Ezel / Ethics Opinions / DCBAR
DCBAR October 2004

When firms merge, can the old firm condition payouts of already-earned fees on each partner staying with the merged firm, or does Rule 5.6(a) bar that?

Short answer: The opinion concludes that an agreement distributing a pre-merger firm's already-earned (but later-paid) profits only to partners who keep practicing with the post-merger firm violates Rule 5.6(a), because it creates a financial disincentive to leave and practice elsewhere. The Rule 5.6(a) exception for retirement benefits reaches only retirement at the end of a career, not every departure, so a two-year vesting condition (and a non-vesting originator's share) that penalizes partners who leave to practice elsewhere is an improper restriction on the right to practice.

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This page answers the general question as of 2004. Ezel answers yours: whether it's allowed on your facts, under the current rules of professional conduct in your state, with citations.

Currency note: this opinion is from 2004
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Plain-English summary

Opinion 325 (adopted October 2004) addresses a law-firm merger. Before merging, the old firm was owed fees for work already completed, payable over time with nothing further to be done to earn them. Anticipating the merger, the old firm's partners assigned that future income to a new entity (Receivables LLC) that paid out a "Management share" tied to each partner's pre-merger profit share and an "Originator's share" for partners credited with bringing in the business. The catch: a partner who left the merged firm within two years lost the Management share (unless the departure was death, illness, or retirement from practice), and a partner who left for any reason at any time lost the Originator's share. The inquirer, forced to leave because the merged firm took on clients adverse to his client base, lost both.

Rule 5.6(a) bars a lawyer from making a partnership or employment agreement that restricts the right to practice after the relationship ends, except an agreement concerning retirement benefits. The opinion reviews the Committee's prior opinions (65, 221, 241, 291) holding that the rule reaches not only explicit practice bans but also agreements that create financial disincentives to leaving or competing. It reads the retirement exception narrowly, citing Neuman v. Akman, 715 A.2d 127 (D.C. 1998), Cohen v. Lord, Day & Lord, 550 N.E.2d 410 (N.Y. 1989), and Borteck v. Riker, Danzig, 844 A.2d 521 (N.J. 2004), to mean retirement at the end of a career; a contrary reading would let the exception swallow the rule.

Applying that framework, the opinion first concludes the Receivables LLC agreement is a "partnership agreement" within Rule 5.6(a); a firm cannot escape the rule by routing part of its practice through a separate entity. It then concludes the two-year Management-share vesting condition violates the rule, because its practical effect is to penalize partners who leave to practice elsewhere by cutting off previously earned income, and the carve-outs for death, illness, and retirement show that those who can leave to practice are the ones the disincentive targets. The non-vesting Originator's share is a closer question, but the opinion concludes it also violates the rule: a firm winding up its affairs cannot use its former partners' already-earned assets to condition future payouts on continued practice with the new firm. The opinion is careful to distinguish an ongoing firm that simply stops compensating departing partners; that, without more, does not violate Rule 5.6(a).

In practice

Under the D.C. rules as they stood at the time of the opinion, the opinion concludes that partners of a dissolving firm may not condition the distribution of the firm's already-earned receivables on a former partner's continued practice with the merged firm; doing so, per the opinion, is a financial disincentive to leave that Rule 5.6(a) prohibits. The opinion treats the retirement exception as limited to end-of-career retirement, so a mid-career vesting condition does not qualify.

The opinion draws a line the inquiry did not require it to cross: an ongoing firm that stops compensating a partner who departs (even for future benefit of past work) does not, without more, violate the rule. The problem here was a wound-up firm trying to retain control over previously distributed, already-earned assets to influence where its former partners practice. Because the opinion predates later rule developments, verify the current D.C. rules before relying on specific requirements.

Common questions

Q: Can a merging firm make partners forfeit already-earned fees if they leave within a set period?

A: The opinion concludes no. A two-year vesting condition that cuts off a partner's share of already-earned profits if the partner leaves to practice elsewhere is a financial disincentive to leaving that violates Rule 5.6(a).

Q: Does the retirement-benefits exception save this kind of agreement?

A: The opinion concludes no. The Rule 5.6(a) retirement exception covers retirement at the end of a career, not every departure, so a forfeiture imposed on partners who leave mid-career to keep practicing is not a retirement-benefits agreement.

Q: Can a firm avoid Rule 5.6(a) by routing the payout through a separate LLC?

A: The opinion concludes no. The Receivables LLC agreement was a "partnership agreement" within the rule; a firm cannot escape the prohibition by creating a separate organization to handle part of its practice.

Q: Does every loss of compensation on departure violate the rule?

A: The opinion concludes no. An ongoing firm that simply stops compensating a departing partner, even for the future benefit of past work, does not by itself violate Rule 5.6(a); the violation here turned on a wound-up firm conditioning already-earned, distributed assets on continued practice elsewhere.

Background and rules framework

The opinion interprets D.C. Rule 5.6(a) (and its predecessor DR 2-108(a)), which prohibits partnership or employment agreements that restrict a lawyer's right to practice after the relationship ends, subject to a retirement-benefits exception. The opinion frames the rule's purpose, quoting Neuman v. Akman, as protecting clients' ability to choose their lawyers and lawyers' ability to advance their careers, and ties it to the lateral-movement provisions in Rule 1.10. It relies on prior D.C. Opinions 65, 221, 241, and 291 and on Cohen, Borteck, and Hazard & Hodes for the narrow construction of the retirement exception.

Citations and references

Rules of Professional Conduct:

  • D.C. RPC 5.6(a) / Model Rule 5.6(a) (restrictions on the right to practice; retirement exception)
  • D.C. RPC 1.10 (lateral movement of lawyers between firms), referenced for purpose

Cases:

  • Neuman v. Akman, 715 A.2d 127 (D.C. 1998) (purpose of Rule 5.6(a); scope of the retirement exception)
  • Cohen v. Lord, Day & Lord, 550 N.E.2d 410 (N.Y. 1989) (retirement exception limited to end-of-career retirement)
  • Borteck v. Riker, Danzig, Scherer, Hyland & Perretti LLP, 844 A.2d 521 (N.J. 2004) (defining "retirement")
  • Gray v. Martin, 663 P.2d 1285 (Or. App. 1983)

Other opinions cited:

  • D.C. Ethics Opinions 65, 221, 241, 273, 291 (Rule 5.6(a) and financial disincentives to practice)

See also

Source

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