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Saturday, July 26, 2008

Law Firm Partnership Exits, Partnership Contracts and Fiduciary Limbo

With my Business Organizations students, after reading the "grabbing and leaving" agency cases, I always raise the question of what an exiting law firm partner can do without breaching her fiduciary duty to the partnership - in preparation to leave and in terms of client retention/solicitation. (As an aside, I should note my dismay that I have not yet seen a limerick for my favorite of these cases - Town & Country Home & House Service v. Newbery).

Well, this article in the NYLJ (subscription required) by Arthur Ciampi provides a a succinct discussion of a contract twist on my tiresome hypotheticals. It begins by noting that law firm partnership agreements commonly contain a provision that allows a partner to withdraw only upon 60 (or 30 or 90) days written notice to the firm's executive committee. Of course, partnership agreements include this notice period for practical reasons - for continuity and stability during the transition. But, the article points out that "[s]uch provisions often place the departing partner in a state of limbo - neither "fish nor fowl" - because, during this interim period, the rights and obligations of the departing partner and the partnership are unclear." Which tees up for an interesting (and, at least in New York, unresolved) question: what duties does the departing partner owe to the firm during the contractual notice period? The article provides the following analysis, beginning with the obligations of a partner when no such contractual notice provision exists:

The Court of Appeals in Graubard Mollen Dannett & Horowitz v. Moskovitz1 set forth a law firm partner's rights and obligations upon withdrawing from their partnership. In so doing, the court found that once partners notified their partnership of their intent to withdraw as partner, they dispatched their fiduciary duty and were at that point permitted to inform clients of their departure and that they wished to continue to represent them. The court also identified the dual fiduciary duties at play:

It is unquestionably difficult to draw hard lines defining lawyers' fiduciary duty to partners and their fiduciary duty to clients. That there may be overlap, tension, even conflict between the two spheres is underscored by the spate of literature concerning the current revolving door law firm culture.

One respected commentator says that, while a departing partner's preresignation negotiations with firm clients in most businesses would probably constitute breach of the common-law obligation of loyalty to the firm, in the case of law practice, "the public policy favoring client freedom of choice in legal representation should override the firm's proprietary interest in holding its clientele."

The Court of Appeals has not addressed the issue of the obligations of a departing partner when there is a contractual notice provision. It is suggested that the problem created by these provisions is determining: what is a partner permitted to do during the contractual waiting period.

Here are the arguments of the departing partner, and those of the firm:

Not surprisingly, departing partners argue that pursuant to Graubard and its progeny, upon giving notice to one's partners, a departing partner is free to contact clients and that the contractual notice provision does not change that right. They continue to argue that this is the case because an attorney is obliged to inform clients of their intention to leave the partnership because such change will likely materially affect the client's representation and that the delay caused by remaining silent during a typical contractual notice provision would deprive a client of a meaningful choice of counsel. In addition, departing partners argue that once the firm and its partners know of their intent to depart from the partnership, the "playing field" is even and the partnership is not damaged by the contacting of clients.

The partnership disagrees and typically argues that the plain language of the agreement provides that the partner remains a partner until the last day of the notice period and thereby continues to owe fiduciary duties to the partnership which include a duty not to compete and therefore not to contact clients about the partner's new firm. Accordingly, partnerships often contend that a partner is not permitted to contact clients during the notice period and that doing so is a breach of fiduciary duty which could be compensable in money damages. Partnerships find support for this contention in the Partnership Law and cases which maintain that partners are free to contract among themselves and that the courts will bind partners to their agreements.

Until there is some judicial direction, however, there will be no controlling answer concerning who is correct and this debate will continue. Accordingly, in light of these murky waters, law firm partnerships should consider taking advantage of the flexibility offered by their chosen legal form of partnership and include more detailed provisions in their partnership agreement which resolve the issue in the manner best suited for their particular partnership and its practice. Surely heated debate will occur among the partners concerning what is the best way to address this issue, and, while the debate itself may be contentious and even unpleasant, it is submitted that the partnership would be well-served to vet the issue on its own terms in its own conference rooms or risk having the issue decided for it in the course of a litigation in a room of another kind, a courtroom.

Which all leads to the next question, which Ciampi addresses: can the limbo be solved with additional contract language about what the exiting partner can do during the notice period? He offers some possible language.

[Meredith R. Miller]

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