January 31, 2020
What Does ABA’s Departure Opinion Mean for California Law Firms?
Although we routinely see headlines about partner and group departures, especially during this time of the year, the ABA’s recent ethic’s opinion on obligations for lawyers changing firms (ABA Formal Opn. 489, December 4, 2019) received much less attention. Law firms should have taken notice, however, because the opinion represents some significant new thinking on law firm notice provisions. Of course, legal ethics opinions are only advisory and for California law firms who are governed by California rules and case law, not all of the ABA’s analysis applies. Furthermore, on January 25, 2020, the State Bar of California’s Board of Trustees approved for publication California’s own ethics opinion addressing departing lawyers drafted by the Committee on Professional Responsibility and Conduct (COPRAC). The COPRAC opinion provides guidance to both law firms and lawyers involved in departures in California.
ABA Says Law Firm Notice Provisions May Be Unenforceable.
Definitely the most controversial aspect of the ABA opinion is its suggestion that law firm notice periods “cannot be fixed or rigidly applied without regard to client direction” (ABA. Opn. 489, p. 5). “If the [notice period] would affect a client’s choice of counsel or serve as a financial disincentive to a competitive departure, the notification period may violate Rule 5.6.” (Id at 5.) The opinion goes on to state, “[a] lawyer who wishes to depart may not be held to a pre-established notice period particularly where, for example, the files are updated, client elections have been received, and the departing lawyer has agreed to cooperate post-departure in final billing.” The opinion even seems to question whether a “reasonable” notice provision, one that may be legitimately designed to support the smooth transition of the partner out of the firm, would be enforceable if it is intended for any purpose other than the client’s interest.
The ABA opinion cites to Rule 5.6(a) in support of this position: “A lawyer shall not participate in offering or making: (a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement…” and case law interpreting Rule 5.6, which it states “supports the conclusion that lawyers cannot be held to a fixed notice period and required to work at a firm through the termination of that period.” The opinion then argues by analogy that “[t]here is no meaningful distinction for the purposes of Rule 5.6 between an agreement provision that imposes a financial disincentive to a competitive departure irrespective of the pre-departure notice requirements and a provision that imposes a financial disincentive for the failure to comply with a fixed, pre-established notice period that extends beyond the time necessary, generally or in a particular case, to ensure an appropriate transition…” (ABA at p. 6)
Of Course, California is Different.
While the substance of the California Rule of Professional Conduct (CRPC), Rule 5.6(a)(1) is nearly identical to the ABA model rule language, California case law has interpreted this rule differently than most other jurisdictions. Comment 1 to Rule 5.6 highlights this difference. “Concerning the application of paragraph (a)(1), see Business and Professions Code section 16602; Howard v. Babcock (1993) 6 Cal.4th 409, 425 [25 Cal.Rptr.2d 80].” (Comment 1, Rule 5.6)
While case law in other jurisdictions has interpreted Rule 5.6 as prohibiting a law firm from imposing any kind of financial disincentive or economic consequence on a lawyer leaving a law firm to compete, California has embraced its own, and decidedly minority, view. The California Supreme Court’s opinion in Howard v. Babcock expressly rejected the idea that allowing partners to enter into restrictive covenants in certain circumstances (which is permitted by California Business and Professions Code section 16602) conflicted with California’s rule of professional conduct addressing this topic. “We are not persuaded that this rule was intended to or should prohibit the type of agreement that is at issue here. An agreement that assesses a reasonable cost against a partner who chooses to compete with his or her former partners does not restrict the practice of law. Rather, it attaches an economic consequence to a departing partner’s unrestricted choice to pursue a particular kind of practice.” (Howard at 419.)
As such, the ABA’s analysis and application of Rule 5.6 to notice periods is unlikely to be viewed as controlling in California. But what does it mean for California law firms? Law firms should have written policies and procedures in place that govern departures and make clear what steps lawyers should take to smoothly transition out of the firm in compliance with law firm’s policies and California’s ethics rules. And yes, firms should review their partnership and shareholder agreements, with an eye towards drafting objectively reasonable (no, not 120 days) notice periods, and not use those provisions in an objectively punitive manner. Separately, under the Howard analysis, law firm partners can lawfully agree in their partnership agreements to impose reasonable costs on the partners who leave the law firm. Such provisions may include assessing costs associated with the law firm’s ongoing financial obligations or estimated damages affiliated with the partner or group’s departure.
Dena M. Roche
O’Rielly & Roche LLP