(May 1996)The inquirer wishes to know whether, under the Rules of Professional Conduct, an attorney may sell his or her practice for a percentage of the revenue derived by the buyer attorney from the cases pursued on behalf of the seller's former clients over a five year period.
The inquiry raises the issue of fee splitting found in Rule 1.5(e) of the Rules of Professional Conduct. That Rule provides:
(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.Pursuant to Rule 1.5(e) the contemplated sale of the practice would be permitted if the selling attorney notified the clients that he or she intended to refer the matter to the buying attorney, and that as part of the referral arrangement, the buying attorney would be splitting the fee with the selling attorney. In addition, after such notice, the selling attorney would be required to permit the clients an opportunity to object i.e. to respond within a certain fixed time, to the buying attorney's involvement or to the fee splitting. Implicit in this notice provision is the requirement that the clients be permitted the freedom to select an attorney of their choosing. In addition, the buying attorney must be sure to avoid conflicts of interest with any of his or her present clients.
The selling lawyer must also be aware of the need for confidentiality of the information in his or her clients' files, and the selling attorney must keep the contents of each client's file confidential, even from the buying attorney, until he or she obtains the consent, or lack of objection, from each client.
The Committee refers the inquirer to Rule 1.17 of the Model Rules of Professional Conduct, and its comments which the American Bar Association has approved (copy attached). Under the Model Rule, the sale of the practice would be permitted with certain limitations including those discussed above.
Finally, the selling attorney must follow the dictates of Rule 1.16(d) which prescribes the steps to be taken upon termination of representation. For those clients who have agreed to the buying attorney's representation, Rule 1.16(d) requires only that the file be transferred. However, those clients who refuse to consent to the buying attorney's representation must be given a reasonable amount of time to employ other counsel, their papers must be surrendered to them, or to counsel of their choosing, and any advanced unearned fees must be returned to them.1
1. Rule 5.4 (a)(1) and (2) only apply to payments to the estate of a deceased attorney by an attorney who took over the client's work. Thus, this Rule does not apply to a living attorney who seeks to sell his practice to another attorney.