Colorado Supreme Court Prohibits Firms from Charging Per-Client Fee to Departing Partners

Attorney Grant Bursek left his practice with Johnson Family Law (JFL).  Eighteen clients went with him, preferring to retain him as their attorney.  JFL sought  to enforce an agreement that required departing attorneys to pay $1052 for each departing client.  Refusal to pay would result in interest charges at a rate of 18% per annum.  Mr. Bursek challenged this provision as violating Colorado's Rule of Professional Conduct 5.6(a), which prohibits firms from making agreements that “restrict[] the right of a lawyer . . . to practice after termination of the relationship.”

After departing, Mr. Bursek refused to pay the nearly $19,000 he owed under his agreement with JFL.  He sued, and a trial court found the provision unenforceable.  A intermediate appellate court subjected the provision to a multi-factor test and found that this provision was unreasonable and therefore enforceable, but it severed other parts of the agreement and found that those parts were enforceable.  The Colorado Supreme Court granted certiorari to determine whether (1) a firm may ever contractually require a departing lawyer to pay a per-client fee for each client the lawyer takes with them and (2) if so, how to determine the reasonableness of such an agreement.

In Johnson Family Law P.C. v. Bursek, the Colorado Supreme Court agreed with Mr. Bursek.  While a firm can require departing attorneys to reimburse certain costs associated with clients that are following the attorney out of the firm's practice, they may not charge a fixed cost without interfering with the attorney's right to practice and the clients' right to the attorney of their choice.  In so ruling, Colorado noted the majority rule that Rule 5.6(a) "bars any contractually imposed financial burden on an attorney’s professional autonomy."  The minority rule, adopted in California and Arizona, evaluates "agreements for whether they represent a reasonable balance between client choice and attorney autonomy on the one hand and a firm’s interest in financial and practice stability on the other."

Colorado Supreme Court
Image by Jeffrey Beall - CC BY 3.0

The intermediate appellate court Hhad adopted the minority approach.  While the Supreme Court agreed that a reasonableness approach is generally appropriate, the undifferentiated fee assessed here constituted a per se  violation of Rule 5.6(a).  Such fees force a departing attorney to make individualized determinations as to whether each client is "worth" keeping, given the costs involved.  It seems that the court will countenance no blanket liquidated damages provision in this context.  Rather, the burden will always be on the firm to show costs associated with each departing client.  

The court also reversed the intermediate appellate court's ruling on severability.  Because JFL's agreement imposed fees on departing attorneys in violation of Rule 5.6(a), the entire agreement was in violation of public policy.  As such, it is unenforceable in its entirety.

I'm not sure how I feel about this ruling.  I'm no expert in professional ethics, so this is just one contracts prof's take: On first glance, the challenged provision strikes me as a liquidated damages clause like any other liquidated damages clause.  It is hard for the firm to know in advance what losses it will have suffered when a departing attorney takes clients with them.  And so, the enforceability of the clause turns on the reasonableness of the estimate of just over $1000 per client.  The court undertakes no such analysis, rejecting the premise that such costs are very difficult to determine.  

Its reason for doing so has to do with the pressure it puts on the departing attorney to decide whether keeping a client is "worth it," but that, it seems to me, is wrongheaded for two reasons.  First, the attorney would face that determination whether or not the cost is fixed or established at the time of departure.  Second, it mistakes the unique public policy at issue here, which is not about the departing attorney's interest in continuing to represent a client but about the client's interest in keeping the attorney of their choice.  Notwithstanding that public policy interest, we allow firms to recover their costs incurred in connection with client recruitment, and so the only question should be the reasonableness of those costs.