One of my first blogs – published about a year before the word “blog” was
invented
– was titled Law Firm Divorces &
Associates Striking Out On Their Own: The Art and Ethics of Client Grabbing, the title a nod to
pioneering commentary in this area by Professor Robert Hillman: Law Firms
and Their Partners: the Law and Ethics of Grabbing and Leaving, 67 Tex. L.
Rev. 1 (1988). In my blog I described
the leverage Colo. RPC 5.6(a) gives any lawyer planning
to leave a firm with Files in the Night:
[I]t
is always under the banner of “the client’s freedom to choose” that the departing/grabbing
lawyer departs the old castle, client files in tow, leaving the remaining guard
standing upon the surprisingly shaky ground of “sanctity of contract,” and a
“partner’s fiduciary duty to fellow partners.”
Although cases addressing “lawyer mobility” are
legion, it took another 25 years for Colorado to weigh in. It finally did, in April 2022, in Johnson Family Law, PC
v. Grant Bursek,
2022COA48 (April 28, 2022) (hereafter “Johnson”).
The 35-page opinion does an excellent job
tracing the evolution of judicial thinking regarding whether Rule 5.6(a) creates an absolute
bar to agreements which impose monetary restrictions on a departing lawyer, or
whether some reparation to the departed firm is permissible. In breaking from the majority rule that any
financial imposition on a lawyer’s departure is unenforceable, the Johnson court
observed:
Previously, law firms’ investments in the
development of clientele was “fairly secure, because the continued loyalty of
partners and associates to the firm was assumed.” Howard v. Babcock, 863
P.2d 150, 157 (Cal. 1993) (citation omitted). “But more recently, lateral
hiring of associates and partners, and the secession of partners from their
firms has undermined this assumption.” Id. And when attorneys with a
lucrative practice leave a law firm with their clients, “their departure from
and competition with the firm can place a tremendous financial strain on the
firm.” Id.
Johnson at 7-8.
Striking
a balance between the freedom of a departing attorney to change jobs and
financial carnage and other turmoil such departures can create, the court
ruled:
We conclude that such an agreement can violate
the rule, but the inquiry must be case-specific, requiring an assessment of
whether a particular disincentive unreasonably restricts an attorney’s practice
under the unique factual circumstances of each agreement.
Johnson at 6. The court found that “[b]ecause the
Agreement’s assessment of a $1,052 fee per client who departed with Bursek is
unreasonable . . . we conclude that the Agreement violates Rule 5.6(a).” Id.
The
court further held that, although not all violations of the Rules of
Professional Conduct implicate public policy to such a degree that agreements
made in contravention of them must be deemed void, Johnson at 30-31, violations
of Rule 5.6(a) do. Distinguishing the
Colorado Supreme Court’s ruling in Calvert v. Mayberry, 2019 CO 23 (finding a
contract made in violation of Rule 1.8(a) is presumptively, but not per se, void),
the court held:
[A]n agreement found to violate Rule 5.6(a)
will necessarily offend the two underlying policies of the rule. Accordingly, unlike Rule 1.8(a), we see no
reason to create for such agreements a rebuttable presumption of invalidity.
Rather, we conclude that an agreement that violates Rule 5.6(a) is necessarily
void as against public policy.
Johnson
at
32. Examining the agreement at issue the
court “conclude[d] that the provisions of the Agreement imposing the $1,052 per
client fee are void as a matter of public policy, but the rest of the Agreement
remains enforceable.” Id. at 33.
It
is refreshing to see the Colorado Court of Appeals recognize the reality of
modern law practice. Whereas in days long
past it was common for an attorney to remain with a firm for her entire career,
today an often employed strategy to “build one’s book of business” is to change
firms often, hoping that the “snowball effect” will enlarge one’s
client base by accumulating clients from prior firms. It is heartening to see the court strike a
balance between a lawyer’s right to change jobs and the interests of her former
firm by declining to use the Rules of Professional Conduct as a cudgel to automatically
void agreements voluntarily entered into.
Perhaps there remains some breath yet left in “the sanctity of contract”
and “the punctilio of an
honor the most sensitive.”
The
primary interest sought to be protected by Rule
5.6(a) is not a lawyer’s freedom to change firms as frequently as
undergarments, but rather the ability of a client to remain with a lawyer they
prefer. Recognizing that a financial
disincentive may impinge on this interest, a fair balance must be struck between
protecting the ability of a client to keep their preferred counsel and a jilted
firm’s financial health.
The
focus of virtually every opinion concerning lawyer departures has been whether
imposing a financial penalty on the departing lawyer will negate a client’s right
to follow the lawyer to her new practice. Conversely, virtually no attention has been paid
to the protection of those clients remaining with the former firm. Particularly in smaller firms, there is an existential
risk that the sudden exodus of a major rainmaker or practice group will bring
down a firm. Myopic focus on the concerns
of the departing attorney’s clients ignores that the rights of those clients
who wish to remain loyal to the firm may be seriously impacted if the result of
the departure is that the firm ceases to exist. Financial compensation from the departing lawyer
is one way to mitigate that risk.
In
finding the financial terms of the agreement in Johnson unreasonable and
therefore unenforceable, the court focused on two facts:
First,
attorney Bursek had only been employed as an associate member of the Johnson
Family Law firm (doing business as Modern Family Law (“MFL”)) for 17
months. Quoting with approval the
opinion of the Arizona Attorney Ethics Advisory Committee (Ethics Opinion 19-0006 (2020), which found a
financial penalty of $3,500 for each firm client or prospective client an associate
provided legal representation to after departing a firm unenforceable, the Johnson
court observed:
[It] is not an agreement among partners or shareholders
on an equal footing, but rather an agreement imposed on a newly hired associate
who is not in the same bargaining position. And the agreement is one-sided in that
it protects the firm but will never benefit the associate.
Johnson
at 23.
Second,
the court was not satisfied with the agreement’s explanation that the $1,052
per client charge was a legitimate reimbursement of historical marketing
expenses. See Johnson at
2-3.
$1,052 is not an insignificant sum, especially
considering that the fee was greater than half of Bursek’s semi-monthly base
salary at the time he departed MFL. . . .
Moreover, such a significant restriction on
Bursek’s practice is not justified in light of MFL’s commercial interests at
stake. Unlike Fearnow and Howard, the disincentive here is not
designed to maintain the capital structure of MFL; it imposes an affirmative obligation
to pay MFL rather than a forfeiture of capital interest or accounts receivable.
And while the Agreement states that the purpose of the fee is to recoup
marketing costs — which is, perhaps, a legitimate interest — MFL did not
explain why the $1,052 per client fee represents a fair estimation of marketing
costs for each client. In fact, the fee was imposed even for clients whom
Bursek brought to MFL himself, separate and apart from the firm’s marketing
efforts. As the district court pointed out, the fee appears to be a
disguised attempt to penalize competition rather than a legitimate effort to
reimburse the firm for actual marketing expenses. Thus, it has no clear
relationship to any harm caused by Bursek’s departure.
Johnson
at
24-25 (emphasis added). The court
also properly recognized that a family law practice was involved:
The area of practice, family law, is also
significant here. Family lawyers not
only provide legal advice, they provide a host of supporting roles that defy
measurement. It was entirely reasonable for Bursek’s clients to follow the
lawyer they trusted. That the Agreement restricted his clients’ mobility within
such a sensitive practice area weighs further against its reasonableness.
Id.
at 26.
The distinction drawn by the Johnson court
between the bargaining power of associates and partners is valid, and calls to
mind People v. Wilson, 953 P.2d 1292 (Colo.
1998), in which the respondent in a grievance proceeding was disciplined for
attempting to enforce a “Covenant Not to Steal.” The covenant prohibited departing associates
from soliciting the firm’s clients and further provided:
4.
In the event that any client of the firm chooses to fire or terminate
services of the firm and retain the departing associate or associate’s firm to
handle their case after the date of departure, associate agrees to compensate
the firm in the amount of 75% of the total fee generated from ultimate
settlement or disposition of the client’s case, together with the firms [sic]
hourly rate as stated in its fee agreement with said client for any hours put
in by the firm while the firm was still retained by the client.
5.
In the event that associate solicits clients of the firm before or after
his or her departure from the firm, and the solicitation prohibited above results
in client discharging the firm and hiring associate or associate’s firm to
handle their case, then associate agrees that any and all fees generated from
the client’s case from settlement, verdict, or other disposition of the case
shall be fees of the firm and associate or associate’s firm shall not be
entitled to any fees as a result of the legal representation as a penalty for
the solicitation prohibited above.
953 P.2d at 1293. The Colorado Supreme Court had little
difficulty holding that this unabashed penalty violated Colo.
RPC 1.5(d) in that it bore no relationship to the respective services
performed, Colo.
RPC 1.5(a), which prohibits charging or collecting an unreasonable fee, and
Colo.
RPC 8.4(d), “by interfering with the client’s right to discharge his or her
lawyer at any time, with or without cause.”
Id. At 1294.
While MFL demonstrated considerably more tact
in crafting its agreement by including an explanatory statement that the compensation
to be paid was for recoupment
marketing costs (which, significantly, the Johnson court recognized is “perhaps,
a legitimate interest”), its failure to exclude “clients whom Bursek brought to
MFL himself, separate and apart from the firm’s marketing efforts” doomed it
from outset. This drafting failure gave the
court an easy “out,” and thus deprived the Bar of an opinion which might have considering
the cost of client acquisition, and whether its recovery is a legitimate and
enforceable basis for a monetary restraint on lawyer mobility.
In
the abstract, a $1,052 fee per client charge may understate the actual cost of
client acquisition, certainly for personal injury firms which advertise
heavily. One service estimates Denver
television advertising rates to be between $5 CPM and $45 CPM (“cost per
mille,” or per 1,000 impressions) depending upon the market and program viewership. The monthly television advertising budget for
some Denver P.I. firms approaches or exceeds $50,000.00, far more than an
associate striking out on her own can afford.
Philip Franckel, who publishes the Lawyer Advertising
Blog, has
estimated that:
At $120 per call, one
month of a $12,000 monthly advertising budget for personal injury cases will
yield 100 calls resulting in your law office obtaining 7 new clients. These 7
cases are worth a total of $243,572 in gross settlements with $10,500 in total
case expenses. Total legal fees after deduction of expenses are $77,690.66.
This amount doesn’t reflect that fact that your new clients will refer other
new clients.
This
equates to a per-client acquisition cost of $1,714.29. While the return on this investment can be substantial,
the ROI for each client may be enjoyed primarily by the departing lawyer, while
the entire sunk cost of client acquisition remains with the spurned firm. Assuming Franckel’s estimates are reasonably
accurate, depending upon MFL’s advertising and other marketing expenditures, a $1,052
fee per client charge for clients developed at the MFL’s expense is hardly per
se unreasonable considering the substantial return on MFL’s investment that
Bursek may receive from taking an existing client. Poor drafting by MFL allowed the Johnson court
to avoid this analysis altogether.
One
number the Johnson court did consider was the ratio of the imposed
per-client fee to Bursek’s compensation – “the fee was greater than half of
Bursek’s semi-monthly base salary at the time he departed MFL.” Johnson at 24. This, however, is not a relevant yardstick of reasonableness
for it completely ignores that, after leaving the firm’s employ, Bursek’s income
could substantially increase. We cannot be
certain, however, for the opinion is silent on whether Bursek joined another firm
or entered solo practice, what his subsequent overhead and compensation was, and
what fees he earned from the clients who followed him.
A
legitimate concern addressed by the Johnson court is the special nature
of family law practice. It was entirely appropriate
for the court to consider the heightened emotional vulnerability of many family
law clients and the interest of the justice system in assuring that these clients
have continuity with an attorney in whom they have placed their trust. This is especially true for clients of limited
financial means.
But
this consideration also highlights the difficulty of applying the court’s test,
i.e., that “the inquiry must be case-specific, requiring an assessment
of whether a particular disincentive unreasonably restricts an attorney’s
practice under the unique factual circumstances of each agreement.” Just as not all family law clients are emotionally
vulnerable or poor, so too the assessment of whether a particular financial disincentive
will unreasonably restrict an attorney’s right to practice cannot precisely be determined
at the outset of such an agreement.
The
practice of a lawyer may flourish or crater during her time with a firm. Regardless of its trajectory, a law practice is
likely to experience the ebbs and flows that affect all lawyers. The potential injury from a lawyer’s departure
to a firm – the fortunes of which will also evolve during the lawyer’s tenure –
is not calculable with precision in advance. An agreement which undertakes to fairly balance
the interests of a departing lawyer with those of the law firm should be judged
by the same standards
as other liquidated damages, with the additional consideration of respecting
the right of clients to retain their counsel of choice:
- The amount of the damages
identified must roughly approximate the damages likely to fall upon the
party seeking the benefit of the term as assessed at the time when the
agreement of contract was entered into.
- The damages must be sufficiently
uncertain at the time the contract is made that such a clause will likely
save both parties the future difficulty of estimating damages.
Careful
drafting can avoid unduly limiting a clients’ ability to follow a lawyer, for example
by agreeing to extend the time for payment, or other creative means. Another approach would be apportion fees between
the departing lawyer and the firm on a per-client basis.
Colo.
RPC 1.5(d) permits attorneys “not in the same firm” to divide legal fees provided
the total fee is reasonable and the client consents. Certainly enforcing an agreement apportioning fees
entered into between attorneys who were once in the same firm is proper.
Such an agreement was in fact upheld by a
prior panel of the Colorado Court of Appeals.
In
Norton
Frickey, PC v. James B. Turner, PC, 94 P.3d 1266 (Colo. App. 2004), the
court declined to apply Colo. RPC 1.5(d), which requires a client’s consent to a
division of fees among lawyers not in the same firm, to a settlement agreement entered
while the departing lawyer was still a member of the personal injury firm which
sought to enforce it. In upholding the agreement,
the court pointedly observed:
Interpreting the scope language in the context
of Colo. RPC 1.5(d), we agree with a Texas court when it concluded that the
rule "should not be too readily construed as a license for attorneys to
break a promise, go back on their word, or decline to fulfill an obligation, in
the name of legal ethics." Baron
v. Mullinax, Wells, Mauzy & Baab, Inc., supra, 623 S.W.2d at 462.
The
court concluded, “as a matter of law, that the agreement [requiring the departing
lawyer to repay all costs advanced by the firm for such clients, plus forty percent
of all money received by the departing attorney from clients who followed the departing
lawyer, was] not void as against public policy and [was] enforceable in
accordance with its terms.” Norton Frickey, 94 P.3d at 1271.
It
is not unheard of for a successor attorney to enlist a client in an effort to avoid
sharing a fee with prior counsel. A rule
which eliminates the temptation to use clients as pawns in such disputes supports
both the client’s interest in choice of counsel as well as the interest of justice
by removing from the cross-fire clients who might otherwise be caught in it.
In
both Norton Frickey and Johnson, the Colorado Court of Appeals properly
declined an invitation to void as a matter of law agreements voluntarily entered
into between members of a firm which provided for compensation to the firm upon
the lawyer’s departure. The forty percent
division of fees in Norton Frickey was upheld, while the fixed per-client
charge in Johnson was not. The lesson
for firms seeking to avoid the economic harm caused by a lawyer’s departure is to
draft an agreement that bears a reasonable and demonstrable relationship to the
firm’s potential injury, is easy for a court to understand and apply, and respects
and reasonably accommodates the right of a client to retain counsel of their choice.
