Do employment agreements that require a departing lawyer to compensate the firm for clients that follow the lawyer violate the Rules of Professional Conduct?

Michael 1 Comment

Here’s today’s issue:

  • Can a law firm ethically require a departing lawyer to compensate the firm for clients that go with the departing lawyer?

It’s an issue I’d never considered until yesterday, when a regular reader alerted me that the Colorado Supreme Court had recently addressed it.  The tip led me to finding this opinion, as well as the ABA Journal’s article about the opinion.

Here’s what happened.

Per the opinion, in 2019, and while employed at Firm, Lawyer

  • “signed a ‘Reimbursement Agreement’ that required him ‘to reimburse [Firm] for marketing expenses related to any client, case or active matter’ that left the firm and followed him. Recognizing that ‘actual expenses may be difficult to determine,’ the agreement provided that ‘historic costs directly related to marketing expenses’ for each client of the Denver office were $1,052. Thus, for each client who chose to continue being represented by [Lawyer] the agreement required him to pay [Firm] $1,052, whether or not there was evidence that [Firm] had expended marketing funds on that client. If [Lawyer] did not pay the total amount owed under the agreement within thirty days of departing the firm, he would owe interest accruing at a rate of 1.5% per month (18% per year) on any unpaid amounts.”

Five months after signing the agreement, Lawyer left Firm.  18 clients went with Lawyer.  Firm demanded payment pursuant to the Reimbursement Agreement.  According to the opinion, “[w]hen [Lawyer] refused to pay, the firm sued for breach of contract. At trial, both parties asked the court to determine whether the agreement was enforceable under Rule 5.6(a).”

A few paragraphs ago, you might have been asking yourself “Self, is there a rule on that?”  Now you’re probably asking “Self, what’s Rule 5.6?” 

Fear not! I’m here to help.

But for the title, Colorado Rule of Professional Conduct 5.6 is identical to Vermont’s.[1]  Here, V.R.Pr.C. 5.6 is titled “Restrictions on Right to Practice.”  It prohibits a lawyer from participating “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.”

Ater a trial and an intermediate level appeal, 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.”

The Court began its analysis by noting a jurisdictional split in opinion. 

First, the Court stated that “[t]he majority view . . . holds that any contractually imposed financial burden on an attorney’s professional autonomy violates the rule.”[2] (emphasis in the original). 

Next, the Court explained that “[t]he minority view

  • “does not treat financial disincentives to departure and competition as per se violations of Rule 5.6(a). Instead, these cases evaluate 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.”[3]

In the end, the Colorado Supreme Court adopted the minority view.  More specifically, the Court held “that the reasonableness inquiry is the appropriate approach to assessing whether a particular financial disincentive imposed on a departing lawyer constitutes a restriction on the right to practice.” The Court went on to conclude “that an undifferentiated fee assessed for each client who chooses to follow a departing lawyer violates Rule 5.6(a).”

I understand that block quotes can be a pain to read and, at times, reflect a lazy blogger.  However, here, I think the Colorado Supreme Court’s reasoning is important.  The Court wrote:

  • “An agreement that requires a lawyer to pay a former firm such an undifferentiated fee is fundamentally at odds with the twin policy goals of Rule 5.6(a): to protect lawyers’ professional autonomy and to ensure that clients have the freedom to choose an attorney. As the Ethics Advisory Committee of the Arizona Supreme Court recognized when considering a similar agreement, it ‘acts as a substantial disincentive for the departing lawyer to agree to continue representing a client who wants to continue working with that lawyer.’ Of particular concern, such a fee forces attorneys to make individualized determinations of whether a client is ‘worth’ retaining and incentivizes them to retain clients in high-fee cases and to jettison clients with less lucrative claims. This direct intrusion on the attorney-client relationship is quite different from financial disincentives that might indirectly affect client choice by making it more costly for an attorney to leave a firm. No reasonableness analysis is needed to determine that per-client fees of the sort at issue here violate Rule 5.6(a).” (citations omitted).

Nevertheless, the Court went on to note that:

  • “there could be circumstances that justify a firm seeking reimbursement of particular costs that it incurred for or expended on a client. If, for example, the firm had advanced litigation costs for a client or expended unusual funds to attract a particular client, it might be reasonable and consistent with Rule 5.6(a) to expect the exiting lawyer to reimburse those costs.”

However,

  • “[b]ecause we are not presented here with any client-specific cost scenario, we need not (and do not) decide the questions such a scenario might present. What we do conclude is that a fee of the type imposed here—one based not on specific spending for a client but imposed without any individualized assessment of every client who wishes to maintain an attorney-client relationship with a departing attorney—violates Rule 5.6(a).” [4]

Again, until yesterday, I’d never thought about the ethics of contractual provision like the one at issue in the Colorado case. However, forced to do so, I’d guess that such provisions might exist in agreements between Vermont law firms & lawyers.

If so, to the extent that Vermont might adopt the majority view, such provisions should give pause. On the flip side, if you are a lawyer who has signed such an agreement, don’t count on it being unenforceable. The possibility remains that Vermont adopts the minority view and enforces agreements that strike 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.”

As always, let’s be careful out there.

[1] To be clear, this post is educational and should be taken in that vein.  I am not offering guidance or a prediction on how Disciplinary Counsel, a hearing panel, or the Vermont Supreme Court would interpret Rule 5.6’s applicability to a Vermont agreement similar to the agreement at issue in the Colorado opinion.

[2] According to the opinion, the majority view is followed in [at least] New Jersey, Nebraska, Connecticut, Virginia, Tennessee, Iowa, and New York.

[3] According to the opinion, California and Arizona employ the minority view.

[4] The Court went on to hold that, as a matter of public policy, an agreement that violates the Rules of Professional Conduct is not enforceable.

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