What Price Freedom?

Photo by Alexander Mils on Unsplash

Files in the night,
Back up the pickup!
No partners in sight,
This is a stick-up,
Rolling out the door,
With 50 clients, or more!

It’s their right to choose,
And don’t I know it,
No way I can lose,
No way to blow it,
They’ll all come with me,
And that means one big fee!

My plan was safely hatched,
Behind their backs for weeks
The clients I have snatched,
With plans to take with me some key associates, too,
Nobody here knew,
With shear excitement I have shivered,
My practice gift wrapped and delivered.

By daybreak they’ll find,
Their profits tanking,
But my new partners will all be thanking (me)
For my daring flight,
With files in the night!

Files In The Night
(to the tune Strangers In The Night)
(lyrics © 2009 charles f luce jr)

 

The Art and Ethics of Grabbing & Leaving

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:

1. 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.
    
2. 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.