March 21, 2018
California Partners Can Lawfully and Ethically Plan and Prepare to Depart from Their Law Firm
In the world of lawyers and law firms, attorney mobility is a continuing reality. Thoughtful lawyers who plan to depart their law firms are prudently getting advice on how to comply with their legal and ethical obligations to the firm and to their clients as part of the departure process. Law firms that have comprehensive plans in place to manage attorney and group departures can quickly and effectively respond to the news of a departure to help minimize its impact on the firm and clients. Yet one of the biggest questions raised by both law firms and lawyers during and after the departure process is: Can a partner plan to depart a law firm without breaching fiduciary duties to the firm? The short answer: Yes.
It is well known to most partners in law firms that partners have a fiduciary duty to the law firm and to each other. In California, this duty is interpreted to as a duty of loyalty, a duty of care and often a duty of good-faith and fair dealing. (Cal. Corp. Code section 16404(a); See also Heller v. Pillsbury Madison & Sutro (1996) 50 Cal.App.4th 1367.) However, some law firms and partners mistakenly believe that the mere act of planning to leave is a breach of one’s fiduciary duties to the firm. This is not necessarily so. Although fiduciary duties can be hard to reconcile with the actions required to depart a law firm—which by their very nature further the departing partner’s interests and may harm the firm—in general, California statutes and cases have recognized this tension and have permitted, to varying degrees, partners to take the steps necessary to depart from their firms.
For example, California Corporations Code section 16404(e) states that a partner does not violate a duty or obligation under this statute or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest. Similarly, California law and public policy vigorously support an attorney’s right of mobility, and a client’s right to choice of counsel.
In addition, California cases have held that conduct in preparation to compete with one’s employer that clearly is not based upon any independent underlying wrong, harm or legal violation, is not actionable, and such conduct is distinct from actually competing with one’s employer during employment. An employee or partner is fully entitled to prepare, during their employment, to leave and compete with an employer. (Bancroft-Whitney Co. v. Glen (1966) 64 Cal.2d 327, 345-346.) The California Supreme Court has repeatedly recognized California’s strong “public policies supporting the right of at-will employees to pursue opportunities for economic betterment” (see discussion in Reeves v. Hanlon (2004) 33 Cal.4th 1140, 1149) and supporting the right of a former employee “to engage in a competitive business for himself and to enter into competition with his former employer, even for the business of … his former employer. . .” (Id.) Thus, in the context of a departure from the firm, the actions required to prepare to depart the firm and even to prepare to compete with the firm are generally permitted as consistent with California’s public policy that attorneys are entitled to pursue their lawful profession.
Even in the case of a corporate officer, who indisputably owes a fiduciary duty to the corporation, “[t]he mere fact that the officer makes preparations to compete before he resigns his office is not sufficient to constitute a breach of duty.” (Bancroft-Whitney, supra, 64 Cal.2d at p. 346.) Rather, there must be some specific harm to the employer resulting from the planning; merely taking steps in secret to compete with the employer in the future does not violate any legal duty of any kind. (Id. at p. 346 [finding breach of duty where officer engaged in sustained course of conduct to sabotage corporation in favor of competitor before joining competitor].) “An employee does not breach his duty of loyalty by preparing to compete with his employer.” (Mamou v. Trendwest Resorts, Inc. (2008) 165 Cal.App.4th 686, at p. 719.)
For attorneys considering departing their law firms, this means keeping their plans or considerations of a departure separate and apart from the tasks they undertake as partners, and perhaps, managers in their firm. This often means separating the goal of contemplating departure and planning, and preparing to compete, with actually competing. To achieve this goal requires thoughtful analysis of key provisions in the attorney’s partnership agreement, an understanding of applicable ethical obligations as an attorney and compliance with existing laws.
For law firms, understanding what is permissible conduct for departing partners helps to focus the firm on what, if any, actionable conduct occurred by the departing partner that requires a formal or legal response. It also highlights the importance of having law firm partnership agreements that address departures in a way that do not violate public policy, but can still adequately protect the firm’s interests.
Based on current trends, partner departures and attorney transitions are here to stay. Properly preparing for and anticipating them is the key to success for both lawyers and law firms.
Dena M. Roche
O’Rielly & Roche LLP