). The agreement required a flat percentage of future hourly billings in an attempt to "impose a barrier to the creation of a lawyer/client relationship between the departing lawyer and clients of his former firm." Opinion 65. See also Opinion 194 (disapproving reduction of payments otherwise due to withdrawing partner if that partner entered into a competing practice within one year of withdrawal).
By contrast, the fee division agreement at issue in this inquiry seeks compensation for work already performed by the firm. One purpose of predetermined fee-sharing with a departing lawyer is to avoid the unseemly bickering and the potential for litigation over clients and fees that can occur when a departing lawyer takes clients whose matters are being handled on a contingent fee basis. The agreement here applies only in contingent fee personal injury cases in which significant costs may be incurred by the firm near the beginning of the attorney-client relationship. Fees ultimately realized are divided on a percentage basis which varies according to the length of time the case was handled by the firm and the length of time it was handled separately by the departed lawyer.
The Committee can neither approve nor disapprove the specific percentages used by this firm. If the percentages represent a generally fair allocation of fees based on the firm's historical experience there is no violation of Rule 5.6(a). On the other hand if the firm's share is excessive, this would have the effect of restricting the right of the departing lawyer to practice after the termination of the relationship in violation of Rule 5.6(a). Opinion 65. The determination whether the percentages are generally fair under the varying circumstances addressed by the employment agreement is a factual determination. The Committee cannot make fact findings.
In sum, we conclude that in general a scheme for dividing contingent fees between a firm and a departing lawyer based on the length of time the case was with the firm and the length it was with the departed lawyer is ethically permissible. But we make no determination about the particular percentages used in the agreement before us.
We reach a different conclusion about paragraph three's provisions for client notification. This Committee has determined that direct personal solicitation of a firm's clients by a departing lawyer may be limited by agreement without running afoul of the predecessor to Rule 5.6(a). Opinion 77. In Opinion 97, which involved a similar agreement, the Committee stated that the right to mail announcements sufficiently protected the attorney's right to practice law and the client's ability to make an informed choice. "[I]f the right to send announcements is preserved, the firm may ethically enter into an employment agreement which limits direct solicitation by the associate after termination of his employment." Opinion 97 (emphasis added).
Though no employment agreement was involved, a similar conclusion was enforced by the Pennsylvania Supreme Court. That court let stand an injunction which prohibited attorneys from directly communicating with clients of their former firm. The injunction expressly permitted the attorneys to send announcements, and emphasized the client's right to choose counsel. Adler, Barish, Daniels, Levin & Creskoff v. Epstein, 482 Pa. 416, 393 A.2d 1175 (1978). At a minimum, it appears, the attorney retains the right to send announcements. Id. at 1179; see also Rule 7.1.
The present agreement, however, provides that the firm will control the content and timing of the notification letter, that the client will respond to the letter by contacting the firm, and that the attorney may not discuss his or her departure with the client until after the client has responded to the firm's notification. This creates a situation in which the firm controls all communication with the client relevant to the client's decision on continued representation.
The importance of the client's right to freely choose counsel is widely recognized. "An agreement restricting the right of partners or associates to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer." Rule 5.6, Comment . The Committee has declined to approve efforts which "prevent or unduly hinder clients from obtaining legal representation from attorneys of their own choosing who may have formed new associations." Opinion 181. This is consistent with opinions of other jurisdictions. See, e.g., Virginia Bar Opinion 1232 (lawyer may do nothing that restricts the client's right to counsel of his or her choice); Illinois Bar Opinion 86-16 (law firm may not restrict a client's right to choose his own legal representation, either generally or as between the firm and a departing associate).
Our opinions safeguard the client's ability to make informed decisions with regard to continued representation. This is done, at a minimum, by allowing the departing attorney to send announcements containing information sufficient to permit such decisions. Though the firm has argued that announcements are in fact being sent, its control over the announcement means that information received by the client may be biased in favor of the firm. Indeed, the firm's form notification to the client does not even tell the client where the departing lawyer can be contacted. The client's decision on representation may well be affected by the attorney's unexplained failure to communicate regarding his or her departure combined with a lack of information with which the client can contact the lawyer. Thus, we conclude the firm's form notification letter is insufficient as a substitute for the departed lawyer's right to send announcements after the termination of employment.
Finally, we address the restrictions on the lawyer's right to speak with the client about the departure until after the client has responded to the notification letter. We have previously determined that Rule 5.6(a) (in its predecessor form) permits a firm to limit such contacts when initiated by the lawyer. Opinion 77; Opinion 97. This agreement goes beyond such a restriction, however, to prohibit truthful responses to client-initiated inquiries. As such it has the same effect as the one rejected in Opinion 181: "[T]he Agreement appears to prevent a departed lawyer from responding to unsolicited questions about the possibility of representation from firm clients.... DR 2-108(A) clearly condemns these types of restrictions." See also Rule 1.4.
In summary, the Committee finds that an employment agreement allocating contingent fees between a firm and a departing lawyer may be on a percentage basis determined according to the amount of time the case was with each. The firm may not restrict the attorney's right to send an announcement notifying clients of his or her departure, nor prohibit discussion of the termination should the client initiate the discussion with the attorney.
 The agreement provides that the letter may be sent sooner if the attorney so requests, though this remains at the firm's discretion.
 Rule 1.8(d) permits the lawyer to advance costs of litigation even when the client is not ultimately liable for them.
 Our prior Opinions have not decided, and we do not decide here, the question whether a firm has an ethical obligation to notify a client of the impending departure of a lawyer prior to the date of such departure. We note, however, that there may be situations in which notice of an impending departure is required to safeguard the client's right to make informed decisions with regard to his or her representation. In such circumstances, a firm that prohibits predeparture contact by the departing lawyer may itself be under an obligation to notify its clients of the impending departure.
 That agreement prohibited an attorney from taking any action which would "interfere with the business of the firm in any way." This would apparently have precluded the sending of new practice announcements.