Can an Arizona firm require a departing associate to pay a per-client fee for each former-firm client they keep representing?

Plain-English summary

A firm asked whether it could use an employment contract requiring an associate to pay the firm $3,500 for each client the associate represents after leaving, characterized as a "Firm Reimbursement Fee" for marketing costs. The Attorney Ethics Advisory Committee, reconsidering State Bar of Arizona Opinion 09-01, concluded that such a per-client fee violates ER 5.6 and superseded Opinion 09-01 while reaching the same result.

The committee worked through the Arizona Supreme Court's decision in Fearnow v. Ridenour, Swenson, Cleer & Evans, 213 Ariz. 24 (2006), which held that ER 5.6 does not categorically condemn every agreement imposing a financial disincentive on a departing lawyer, and that such agreements (there, a forfeiture of capital interest tied to competing with the firm) should be examined under a reasonableness standard. The committee read Fearnow narrowly: the Court rejected a categorical ban on all disincentives but did not say only unreasonable agreements violate ER 5.6, and it did not adopt "reasonableness" (a legal-enforceability standard) as the ethical standard.

The committee then distinguished the per-client fee from the Fearnow shareholder agreement. The Fearnow-type arrangements involved lawyers of roughly equal bargaining power, forfeiture of rights that existed only because of the partnership or shareholder relationship, and protection of the firm's capital structure, rather than a fee tied to representing particular clients. By contrast, the $3,500 per-client fee is imposed on a newly hired associate with unequal bargaining power, is one-sided (it only protects the firm), is an affirmative obligation to pay rather than a forfeiture, and is directly tied to continued representation of specific clients. Echoing Opinion 09-01, the committee found the fee acts as a substantial disincentive to continue representing a client (especially in lower-value cases), incentivizes charging those clients more, and creates a potential conflict between the lawyer's interest and the client's under ER 1.7(a)(2). On its face, the committee concluded, the agreement is an attempt to prevent the associate from representing specific clients, which falls within ER 5.6's prohibition.

In practice

The opinion holds that, under Arizona ER 5.6 as the committee read it after Fearnow, a per-client "reimbursement" fee charged to a departing associate for keeping firm clients is prohibited, while a firm's forfeiture-of-capital provision tied to competition is analyzed differently (and may instead raise only a contract-reasonableness question). The committee identified the operative distinction as whether the financial term is tied to the continued representation of particular clients and impinges on client choice, versus protecting the firm's capital structure among lawyers of comparable bargaining power. Because rules and decisions may have changed since 2020, verify the current ER 5.6 framework before relying on this distinction.

Common questions

Q: Can a firm make a departing associate pay for each client they take with them?

A: No. The opinion concluded that a flat per-client fee charged to a departing associate violates ER 5.6 because it directly impinges on the client's freedom to choose to continue with the departing lawyer.

Q: Didn't Fearnow say financial disincentives on departing lawyers are allowed?

A: Not categorically. The opinion reads Fearnow as rejecting a blanket ban on all disincentives while still leaving some agreements subject to ER 5.6; it did not hold that only unreasonable agreements violate the rule.

Q: What makes the per-client fee different from a capital-forfeiture provision?

A: The opinion points to several differences: the fee is imposed on an associate with unequal bargaining power, is one-sided, is an affirmative payment rather than a forfeiture of partnership rights, and is tied directly to representing particular clients rather than to the firm's capital structure.

Q: Why is a conflict of interest involved?

A: The opinion concluded that the fee gives the departing lawyer a personal financial incentive that can be materially adverse to a client who wants to continue the representation, implicating ER 1.7(a)(2).

Background and rules framework

The opinion interprets Arizona ER 5.6 (restrictions on the right to practice; Model Rule 5.6), which bars agreements that restrict a lawyer's right to practice after leaving a relationship, except retirement-benefit agreements. It reads ER 5.6 together with ER 1.7 (concurrent conflicts, including a lawyer's personal-interest conflict; Model Rule 1.7), ER 1.16 (terminating representation; Model Rule 1.16), and ER 1.17 (sale of a law practice, including the rule that fees charged clients may not be increased by reason of a sale; Model Rule 1.17). The controlling Arizona authority is Fearnow v. Ridenour, Swenson, Cleer & Evans, 213 Ariz. 24 (2006).

Citations and references

Rules of Professional Conduct:

• MR 5.6 / Arizona ER 5.6 (restrictions on the right to practice)
• MR 1.7 / Arizona ER 1.7(a)(2) (personal-interest conflicts)
• MR 1.17 / Arizona ER 1.17 (sale of a law practice; no fee increase by reason of sale)
• MR 1.16 / Arizona ER 1.16 (terminating representation)

Cases:

• Fearnow v. Ridenour, Swenson, Cleer & Evans, 213 Ariz. 24 (2006), ER 5.6 does not categorically bar all departure disincentives
• Haight, Brown & Bonesteel v. Superior Court, 234 Cal. App. 3d 963 (1991), forfeiture of a departing partner's interest

Other opinions cited:

• State Bar of Arizona Ethics Op. 09-01 (superseded by this opinion): the same per-client fee
• ABA Formal Op. 99-414: a departing lawyer's duties to clients

See also

• ABA Formal Op. 06-444: Retirement Restrictive Covenants
• ABA Formal Op. 489: Notice When Lawyers Change Firms
• ABA Formal Op. 468: Selling a Law Practice
• ABA Formal Op. 00-417: Settlement Limits on Lawyers

Source

• Landing page: https://www.azcourts.gov/cld/Attorney-Ethics-Advisory-Committee/Opinions-Issued-by-the-Committee
• Original PDF: https://www.azcourts.gov/Portals/0/26/AEA%20Committee/Issued%20Opinions/EO-19-0006.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

SUPREME COURT OF ARIZONA
ATTORNEY ETHICS ADVISORY COMMITTEE
Ethics Opinion File No. EO-19-0006
The Attorney Ethics Advisory Committee was created in accordance with Rule 42.1 and Administrative Order Nos. 2018-110 and 2019-168.

Though Fearnow v. Ridenour, Swenson, Cleer & Evans, 213 Ariz. 24 (2006) made it clear that ER
5.6 does not categorically prohibit all agreements imposing financial disincentives on a departing
lawyer who continues to practice in competition with their previous firm, imposing a per-client
fee on a departing associate directly interferes with client choice and is prohibited. This Opinion
supersedes State Bar of Arizona Ethics Opinion 09-01.
ISSUE PRESENTED
A law firm (Firm) is contemplating using an employment contract that requires an associate
lawyer (Associate) to pay Firm $3,500 for each client or prospective client for whom the
Associate provides legal representation after departing Firm. The contract characterizes
this as a “Firm Reimbursement Fee” and explains that it compensates Firm for marketing
expenses. Such fees would not be owed, however, where Associate can demonstrate that
the client was not obtained through Firm marketing, where a court requires Associate to
remain counsel of record, or where Firm elects to have the client continue with Associate.
Would such an agreement violate the Rules of Professional Conduct?
RELEVANT ETHICS OPINIONS:
State Bar of Arizona Ethics Opinion 99-14, 01-01, 09-01
ABA Formal Op. 99-414
APPLICABLE ARIZONA RULES OF PROFESSIONAL CONDUCT:
ER 1.7 Conflict of Interest: Current Clients
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the
representation involves a concurrent conflict of interest. A concurrent conflict of interest
exists if:
***
(2) there is a significant risk that the representation of one or more clients will be materially
limited by … a personal interest of the lawyer.
ER 1.16. Declining or Terminating Representation
***
(b) Except as stated in paragraph (c), a lawyer may withdraw from representing a client if:
(1) withdrawal can be accomplished without material adverse effect on the interests of
the client;

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ER 1.17. Sale of Law Practice
A lawyer or a law firm may sell or purchase a law practice, or an area of law practice,
including good will, if the following conditions are satisfied:
...
b) The entire practice, or the entire area of practice, is sold to one or more lawyers or law
firms;
...
d) The fees charged clients shall not be increased by reason of the sale.
Comment
[1] The practice of law is a profession, not merely a business. Clients are not commodities
that can be purchased and sold at will. Pursuant to this Rule, when a lawyer or an entire
firm ceases to practice, or ceases to practice in an area of law, and other lawyers or firms
take over the representation, the selling lawyer or firm may obtain compensation for the
reasonable value of the practice as may withdrawing partners of law firms. See ERs 5.4
and 5.6. ***
[6] The Rule requires that the seller’s entire practice, or an entire area of practice, be sold.
The prohibition against sale of less than an entire practice area protects those clients whose
matters are less lucrative and who might find it difficult to secure other counsel if a sale
could be limited to substantial fee-generating matters. The purchasers are required to
undertake all client matters in the practice or practice area, subject to client consent. This
requirement is satisfied, however, even if a purchaser is unable to undertake a particular
client matter because of a conflict of interest.

[15] This Rule does not apply to the transfers of legal representation between lawyers when
such transfers are unrelated to the sale of a practice or an area of practice.
ER 5.6. Restrictions on Right to Practice
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;

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                                        OPINION

ER 5.6(a) prohibits a lawyer from offering or making “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.” The Arizona Supreme Court addressed the meaning of this rule
in a 2006 opinion, Fearnow v. Ridenour, Swenson, Cleer & Evans, 213 Ariz. 24 (2006). The
Fearnow opinion was not issued in a disciplinary proceeding. The case arose from a dispute
between a law firm and a lawyer who had left the firm to join another firm. Under the terms of the
first firm’s shareholder agreement, the firm would repurchase the capital interest of a lawyer who
chose to retire or was involuntarily expelled from the firm. But a lawyer who decided to leave the
firm and continue practicing in the firm’s geographic area forfeited this right to repayment. When
the firm refused to repurchase a voluntarily departing shareholder’s shares, the lawyer sued,
arguing that the forfeiture provision violated ER 5.6 and was therefore unenforceable as against
public policy.
The trial court agreed with the plaintiff, and the Court of Appeals affirmed, though with a slightly
different analysis. The Supreme Court then took review and reversed, concluding that:
Although the rule prohibits—and we will hold unenforceable—agreements that
forbid a lawyer to represent certain clients or engage in practice in certain areas or
at certain times, its language should not be stretched to condemn categorically all
agreements imposing any disincentive upon lawyers from leaving law firm
employment. Such agreements, as is the case with restrictive covenants between
other professionals, should be examined under the reasonableness standard.
213 Ariz. at 30, ¶ 21. The Court remanded the case to the trial court to make a reasonableness
determination. Id. at 30-31, ¶ 24.
Three years later, the State Bar of Arizona issued Ethics Opinion 09-01, which addressed the
following question: “May Firm require, as a condition of employment, that in the event Associate
departs from Firm, Associate must pay a $3,500 fee for each former Firm client that Associate
continues to represent after departing?”
The opinion concluded that 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).
The Arizona Supreme Court’s Attorney Ethics Advisory Committee elected to reconsider Opinion
09-01 to address the impact of the Supreme Court’s earlier decision in Fearnow. The Committee
finds that the per-client fee that was the subject of Opinion 09-01 is distinguishable from the

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shareholder agreement in Fearnow, which was related to preserving the firm’s capital structure.
Because the per-client fee directly impinges on client choice, it is prohibited by ER 5.6.
Public Policy and ER 5.6
Some commentators have argued that it is problematic to use ER 5.6 to define public policy for
purposes of determining the enforceability of a contract. When that approach is taken, and the Rule
is interpreted broadly, it allows a lawyer to enter into a contract that violates ER 5.6 and then use
the Rule to avoid their obligations under the contract—a clearly inequitable result.
A rule that a contract or action that violates an ethical rule violates public policy
creates a bright line rule that courts would apply regardless of the equities. Under
traditional contract law analysis, when contracts are held to violate public policy,
courts do not look behind the contract to see if it would be unfair not to enforce it.
If a contract violates public policy it is void ab initio. Such a proposition is
problematic in the context of the ethical rules for two reasons. First, invalidating
certain contracts could be used by a lawyer to advance their own personal interests,
contrary to the purpose of the rules, which is not to protect the interests of the
lawyer.
Second, and more significant, unethical agreements may have been fairly negotiated and,
as a matter of substantive contract law, are not problematic
Donald E. Campbell, The Paragraph 20 Paradox: An Evaluation of the Enforcement of Ethical
Rules As Substantive Law, 8 St. Mary's J. Legal Mal. & Ethics 252, 303 (2018). See also Feldman
v. Minars, 230 A.D.2d 356, 361, 658 N.Y.S.2d 614, 617 (1997) (concluding that it would be
“unseemly” to allow an attorney to “us[e] their own ethical violations as a basis for avoiding
obligations undertaken by them” and noting that a violation of the ethical rule regarding
restrictions on the right to practice could be “addressed by the appropriate disciplinary
authorities”); Lee v. Florida Dept. of Ins. & Treasurer, 586 So. 2d 1185, 1188 (Fla. Dist. Ct. App.
1991) (“We first would note that the application of rule 4-5.6 to invalidate or render void a
provision in a private contract between two parties is beyond the scope and purpose of the Rules
and constitutes error.”); Potter v. Peirce, 688 A.2d 894, 895 (Del. 1997) (concluding that a lawyer
could not enter into an agreement in violation of the ethics rules and then “use those Rules as a
shield to avoid a contractual duty”).
The Arizona Supreme Court in Fearnow adopted ER 5.6 as a statement of public policy without
any discussion. Perhaps concerned about creating the inequities discussed above by reading ER
5.6 broadly, the Court—though acknowledging that ER 5.6 is grounded in concerns about
preserving “lawyer autonomy and client choice” (213 Ariz. at 27, ¶ 12)— was unwilling to
“condemn categorically all agreements imposing any disincentive upon lawyers from leaving law
firm employment” (id. at 31, ¶ 21). Instead, “[s]uch agreements, as is the case with restrictive
covenants between other professionals, should be examined under the reasonableness standard.”
Id.

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                                The Scope of the Fearnow Decision

Justice Bales, in his dissent, wrote the majority interpreted ER 5.6 narrowly, as applicable only to
outright prohibitions on a lawyer’s right to practice in a particular area, for a specific period of
time, or certain clients. Id. at 32 and 35, ¶¶ 35 and 46. Others appear to have interpreted the case
similarly. See Karen E. Komrada, Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C.:
Encouraging Firms to Punish Departing Attorneys?, 48 Ariz. L. Rev. 677, 677 (2006); Betsy
Lamm, Ethics and the Arizona Bar: A Discussion of the Arizona Supreme Court's 2005-06
Decisions, 39 Ariz. St. L.J. 613, 624 (2007).
As Justice Bales’s dissent points out, such a narrow reading of the rule means that an agreement
can comply with the Rule—be ethically permissible—while, as a practical matter, achieving the
same result as an outright prohibition by imposing significant financial disincentives. Because that
ethical conclusion is as counterintuitive as the legal problems that result from a broad reading of
the Rule, it invites a closer reading of precisely what the Court in Fearnow said.
In that regard, it is worth noting two things the Court did not say. First, although the Court
explicitly rejected a categorical interpretation of ER 5.6 that would prohibit all financial
disincentives, it did not explicitly adopt a categorical interpretation that would permit all such
disincentives. In fact, by saying that ER 5.6 shouldn’t be read to “categorically” condemn “all”
agreements imposing “disincentives” on a departing lawyer—instead of merely saying that the
Rule doesn’t apply to such disincentives—the majority opinion implies that the rule does—or at
least might—condemn some disincentives.
Second, the Court did not say that only unreasonable agreements violate ER 5.6. Although the
Court in Fearnow ultimately held that the shareholder agreement at issue in that case did not
violate ER 5.6 (213 Ariz. at 25, ¶ 1), it also remanded the case to the trial court for an analysis of
the agreement’s reasonableness. That necessarily means that the agreement could comply with ER
5.6 but still be unreasonable and therefore legally unenforceable. In other words, despite the
Court’s insistence that it was interpreting ER 5.6, it did not adopt “reasonableness,” the legal
standard, as the ethical standard.
Application of Fearnow to the Question Addressed in Opinion 09-01
So, if ER 5.6 does not categorically permit all financial disincentives, and does not prohibit only
unreasonable disincentives, what distinguishes unethical financial disincentives from those that
are ethically permissible?
Under the agreement at issue in Fearnow, the firm agreed to repurchase a departing shareholder’s
stock in the event of disability, retirement, withdrawal, or expulsion from the firm. But a lawyer
voluntarily leaving the firm and continuing to practice law in the firm’s geographic area for more
than 10 hours per week forfeited this benefit. Similarly, the agreement at issue in Howard, a
California case heavily relied upon by the Fearnow majority, provided that a departing lawyer
would be paid for their capital interest in the firm plus a share in the firm’s net profits for a year

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after departure. Those benefits were forfeited, however, if the lawyer thereafter competed with the
firm. Another California case cited by the Fearnow majority, Haight, Brown & Bonesteel v.
Superior Court, 234 Cal. App. 3d 963 (Ct. App. 1991), also involved forfeiture of a departing
partner’s interest in the firm’s capital and accounts receivable. In both cases, the California Court
of Appeal found that the agreements did not violate California’s version of ER 5.6.
Thus, Fearnow and the California cases on which it relied each involved the forfeiture of capital
interests and accounts-receivable for which a departing partner or shareholder would otherwise be
compensated under the terms of the partnership or shareholder agreement, based on the lawyer’s
competition with the firm. Such agreements have certain characteristics in common. They typically
are entered into by lawyers with more or less equal bargaining authority; each lawyer who is a
party to the agreement could potentially be benefitted or penalized by the financial disincentives,
depending on who ultimately leaves and who stays; they involve the forfeiture of rights that would
not exist but for the partnership or shareholder relationship defined in the contract, rather than
imposition of a fee or penalty; and they are related to the capital structure of the firm, and the
firm’s legitimate concern with maintaining the stability of that structure, rather than to continued
representation of particular clients. Such an agreement could, depending on the circumstances, be
unreasonable, and hence legally unenforceable, but it does not raise the type of concerns that would
trigger ER 5.6.
In contrast, the agreement examined by Opinion 09-01 imposes on a departing associate a flat
$3,500 penalty for each firm client the lawyer continues to represent. It is not an agreement among
partners or shareholders on an equal footing, but rather an agreement imposed on a newly hired
associate who is not in the same bargaining position. And the agreement is one-sided in that it
protects the firm but will never benefit the associate. It also involves an affirmative obligation to
pay the firm, rather than the forfeiture of benefits to which the associate would otherwise be
contractually or legally entitled. Finally, unlike the Fearnow agreement, it is directly tied to the
continued representation of particular clients.
In the opinion of the Committee, these are material differences. Such a penalty does not just
discourage the lawyer from leaving the firm, or protect the firm’s capital structure. 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.

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