Trends and Analysis for Successfully Transitioning Lateral Partners
into New Partnerships While Minimizing Risk and Reducing Potential Liabilities

Partnership Agreements.

Law Firm Can’t Require Departing Partner to Forfeit Equity If Partner Takes Clients

In an important order that impacts the field of partner departures nationwide, a district court judge in the the Eastern District of Virginia held that a provision in a law firm’s operating agreement that provides that a withdrawing partner who “takes clients” forfeits up to fifty percent of his equity in the firm is void and unenforceable because it places an impermissible restriction on the partner’s right to practice law. (Moskowitz v. Jacobson Holman, PLLC, (E.D. Va. Jan. 28, 2016.)

The Court’s ruling was based on Rule 5.6 of the District of Columbia Rules of Professional Conduct, which prohibits lawyers from placing restrictions on the right to practice law, and is modeled on the ABA Model Rules.  Versions of this rule have been adopted in every state, except California, although California has its own Rule of Professional Conduct which prohibits “agreements restricting a member’s practice” in certain circumstances. (See California Rules of Professional Conduct, Rule 1-500.) More

Partner Departures and Golden v. California Emergency Physicians Medical Group: Does California’s Business and Professions Code § 16600 Void Any Partnership Provision that Restricts a Departing Partner’s Right to Compete?

The Ninth Circuit’s recent decision, filed April 8, 2015, in Golden v. California Emergency Physicians Medical Group (9th Circuit) Case No. 12-16514, has potentially far-reaching implications for what is deemed to be an unlawful professional restraint in violation of California’s Business and Professions Code § 16600. In closely examining the statute, the Ninth Circuit concluded that the reach of § 16600 does extend far beyond non-compete provisions to every contract restraining someone from “engaging in a lawful profession, trade or business.” With respect to partner departures, some restrictions contained in partnership agreements in anticipation of dissolution or partner departure are excluded from this rule by Section 16602. However, even non-compete agreements between partners, and other contractual provisions that have a similar effect, may be unenforceable if they impose any restrictions on a partner’s right to practice law not contemplated by Section 16602. More

Partner Departure Tip: Locate Your Partnership Agreement and Read It

If you are a partner in a law firm, your partnership agreement is the key document that defines your rights and obligations as a partner. It can govern everything from how you get paid, to how the firm is managed, to what liabilities you have agreed to assume. In addition, it most likely has specific terms that impact how you should properly withdraw or depart from your partnership when the time comes. However, the longer you serve as a partner in a firm, the further removed you often are from what is actually contained in the partnership agreement (which also may have been amended numerous times over the years.) More

Significant Victory in Challenge Against Unfinished Business Rule’s Application to Hourly Fee Matters in California

On June 11, 2014, U.S. District Judge Charles Breyer issued a significant ruling in favor of several large law firms in the ongoing fight regarding whether and if a dissolved law firm has the right to profits from unfinished legal work its former partners brought to their new firms.  In his Order granting summary judgment in favor of the law firms and against the Trustee for the defunct Heller Ehrman LLP, Judge Breyer was reviewing de novo an earlier Bankruptcy Court order that went against the law firms and in favor of the Heller Ehrman Trustee.  In a case of first impression, Judge Breyer concluded that under the facts presented in this case, “neither law, equity, nor policy recognizes a law firm’s property interest in hourly fee matters.” More

Bankruptcy Court finds that Unfinished Business Rule is Valid in California and May Apply to Hourly Rate Matters

There has been a lot of recent press about the validity of Unfinished Business Claims in California (also known as Clawback claims) following a ruling earlier this year by U.S. Bankruptcy Judge Dennis Montali in San Francisco related to the Howrey, Simon, Arnold & White LLP (“Howrey”) bankruptcy.  At issue, was whether the trustee of a bankrupt firm had any basis to proceed against the firm’s former partners to recover profits from unfinished legal business matters that followed former partners to their new firms, even if those profits apply to hourly rate matters.  Although other jurisdictions have litigated this issue (both D.C. and New York), no California court has expressly interpreted the Unfinished Business Rule, as set forth in Jewel v. Boxer (1994) 156 Cal. App. 3d 171 (“Jewel”), as applying to hourly rate matters upon partnership dissolution. More

Absent an Agreement to the Contrary, the California Uniform Partnership Act Controls the Scope of a Departing Partner’s Liability to a Former Partnership for Partnership Obligations Incurred by the Firm after Partner Dissociation

A significant issue for departing partners is to understand and evaluate the scope of any potential liability he or she may have to their former partnership once the departing partner provides notice of departure and dissociates with that partnership.  In some instances, partnership agreements set forth specific terms upon which a departing partner may continue to have obligations to its former partnership for certain firm management expenses that the former partners had agreed to share for a reasonable period of time beyond the terms of the partnership. More

According to the California Supreme Court in Edwards v. Arthur Andersen, There is No “Narrow Restraint” Exception to General Rule Voiding Noncompetition Agreements

As a general rule under California law, contracts that restrict or penalize competition among former employees and employers are void and unenforceable under Business & Professions Code Section 16600.  In Edwards v. Arthur Andersen, the California Supreme Court examined the issue of whether or not there was a “narrow restraint” exception to this general rule, which would allow a contractual provision to be valid and enforceable when a party is “barred from pursuing only a small or limited part of the business, trade or profession.”  The California Supreme Court held that there was no such exception to the unambiguous and undiluted language of Section 16600 and that any such restraints on an employee’s right to pursue his/her trade or business are invalid and unenforceable.  (See Edwards v. Arthur Andersen (2008) 44 Cal.4th 937.) More

California Supreme Court and Non-Compete Provisions in Partnership Agreements: Howard v. Babcock Holds that Partners Imposing a Reasonable Toll on Departing Partners who Compete with the Firm is Enforceable

Prior to considering departing from an existing partnership, a partner needs to give careful consideration and analysis to any non-compete agreement or restrictions on his/her right to practice law imposed by the existing partnership agreement. Understanding these types of provisions and their potential enforceability can properly shape a departing partners strategy for departure and help to minimize risk and potential liability when the departing partner leaves the existing firm. More