Opinion 87-24
(APRIL 1988)

I. THE INQUIRY


The inquiry is as follows:

A lawyer seeks employment pursuant to an employment agreement containing a clause providing that if the lawyer terminates employment and clients of the firm choose to retain the lawyer as their lawyer thereafter, then the lawyer would pay to the firm 50% of the fees earned over a one year period after leaving employment.

II. THE APPLICABLE RULES


RULE 5.6 Restrictions on Right to Practice

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, except an agreement concerning benefits upon retirement; or,

(b) an agreement in which the restriction on the lawyer's right to practice is part of the settlement of a controversy between private parties.

COMMENT:

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. Paragraph (a) prohibits such agreement except for restrictions incident to provisions concerning retirement benefits for service with the firm; Paragraph (b) prohibits a lawyer from agreeing not to represent other persons in connection with settling a claim on behalf of a client.

RULE 1.5 Fees

. . .(e) A lawyer shall not divide a fee for legal services with another lawyer who is not in the same firm unless:

(1) the client is advised of and does not object to the participation of all the lawyers involved, and

(2) the total fee of the lawyers is not illegal or clearly excessive for all legal services they rendered the client.

III. SUMMARY OF OPINION


Rule of Professional Conduct 5.6 prohibits restrictions on the right of the lawyer to practice law. The employment agreement in question does not expressly prohibit the associate's right to practice law, or, to practice law with the clients of the firm after termination of employment. Nevertheless, the employment agreement provides a liquidated damage clause which would require a payment by the associate to his former firm.

The Committee was of the view that the higher the liquidated damage clause, the more likely one could find that a restriction on one's right to practice existed because of the economic disincentives involved in the potential representation. However, such a determination would necessarily require an evaluation of the facts and circumstances of a particular case. No such determination has been made by the Committee in this case.

The division of fees among lawyers must also be considered. The employment agreement contemplates that fees will be shared. Accordingly, Rule of Professional Conduct 1.5(e) would require that the client be advised and not object to the participation of all the lawyers involved; and, that the total fee not be illegal or clearly excessive.

IV. REASONING


The purpose of the applicable provisions of the Rules of Professional Conduct is to ensure that clients may seek the legal advice of a lawyer of their choosing. Although law firms have a right to protect their legitimate business interests, including their client base, they may not do so to the exclusion of the client's preference. It is for this reason that restrictive covenants in the legal profession are prohibited. See generally Dwyer v. Jung, 133 N.J. Super. 343 (1975); ABA Formal Opinion 300 (August 7, 1961).

Law firms may stipulate in advance on the amount of damages which might be caused by the erosion of their client base upon the termination of the firm's lawyer/employees. Such agreements benefit the clients in that they are able from the outset to have their attorney of choice be the person most qualified to handle their matters. The common expression is that the lawyer will have direct client contact; rather than have contact only through a partner or other senior attorney on a ghost writing basis. To that end, liquidated damage clauses have been held to be permissible for this reason, among others. See Opinion 77, Committee on Legal Ethics of the District of Columbia Bar.

In making a determination as to whether such an agreement fosters the aims of the rules, one must first look to whether or not there is a direct restriction on the right of the lawyer leaving the firm to represent the client. If there is, the agreement violates the rules. If there is not, the agreement, at least on its face, does not violate the rules.

Inquiry must be made into whether, in a given situation, the amount of liquidated damages would be so large as to be considered a penalty. However, this would normally be a legal question and not an ethical question. See Opinion 77, supra. Fee splits of one-third are common place and have been-endorsed by the courts. See Joseph D. Shein, P.C. v. Myers, et al., 16 Phila. 283 (1987). Consider also, for example, the case in which the lawyer leaves and goes to another firm at a fixed salary, not contingent at all upon whether the lawyer brings in clients. If the client chooses this lawyer, there is potentially no interference with that representation. Rather, the lawyer would simply pay to the law firm as liquidated damages, a percentage of fees billed or collected during the first year in practice. The lawyer would in no way be penalized economically, nor dissuaded from representation.

Consider the further example of a client of the firm, who has, for many years, paid a fixed retainer for the firm's representation or has had average billings for an extended period of time of say $10,000 per year. The loss of that client could be projected at $10,000 for at least the first year. Indeed, that loss could be projected for future years. Accordingly, it is not unreasonable for the parties to agree to a percentage of that loss for one year as a reasonable liquidated damage fee.

Intimate relationships between the attorney and client should be fostered by the policies of a firm. All attorneys should have signatory authority on written communications to clients and should be encouraged to communicate directly in person with clients. Moreover, attorneys in a firm should handle their affairs independent of interference from other attorneys. Since litigation after employment terminates may well cause a disruption of the attorney/client relationship and thus ultimately be a detriment to the client, the associate and the firm may agree that it is far better to resolve the economic issues in advance.

All clients, in the first instance, are clients of the firm with respect to any attorney practicing in this Commonwealth, be it in a partnership or in a professional corporation. Indeed, the partnership or corporation are liable to that client for the conduct of any attorney practicing with them. Accordingly, if a client of the firm elects within one year of termination of employment to establish or continue an attorney/client relationship with the employee who has disassociated from the firm, then the firm and the prospective employee should be permitted on the conditions which will insure an orderly transition of that relationship.

It is difficult to establish with precision the consequences of a client ceasing to maintain its attorney/client relationship with the firm. There are complexities involved in determining the extent of losses arising from disruption of the business, by loss of personal services, by loss of professional goodwill, by loss of exposure to other attorneys in the firm by which additional business may have been garnered, by loss of costs or expenses that may have been suffered by the firm, including expanding overhead, hiring additional employees, and taking additional space. Accordingly, the lawyer and the firm should be permitted to agree in advance as to an appropriate amount of liquidated damages.

To judge the percentage abstractly as a restriction on the right to practice is unjustified. Furthermore, to judge it as a penalty as opposed to liquidated damages may lack any basis in fact. Consider for example, a fee of $500,000, netting the sole practitioner $250,000.00. Certainly, no one would seriously argue that the provision would be, under those circumstances, a restriction on the right to practice law. The opposite extreme could yield a different conclusion. The realities are that at any given time, many lawyers are breaking former relationships with other lawyers and forming new ones, not solely dependent on the income from the clients of the firm which they have left.

In a given situation, a disciplinary body reviewing the totality of the circumstances surrounding an agreement could find that the agreement results in a restriction on the right to practice. Accordingly, firms must be sensitive to the reasonableness of any financial arrangements between it and its employees. The higher the post termination payment, the more at risk is a firm for such arrangements. However, our Committee cannot make that determination because, in large part, it relates to the business realities rather than the ethical considerations.

With respect to a lawyer participating in a division of fees among lawyers, Rule 1.5(e) provides that the client must be advised and must not object to the participation of all lawyers involved. Furthermore, the total fee must not be excessive or clearly illegal. Since there will be participation in the fee the rule would be applicable and require notification and consent. This situation could be covered in advance by communicating with the client in writing while the employment relationship between the hiring firm and its new lawyer employee, is still in effect.

   

The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.