Clients Are Not Property ABA Formal Opinion 489 & Phantom Rule 5.8, 0520 SCBJ, SC Lawyer, May 2020, #38

• Author: Michael J. Virzi, J.
• Position: Vol. 31 Issue 6 Pg. 38

Clients Are Not Property: ABA Formal Opinion 489 & Phantom Rule 5.8

No. Vol. 31 Issue 6 Pg. 38

South Carolina BAR Journal

May, 2020

Michael J. Virzi, J.

Much has been written, and more could be, on the various ethical considerations surrounding a lawyer’s departure from a law firm. For example, a departing lawyer’s duties to the firm prior to departure, the potential conflicts of interest created by joining a new firm, and the lawyer’s or the firm’s interest in fees later collected by the other could each be the subject of a separate article, and surely have been. This article focuses on the departing lawyer’s and the firm’s duties of communication with clients and on dispelling the myth of who “owns” the client files.

The required substance of communications with clients upon a lawyer’s departure has been well understood by the bar for more than two decades. In 1999, the American Bar Association (ABA) directed lawyers to notify clients of a lawyer’s departure and of the client’s three options: remain with the firm, depart with the lawyer, or hire any other lawyer of their choosing.^[1] This practice appears to be well established and largely undisputed. Several finer points surrounding this notice to clients, however, have remained at best misunderstood and at worst hotly contested. Those include the appropriate timing of the notice, solicitation of clients, the status of the attorney-client relationships during the transition period, and access to client files. Some recent clarifications from the ABA, the South Carolina Supreme Court (in a sense), and other jurisdictions have brought much needed clarity. This article will explain the history of the issue, particularly in South Carolina, and hopefully encourage fewer disputes over who may do or say what and when in firm breakups. While our court has declined four successive proposals from the Bar for a Rule 5.8 that would govern firm breakups, the ABA seems to be advising that existing rules already cover the necessary ground and a new 5.8 is simply not needed.

It is worth noting that these issues arise in two sometimes distinct and sometimes overlapping circumstances: when a lawyer leaves a firm and when a firm breaks up in a larger sense. Attempts to cover both scenarios and the gray area between them (e.g. two lawyers leaving a 10-lawyer firm) has led to lengthy, detailed rule proposals, particularly when they also impose different obligations on the departing lawyers than on the remaining ones. Fortunately, recent guidance on the topic imposes obligations on both equally and is broad enough to cover all departure scenarios.

Some history

The modern guidance on handling firm breakups has been rooted for more than 20 years in the ABA’s 1999 Advisory Opinion 99-414, issued in response to the growing trend of lawyer mobility.² 99-414 focused largely on the departing lawyer’s duties, but portions of it were applicable to the conduct of both the lawyer and the firm. The basic guidance in that opinion was 1) the lawyer and firm should attempt to work together to send a joint communication, 2) if that effort fails, the lawyer or firm may unilaterally notify the client, and 3) in any case, the communication should inform the client of three options: remain a client of the departing lawyer, remain a client of the firm, or choose a new lawyer.³

In 2006, the Supreme Court of Florida created Rule 4-5.8, which made much of the ABA’s 1999 advice mandatory in Florida.⁴ Then in 2008, the South Carolina Bar petitioned the Supreme Court to adopt the Florida rule here, based on a recommendation from the Professional Responsibility Committee. Like Florida’s rule, however, that proposal included a noticeably one-sided provision that favored firms over departing lawyers. It declared that any client that failed to make an election of counsel would remain a client of the firm (and, by implication, not of the departing lawyer). If adopted, that would have been at odds with the prevailing view that a client has an attorney-client relationship with both the law firm and the individual lawyer or lawyers who work on the matter.

Unlike the Florida rule, however, the Bar’s proposal was more balanced between lawyer and firm in another respect. The Florida rule also prohibits departing lawyers from contacting clients until after first approaching the law firm to negotiate a joint communication. The prohibition includes soliciting the clients and merely notifying them of the anticipated departure. In many cases, the latter restriction could conflict with the departing lawyer’s duties of diligence and communication.

More to the point, though, this prohibition in Florida is imposed not on the firm but only on the departing lawyer, despite that the departing lawyer also has an attorney-client relationship with those same clients, as the ABA and others have recently clarified. The Bar’s 2008 proposal was balanced on that point, prohibiting both firm and lawyer from communicating with clients about the departure until efforts are made to negotiate a joint communication.

In 2009, however, the court rejected that proposal in a letter stating that it failed to emphasize the need to protect clients during the transition period and the client’s right to choose counsel. The proposed rule and its comments were explicitly focused on solicitation, and the court noted that the focus should instead be on the clients’ interests. The proposal would have resolved many of the disputes that still exist today between firms and departing lawyers, but it would have resolved a big one in favor of firms. The court and the ABA appear to be insisting that those disputes instead be resolved in favor of the client.

In 2010, the Bar’s Board of Governors sent a revised rule proposal to the court that was not as focused on solicitations, and the court forwarded it to the PR Committee for comment. The Committee commented that the new proposal “appears to favor law firms over departing lawyers … consistent with the notion that firms may have invested time in developing a client base, and new associates should not be placed in a position to disrupt those business relationships. … The [Bar’s 2008 proposal] had attempted to strike a different balance.” This difference in balance was primarily that the 2010 proposal read more like the Florida rule—it prohibited only the departing lawyer and not the law firm from notifying clients before attempting to negotiate a joint notice.

The Committee also offered revisions to the Board’s proposed rule, but even those revisions continued to favor firms over departing lawyers in the same two ways, plus a third one. The Committee’s revision added to the opening language of the rule (taken from a comment in the Board’s proposal) this sentence: “A lawyer leaving a law firm, when the firm remains available to continue legal representation, shall not take client files without an agreement with the law firm to do so.” Declaring that only the firm and not the departing lawyer may take possession of a file in a matter in which they both have an attorney-client relationship would have been one-sided and not focused on the client’s interests. Thus the 2010 proposal took sides in three ways, favoring firms over departing lawyers in all three.

Based on the Committee’s letter (which also noted a forthcoming proposed rule defining the client file for purposes of 5.8 and other rules) the court declined to take further action on the Board’s petition until receiving a resubmission from the Bar. That happened in 2016, shortly after Virginia adopted a version of Rule 5.8 similar to Florida’s.⁵ Virginia’s rule balanced the prohibition on contacting clients before attempting to negotiate a joint communication, prohibiting both the lawyer and the firm from doing so. The Bar’s 2016 petition recommended adopting the Virginia rule, balancing the rule on that point but also eliminating (at least apparently) the one-sided prohibition on the lawyer taking possession of files.

The Virginia rule and the new South Carolina proposal, however, still resolved the attorney-client relationship in favor of law firms and against departing lawyers. It retained the prior language stating that, in the absence of an election by the client, the client remains a client of the firm (and, by implication, not of the departed lawyer). The logical result of this declaration would be that only the firm and not the lawyer would be entitled to possession of the file. That rule would provide a clear resolution of these all-too-common file disputes but a one-sided one. Last November, the South Carolina Supreme Court rejected that proposal as well. Essentially, every proposal that has been sent to the court for consideration has in some measure favored firms over departing lawyers, and every proposal has been rejected.

Moving forward

What then are lawyers to do with client files prior to, or in the absence of, an election of counsel by the client? The answer is simple: act like co-counsel. But let me back up. Last fall, just 13 days after the court rejected the Bar’s most recent Rule 5.8 proposal, the ABA issued Formal Opinion 489, which covered much of the same ground as 99-414. Whereas 99-414 focuses on the conduct of the departing lawyer, however, 489 focuses more on the duties of the firm.⁶ 489 states that the firm and individual lawyers (at least those who are performing substantial legal work directly for a client) both have an attorney-client relationship with the client until the client makes an election to the contrary.⁷ In so many words, the ABA said, “Until then, you are co-counsel.”

The thought of lawyers being co-counsel after a firm breakup may be as uncomfortable as divorcing parents sharing custody, but it shouldn’t be. More importantly, it is necessary to truly elevating the rights and interests of the client above those of the firm and the departing lawyer. The Florida rule, the Virginia rule, and three of the Bar’s four proposals explicitly acknowledged the client’s relationship with both the firm and the individual lawyers involved in the matter, and rightly so. But 489 preserves that in a way that the Florida and Virginia rules do not.

The ABA’s advice in 489 can be summed up in its four most meaningful words: “Clients are not property.” Too many firms take the position when a lawyer leaves that the clients “belong” to the firm or that the firm, by having provided the resources to generate client business, is more entitled to the client relationships than is the departing lawyer. In working with law firms and with departing lawyers over the years, I have noticed that the reasoning offered by the firm’s remaining lawyers is often tied not to any proposition of ethics or other law, but to their financial interests and their own personal history. “We invested the resources in acquiring these clients” and “That’s how I was treated when I left my former firm” are the common refrains. Those feelings are understandable, but the legal profession is not a fraternity. We have no hazing rituals … unless you count Bar Review. Moreover, given the ABA’s refusal to take sides and the court’s rejection of every proposal that attempted to, perhaps it’s time to break the cycle and put clients above our own feelings.

As for the firm’s financial investment, that is more or less real on a case-by-case basis, but it does not take precedence over the client’s right to choose, and it does not operate as a matter of law to sever the attorney-client relationship the client has with the departing lawyer. The file does not “belong” to anyone but the client. It may have value, but it is not anyone else’s asset.

This “clients are not property” refrain was echoed again in February by the District of Columbia Court of Appeals in Diamond v. Hogan Lovells.^[8] On a certified question from the Ninth Circuit in eight bankruptcy cases, the DC court joined a growing chorus around the country that are rejecting expansion of the oft-misapplied Jewel Doctrine, which reads partnership law to prohibit a departing partner from profiting in excess of her partnership share from future work on contingent matters that began at the firm.⁹ Although the issue there was whether hourly fees were part of the “winding up” of a dissolved partnership, not who owns the client file, and the doctrine applies only to partnerships, the DC court admonished firms in nearly the same language as the ABA: “clients do not belong to either the law firm or its members.”¹⁰

489 and 99-414 are both based largely on lawyers’ duties of competence and communication under Rules 1.1 and 1.4, which imposes more than just a duty to talk to clients and return calls.¹¹ Both the firm and the departing lawyer have a duty to communicate all reasonable information necessary to allow a client to make informed decisions. In departure circumstances, that includes the decision how to be represented and by whom. That would be a faint duty if it could be fulfilled at the last second, as the lawyer is walking out the door or immediately after. 489 also includes more guidance than 99-414 on which clients a departing lawyer represents and thus must notify. 489 retains the “significant client contact” language but adopts a test: significant client contact exists when a client can “identify[] the departing lawyer, by name, as one of the attorneys representing the client.”^[12]

A lawyer may face civil liability for soliciting clients in some circumstances, but not for merely informing them of the departure and of the client’s right to choose. Not only is this Miranda-like disclosure not civilly actionable, it is ethically required according to both 99-414 and 489. The ABA and many other authorities point out that not only may a departing lawyer inform clients prior to departure, often they are required to do so by Rule 1.4, based on the circumstances of a particular case.

In order to make an informed decision, clients need sufficient information about the lawyer’s new practice and about what remains of the firm after departure. For some clients, particularly those with other impending decisions about their matters, that information should not come at the last minute. In the context of borrowers’ statutory right to choose their closing attorney, the South Carolina Supreme Court once said, “The suggestion that the attorney preference disclosure may be made at closing borders on frivolity.”¹³ Most clients may not need more notice than that in the case of a firm departure, but some do.

The ABA’s position—that the firm and the departed lawyer remain co-counsel until the client elects otherwise—resolves another point of heated contention in firm breakups: access to the fle. 489 attempts to bring an end to the unfortunately common practice of lawyers taking files without leaving copies behind and the equally (if not more) common practice of firms refusing a departing lawyer access to client files.

489 concludes that firms “cannot restrict a lawyer’s ability to represent a client competently during any pre-departure notification periods by restricting the lawyer’s access to firm resources necessary to represent the clients during the notification period. Firms should not displace departing lawyers before departure by assigning new lawyers to a client’s matter, absent client direction or exigent circumstances requiring protection of clients’ interests.”^[14] Even after departure, any client that has not elected counsel remains a client of both the firm and the departed lawyer, meaning both must have access to the entire client file in order provide competent and diligent representation. This is contrary to widespread practices, but it is essential to elevating clients’ interests above lawyers’.

No matter how acrimonious a departure or firm breakup may be, lawyers and firms who can decide to get along for the client’s sake, at least until the client chooses, will not only better serve the client but also set a better example for the next generation of lawyers by breaking the cycle of “that’s how I was treated.” The good news is the co-counsel relationship doesn’t have to last nearly as long as post-divorce co-parenting often does. The lawyer and the firm remain co-counsel only until the client chooses between them, but that is a crucial time when emotions are at their highest. 489 says more than “clients are not property.” It says both the firm and the lawyer continue to have obligations to the client until the client elects otherwise, and neither may ethically obstruct the other’s access to whatever is necessary to carry out those duties: not just client contact information but the client files.

In light of this new guidance from the ABA, a rule may not be necessary. Everything about the Florida and Virginia versions of 5.8, except where they take sides between firm and lawyer, already exists in Rules 1.1, 1.4, 5.6, and 1.16 according to the ABA. The client-focused approach is in the existing rules; we just needed the ABA’s Standing Committee on Ethics and Professional Responsibility to explain it to us.

489 covers a lot more ground than this article. It is worth reading for its coverage of issues like the “hot potato doctrine,” notice-period requirements in lawyer employment agreements, relative expertise of the firm and the departing lawyer, and of course conflicts of interest at the departing lawyer’s new firm.

Michael Virzi teaches Legal Writing and Professional Responsibility at the University of South Carolina School of Law. He also practices in the area of lawyer ethics and discipline and serves on the SC Bar’s Professional Responsibility and Ethics Advisory Committees.

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Notes:

[1] See ABA Comm. on Ethics & Prof. Responsibility, Formal Op. 99-414 (1999).

[2] Id.

[3] Id.

[4] In re

Amendments to the Rules

Regulating the Florida Bar, 916 So.2d 655 (Mem) (Fla. 2005); R. Regulating Fla. Bar 4-5.8.

[5] Va. Rules of Prof. Conduct Rule 5:8

[6] See ABA Comm. on Ethics & Prof. Responsibility, Formal Op. 489 (2019).

[7] Id.

[8] Diamond v. Hogan Lovells U.S. LLP, 2020 WL 717809 (D.C. Ct.App. Feb. 13, 2020).

[9] See Jewel v.

Boxer, 156 Cal.App.3d171, 203 Cal.Rptr. 13 (1984).

[10] Id. at *6 (quoting D.C. Ethics Comm., Op. 372 (2017)).

[11] See ABA Model Rules of Prof’l Conduct R. 1.1, 1.4.

[12] Formal Op. 489, supra note 6 at *3.

[13] King v.

American Gen. Finance, 386 S.C. 82, 91, 687 S.E.2d 321, 325 (2009).

[14] Formal Op. 489, supra note 6 at *7.

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