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  • InsideTrack
  • November 16, 2022

    Dilemma: Can Your Firm Charge You for Taking Clients When You Leave for a New Job?

    When a lawyer leaves a firm, is it permissible for the firm to impose a fee on that lawyer for each client that follows the lawyer to the new firm?

    Timothy J. Pierce

    dollar question mark

    Nov. 16, 2022 - It's always a good thing to receive a job offer. But what if the lawyer’s employment agreement with their current firm imposes a fee for every client that goes with them if they ever leave that firm? Is this financial disincentive to leave a restriction on a lawyer's right to practice?

    Question

    I have just been offered a job at a private law firm. When reviewing the employment contract, I noticed that the provisions related to termination of employment state that if I leave the firm, the firm will impose a $3,500 “marketing fee” in connection with any client that comes with me to another law firm.

    I questioned whether or not this was permissible, and was told that it was fine because it did not prevent me from taking clients with me if I left in the future – it just reimbursed the firm for its prior marketing efforts.

    Is such a clause imposing a financial penalty for taking clients when leaving a firm permissible under the disciplinary rules?

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    Answer

    SCR 20:5.6 states as follows:

    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; or

    (b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a client controversy.

    What’s at issue here is whether the $3,500 “marketing fee” constitutes a prohibited restriction on the right to practice.

    Tim PierceTim Pierce is ethics counsel with the State Bar of Wisconsin. Reach him by email or through the Ethics Hotline at (608) 229-2017 or (800) 254-9154.

    That question was answered in the affirmative by Arizona Ethics OpinionEO-19-0006, which in finding that the provision violated 5.6(a) stated:

    … such an agreement would violate ER 5.6 because it would, for four reasons, "improperly constrain a client’s freedom to choose to continue representation by the departing associate": (1) it would discourage the departing lawyer from representing a client that might want to continue with the lawyer; (2) the set amount of the fee would have a disproportionate impact on continuing to represent clients in lower-value cases; (3) it would give the departing lawyer an incentive to charge the client more, in violation of the policy behind ER 1.17(d), which prohibits increasing a client’s fees when a practice is sold; and (4) it would create a conflict of interest in violation of ER 1.7(a)(2).

    ***

    As Opinion 0901 explains, such a penalty acts as a substantial disincentive for the departing lawyer to agree to continue representing a client who wants to continue working with that lawyer. That is particularly true for clients with lower-value cases. It also incentivizes charging those clients higher fees and creates a potential conflict between the lawyer’s interests and the interests of a particular client. More than the agreements at issue in Fearnow and the California cases on which Fearnow relied, the agreement appears on its face to be an attempt to prevent the associate from representing specific clients. As such, the Committee has concluded that such a per-client fee is distinguishable from Fearnow and falls within the scope of ER 5.6’s prohibition.

    The above excerpt refers to Fearnow v. Ridenour,1 a nondisciplinary case which held that, in Arizona, some financial disincentives were contractually enforceable.2 The Arizona ethics committee was asked to reconsider an earlier ethics opinion in light of the Fearnow decision, but still had little difficulty finding the provision violated the disciplinary rule.

    There is ample authority from many jurisdictions holding that such financial disincentives constitute impermissible restrictions in the right to practice.3

    This is because it is well established, pursuant to SCR 20:1.4, that a lawyer leaving a private firm for another has an obligation to inform affected clients of that fact, and that both the firm and the departing lawyer have an obligation to respect clients’ right to decide who will represent them after the lawyer’s departure.4

    Conclusion: A Fundamental Principal

    Lawyers cannot ignore their duties under the disciplinary rules because of financial incentives or disincentives. This reflects a fundamental principal in professional responsibility law that lawyers may not buy and sell clients through penalties or payments – because it is the clients, not the lawyers, who have the right to decide who will represent them in the future.

    Therefore, financial incentives or disincentives to lawyers to not represent certain clients in the future will normally be found to violate SCR 20:5.6.

    It is also worth noting that is not only misconduct to agree to such a restriction, but also to make such an offer.

    In Case You Missed It: Read Past Ethical Dilemmas

    Ethical Dilemmas appears monthly in InsideTrack. Check out these topics from recent issues:

    Endnotes

    1 Fearnow v. Ridenour, 138 P.3d 723 (Ariz. 2006).

    2 Arizona and California are outliers in having case law that holds some financial disincentives may be contractually enforceable. The majority of jurisdictions that consider this issue find that such financial disincentives violate the disciplinary rule and are unenforceable. Wisconsin has no case law directly on point.

    3 See, e.g., Cohen v. Lord, Day & Lord, 550 N.E.2d 410, 411 (N.Y. 1989); Dowd & Dowd, Ltd. v. Gleason, 693 N.E.2d 358, 370 (Ill. 1998); Stevens v. Rooks Pitts and Poust, 682 N.E.2d 1125, 1130 (Ill. App. Ct. 1997); Jacobson Holman PLLC v. Gentner, 244 A.3d 690 (D.C. 2021); ABA Formal Ethics Op. 489; Pa. Ethics Op. 2016-024 (2016).

    4 See, e.g., Wisconsin Ethics Op. 97-3 and ABA Formal Ethics Op. 99-414.


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