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]
July 24, 2008
Another Plug for The Slippery Slope
This time, I think I need not ask forgiveness for a shameless plug for my new podcast project, The Slippery Slope. While the project features general interest, law-related conversations on a wide variety of topics, the most recent episode actually does touch upon a topic near and dear to the heart of ContractsProf Blog: the sale of goods -- on the street, that is. Here's information about the most recent podcast, which you can listen to or download here:
This podcast features a conversation with attorney Sean Basinski, described by New York Magazine as the "César Chávez of Hot-Dog Stands." Sean is the founder and Director of the Street Vendor Project (which is affiliated with the Urban Justice Center). Upon graduating from law school, Sean received a Yale Initiative for Public Interest Law Fellowship to start the project. His inspiration came from his own 9-month stint selling Mexican food from a pushcart on Park Avenue and 52nd Street in Manhattan.
Topics include: street vendor demographics, permit and licensing requirements, common misconceptions about New York City street vendors, where the carts go at the end of the day, and the amount of street food Sean consumes.
[Meredith R. Miller]
July 23, 2008
"A Kiss is not a Contract"
A little July humor from Flight of the Conchords. Caveat: contains language and themes that may not be appropriate for work or the company of children.
The summary: a kiss does not constitute a binding promise of anything more (maybe just an invitation to make an offer?). I like the gender role reversal here -- at least, I would have thought gender stereotypes would have a woman singing these lyrics. Adds to the humor (or is the humor?), I suppose. I won't try to determine why this is funny - as we were reminded in Leonard v. Pepsico, "Humor can be dissected, as a frog can, but the thing dies in the process. . . ."
[Meredith R. Miller]
July 22, 2008
Catfight: Barbie v. the Bratz
She may look all, "Oooh, let's have a tea party," but Barbie (left) can be a monster in the courtroom. According to news reports, including this one in Tradingmarkets.com, Barbie's Mattel has prevailed over rival MGA, distributor of the Bratz dolls.
A jury agreed with Mattel's claim that Bratz doll designer, Carter Bryant, had created designs and prototypes for the Bratz while employed by Mattel. The jury thus concluded that MGA and its CEO had, among other things, interfered with Bryant's contractual duties to Mattel. Bryant himself had earlier settled with Mattel. The trial is not over, but I think I can hear the skinny lady singing.
My money would have been on the Bratz dolls to pummel Barbie down to her goody-two-shoes. My seven-year-old daughter is a fan of both dolls, and the Bratz' sass usually bests Barbie's moxie. Still, I overlooked the tale of the tape (left). As you can see, modern Barbies are pumped up. Not only are their waists wider, they have six-pack abs. Don't mess with Barbie, Bratz. She'll f you up.
Limerick of the Week: The Punctilio
I make a big deal out of Cardozo's opinion in Meinhard v. Salmon. The paragraph in which he defines the fiduciary duty among co-venturers in a business is as close to poetry as any legal opinion has ever come.
Here it is, in all its glory:
Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the "disintegrating erosion" of particular exceptions (Wendt v. Fischer, 243 N. Y. 439, 444). Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.
All I wanted to do was to somehow work the line with the punctilio into a Limerick. That is indeed all I have done. The point of the fourth line is that I have often found that students find Cardozo's prose inpentrable and thus lose interest before they can apprehend his penetrating thoughts.
Meinhard v. Salmon
Among partners, in matters compensative,
Cardozo, opining most pensative
Held out as the standard --
As attention meandered --
The punctilio of an honor most sensitive.
July 21, 2008
Missouri Appeals Court Holds that Employee ADR Program is Not an Enforceable Contract
In late June, the Missouri Court of Appeals addressed the legal enforceability of a program adopted by Hallmark requiring employees to arbitrate employment disputes. The court held that Hallmark's ADR program did not constitute a contract and that there was no consideration to bind the employees to the promise to arbitrate claims.
Mary Kay Morrow began employment with Hallmark in 1982. In 2002, the company adopted an ADR program. The policy provided that, if an employee continued to work for the company after the policy's effective date, that employee was deemed to have agreed to arbitration under the policy's procedures. When Ms. Morrow sued Hallmark for age discrimination, the company pointed to its ADR program as a binding contract. Morrow argued that "the notion that the [ADR policy] is a contract is an illusion." The Missouri appellate court held that Morrow could not be compelled to arbitrate because the ADR program did not constitute a "contract." The court appeared to reason that simply continuing employment did not amount to assent to be bound by the ADR policy and, thus, no contract was formed:
Contracts embody the intention of two or more parties to bind themselves legally to promises, and are often characterized by the concepts of mutual promises. Sometimes, in lieu of mutual promises, a non-promising party may provide legal consideration, that is, the transfer of something of value to the promising party. See Triarch Indus., 158 S.W.3d at 775. Many courts have invalidated purported contracts containing “non-mutual arbitration provisions” (requiring only the party with less economic bargaining power to submit claims to arbitration) because they are so “one-sided” as to be illusory or unconscionable. Id. at 774-75.
Hallmark informed its employees that by continuing to work after notice of the DRP, they would be deemed to have consented to its terms. Hallmark acknowledges that the DRP was presented as a new term or condition of employment. Employees are typically not asked or required to sign a document indicating agreement with new terms of employment. If employees do not agree with a new term of employment, they may leave.
With regard to contracts, on the other hand, signatures remain a common, though not exclusive, method of demonstrating agreement. See, e.g., Bailey, 209 F.3d at 745 (noting that the employee never signed an agreement to arbitrate and expressed disagreement with the plan); Gannon v. Circuit City Stores, Inc., 262 F.3d 677, 682 (8th Cir.2001) (employee demonstrated her intent to arbitrate by signing agreement); McIntosh v. Tenet Health Sys. Hosp., Inc., 48 S.W.3d 85, 89 (Mo.App.2001) (noting that employee signed arbitration clause agreeing, along with company, to submit claims to arbitration). In Gilmer, 500 U.S. at 23, both employer and employee signed the agreement required by the NYSE. Here, in contrast, the employee was not expected to express agreement, but was expected simply to acquiesce in the new requirement in order to keep working.FN3 As will be shown in the discussion below, the distinction between terms and conditions of employment, on the one hand, and legally enforceable contracts, on the other, is crucial for this case.
The court's contract formation discussion also had a strong taste of unconscionability and/or illusory promise analysis:
[T]he program does not involve mutual promises because Hallmark reserves the right, in its sole discretion, to modify or revoke the provisions of this program.
Further, and the part of the case that raises a nice, modern example of the relationship between contract modification and consideration, the court held that the Morrow's continued employment in an at-will employment relationship did not constitute consideration:
Hallmark's position, for instance, is that it lawfully terminated Ms. Morrow's at-will employment when it was no longer pleased with her services. It terminated her a little over a year after the DRP went into effect, but the legal posture of the case would be the same if it had terminated her fifteen minutes after the DRP went into effect. Ms. Morrow had no employment contract, and no offer of “continuing employment,” with Hallmark.
We also reject the notion that, after the DRP went into effect, the work she was then allowed to do could constitute consideration, as though a contract could be formed in retrospect. Obviously, there must be a meeting of the minds at the time the purported contract is formed. “Continued employment” was neither promised at that time nor received at that time-that is, at the time the alleged contract was formed.
The idea that an employer can create any legal contract it dares to create (based on a condition of at-will employment) cannot be sustained upon reflection. Imagine, for instance, an employer publishing a memo to employees stating that:
Anyone who continues to work for us through next Monday will be conclusively deemed to have agreed, as a condition of remaining in our employ through that date, that you will contribute twenty dollars per month over the next ten years to the National Association of Manufacturers (NAM), whether or not you remain employed here during that time. If you do not agree, you will need to resign your employment immediately, because by continuing to work, you are agreeing.
While it is unlikely that any employer would do that, we are here talking about contract analysis. If an employer did impose such a requirement, it would be impossible to conceive that anyone would seriously argue that because an employee continued to work through the next Monday before being terminated, there was formed a true, legally enforceable contract to support the NAM, rendering the requirement legally enforceable as a contractual provision. Similarly, a requirement pursuant to a collective bargaining agreement that the employees must support their union as a condition of employment would be understood to apply only as long as the employee remained in employment, and would be enforceable only through employee discipline, not through the courts. Nor could an employer effectively argue that the fact that the employee continued to work for a year after the requirement became effective somehow constituted legal consideration supporting the contract.
Morrow v. Hallmark, 2008 WL 2582662 (Mo. App. W. D., June 30, 2008).
[Meredith R. Miller]