Who Owns the Client?

• Publication year: 2018
• Author: By Steven L. Krongold

Who Owns the Client?

By Steven L. Krongold

Steven L. Krongold specializes in business litigation. For the past 30 years, Mr. Krongold has litigated disputes involving trademarks, copyrights, trade secrets, invasion of privacy, cybersquatting, investment fraud, defamation, and other business-related torts. Mr. Krongold can be reached at the Krongold Law Corp., P.C., located in Orange County, CA.

Several years ago, reeling from the Great Recession, several prominent national law firms dissolved or filed for bankruptcy protection. A partial list of such firms includes Dewey & Leboeuf (2012), Howrey (2011), and Thelen (2008). Before then, other failed firms included Brobeck, Phleger & Harrison (2003), Arter & Hadden (2003), and Coudert Brothers (2005). When firms are on the brink of collapse, partners jump ship, taking clients with them. This happened with Heller Ehrman LLP ("Heller"), a firm founded in San Francisco in 1890 that suddenly collapsed in 2008.

Just a year before its demise, Heller employed more than 700 attorneys in offices across the globe. Sensing the end was near, most of these attorneys left to join other large firms, including Jones Day, Foley & Lardner, and Davis Wright Tremaine. The clients followed their chosen lawyer, signing new retainer agreements. When Heller filed for bankruptcy under Chapter 11, the court appointed a plan administrator who became responsible for recovering assets of the partnership in order to pay creditors. The administrator filed lawsuits against the new law firms seeking to recover profits earned on former Heller clients, specifically, on hourly fee matters pending when the firm dissolved. The Ninth Circuit certified a question, which the California Supreme Court agreed to resolve: what property interest, if any, does a dissolved law firm have in legal matters, and therefore profits, of cases that are in progress but not completed at the time of dissolution? (Heller Ehrman LLP v. Davis Wright Tremaine LLP (In re Heller Ehrman LLP), 830 F.3d 964, 966 (9th Cir. 2016), req. granted Heller Ehrman LLP v. Davis Wright Tremaine LLP, 2016 Cal. LEXIS 7131 (Cal. 2016).)

In suing to recover profits, Heller relied on the Revised Uniform Partnership Act (RUPA), specifically, Corp. Code, § 16404, subd. (b)(1). This provision sets forth a partner's duty to account and hold as trustee for the partnership "any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived...