Law Firm Cannot Claw Back Fees of Departed Partners

• Pages: 7-7
• Date: 01 October 2022
• Author: Martha L. Kohlstrand
• Subject Matter: Civil Law

f‌irm cannot se ek prof‌its

from departe d partners for

work perform ed on mat-

ters they take with them ,

according to the cour t

in Diamond, Trustee of H owrey LLP

v. Hogan Lovells LLP, et al. There, the

court determi ned that clients have an

“almost unfettere d right to choose

or discharge co unsel.” This decision

highlights an e merging trend that

may make depart ure easier for law

f‌irm partners, ABA Litigation Section

leaders say.

After the 200 8 f‌inancial crisis, the

partners of law f‌i rm Howrey LLP voted

to dissolve and ame nd its partner-

ship agreeme nt to clarify that Howrey

had no claim on any wor k or clients

that had originated prior to the former

partners’ d eparture or the dissolutio n

of the f‌irm, which ever was earlier. The

arrangeme nt is commonly known as

a “Jewel waiver,” named for Jewe l v.

Boxer, a California de cision that held

that income generated by partners

winding up unf‌in ished cases should be

allocated to the for mer partners unless

otherwise decided by the partnership.

Jewel also gave rise to the “ unf‌inished

business doc trine,” which holds that

a dissolved par tnership continues to

exist until the “wind ing up” of its unf‌in-

ished business is completed.

In 2013, the bankruptcy trustee

for Howrey’s estate sue d eight law

f‌irms that had hire d former part-

ners in the U.S. Bankruptcy Court for

the Norther n District of California,

seeking prof‌it s from client matters

that had origina ted at Howrey and

contending that th e Jewel waiver

constituted a frau dulent transfer of

f‌irm assets. The bankruptcy court

denied the law f‌ir ms’ motions to dis-

miss, holdin g that under District of

Columbia law, which g overned the

partnership agreement, “new reten-

tion agreemen ts” signed by former

clients did not pr eclude application

of the unf‌inished business doctrine.

Law Firm Cannot Claw Back Fees of

Departed Partners

The U.S. District Court for the

Northern District of California reversed,

holding that “a law f‌irm does not own

new client matters taken on by other

f‌irms.” The trustee appealed to the U.S.

Court of Appeals for the Ninth Circuit,

which concluded that the case turned

on questions of D.C. partnership law,

and certif‌ied several questions to the

District of Columbia Court of Appeals,

the territory’s highest court.

That court concluded that a law

f‌irm has no property interest in hourly

billed client matters because clients

have the right to control their own

representation. Though a depart-

ing partner owes a duty of loyalty to

account for fees from hourly billed

work performed prior to leaving a f‌irm,

he or she is not required to remit prof-

its earned on those matters following

departure. The court noted that fees

for contingency matters might merit

dierent treatment because those fees

are not paid until a settlement or judg-

ment is reached.

“This decision should make it eas-

ier for lawyers to switch f‌irms without

fearing disputes with their previous

f‌irm regarding fees,” notes Merri A.

Baldwin, San Francisco, CA, cochair of

the Attorney Liability Subcommittee

of the Litigation Section’s Professional

Liability Litigation Committee.

“This case is important because now

courts in thre e large legal markets—

New York, California , and the District

of Columbia— have reached the same

conclusion,” explains Kevin J. McEleney,

Hartford, C T, cochair of the Bankruptcy

and Creditors Rights Litigation

Subcommittee of the Section’s

Commercial & Business Litigation

Committe e. “It’s a well- reasoned opin-

ion that is consiste nt with the Rules of

Professional Conduct,” he adds.

At least one case appears to depart

from the trend, observes Laura K.

Lin, San Francisco, CA, cochair of the

Section’s Ethics & Professionalism

Committee. In LaFond v. Sweeney,

By Martha L. Kohls trand, Litigation N ews Associate Editor

the Colorado Supreme Court issued a

quantum meruit judgment in favor of

the dissolved f‌irm in a similar situation.

“While LaFond is arguably distinguish-

able on the grounds that it involved

contingency fees,” Lin continues, “the

court doesn’t appear to have viewed

the payment structure as a decisive

factor. And because partnership is an

issue covered by state statute, courts

in dierent jurisdictions may reach dif-

ferent conclusions.”

Other Section leaders believe the

distinction is clear. “It’s important

to remember that hourly billed mat-

ters are viewed very dierently from

contingency cases,” opines Siobhan

Briley, Coralville, IA, cochair of the

Bankruptcy Litigation and Creditors

Rights Subcommittee of the Section’s

Commercial & Business Litigation

Committee. Baldwin agrees. “The

unf‌inished business doctrine is alive

and well when it comes to contin-

gency fee cases,” she quips.

Lin sees some practical implica-

tions for attorneys. “First, attorneys

should focus on timely billing, to

clarify what work was done pre- and

post-departure,” she advises. “Second,

they should be certain to sign a new

engagement letter with the client at

the new f‌irm. This is strictly required

under the D.C. Circuit’s approach, but

good practice nonetheless.”

“Firms should make sure their part-

nership agreement is clear about the

distribution of earned fees among the

partners,” Briley adds. “And every f‌irm

should have a Jewel waiver to clarify

this issue in advance of dissolution,

should the partners vote to dissolve.”

FALL 2022 • VOL. 4 8 NO. 1

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ETHICS STRU GGLES IN THE LEGAL WORL D