May an Illinois law firm's shareholder agreement require a departing partner (or that partner's new firm) to share 15% of fees generated at the new firm from clients originated by a retired partner of the old firm?

Plain-English summary

A professional-corporation law firm with 10 shareholders is considering amending its shareholder agreement. Under the proposal, a "retired shareholder" (one who becomes a judge, becomes in-house general counsel, or retires from practice) would receive 15% of new collections from the shareholder's "origination clients." The amendment would also require any shareholder who later leaves the firm to practice solo or at a new firm to pay (or cause the new firm to pay) the same 15% on fees generated at the new firm from the retired shareholder's origination clients. There would be no client agreement covering the payments.

The committee splits the proposal into two pieces and reaches different conclusions on each.

First, the payments from the old firm to the retired shareholder under the retirement provisions are permissible. Per Rule 1.5 Comment 8, the cross-firm fee-sharing restrictions of Rule 1.5(e) do not prohibit or regulate payments made pursuant to a separation or retirement agreement. The committee cites Mass. Bar Ethics Op. 2014-4 (purchase-price-of-practice arrangements may include future fees from current and former clients but not new clients referred by the lawyer) and notes that Comment 8 reaches separation arrangements that are not strictly "retirement," including a shareholder leaving for in-house counsel work.

Second, the perpetual fee-share obligation on the departed shareholder and the new firm fails. The committee identifies two independent reasons. As to the new firm: Rule 1.5(e) requires that any cross-firm fee division be in proportion to services performed, that the client agree, and that the total fee be reasonable. The proposed arrangement satisfies none. The retired shareholder performs no services (as a condition of payment under the proposal), and there is no client agreement. The Comment 8 retirement-agreement exception does not apply, because the agreement is between the old firm and the retired partner, not between the new firm and the retired partner.

As to the departing shareholder: Rule 5.6(a) bars "an agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement." The committee draws on Dowd & Dowd v. Gleason, 181 Ill. 2d 460 (1998) (Rule 5.6's purpose is to give clients greater freedom in counsel choice and protect lawyers from onerous restrictions on mobility) and on DC Bar Ethics Op. 65 and Op. 325 for the proposition that financial disincentives, not just outright restrictions, fall within Rule 5.6's reach. The committee qualifies this with Hoffman v. Levstik, 369 Ill. App. 3d 144 (1st Dist. 2006) (forfeiture of paid-in capital did not violate Rule 5.6 where the contract did not interfere with the client's free choice).

Applied to the proposal, the committee concludes the perpetual fee-share obligation would clearly inhibit a lawyer's ability to leave the old firm. The committee adopts DC Bar Op. 65's framing: such a requirement "imposes a barrier" because the departing attorney would find work for old-firm clients economically less attractive than work at similar rates received from other clients, and might be deterred. The same effect would impair clients' choice of counsel. The committee notes the Rule 5.6(a) "benefits upon retirement" exception does not save the provision: per ABA Formal Op. 06-444, that exception permits a firm to restrict the retired lawyer's practice in exchange for retirement benefits, not to restrict other lawyers' practice.

In practice

Under this opinion, an Illinois firm's shareholder, partnership, or operating agreement may include retirement or separation provisions that pay a retired partner a portion of fees subsequently generated by the partner's origination clients at the old firm. Per Rule 1.5 Comment 8, such payments are not subject to Rule 1.5(e)'s cross-firm conditions. The opinion holds that the same agreement may not require the departing partner, or the partner's new firm, to share fees generated at the new firm with the retired partner of the old firm; that obligation fails Rule 1.5(e) (no client agreement; no proportionate services) and Rule 5.6(a) (perpetual fee-sharing operates as an impermissible financial disincentive on departure).

Common questions

Q: Can a law firm pay a retired partner a share of fees from the partner's origination clients?

A: Per Rule 1.5 Comment 8, yes. Comment 8 excludes payments made under retirement and separation agreements from Rule 1.5(e)'s cross-firm fee-sharing restrictions. The committee notes Comment 8 reaches not only literal retirement but also separation arrangements (e.g., a shareholder leaving to become in-house counsel).

Q: Can the shareholder agreement require a departing partner to keep paying the retired partner from fees the departing partner earns at a new firm?

A: The opinion concludes no. The departing partner's obligation runs afoul of Rule 5.6(a), which the opinion treats as reaching financial disincentives that restrict lawyer mobility and impinge on client choice. The committee draws on Dowd & Dowd v. Gleason and DC Bar Op. 65 for the analytical frame.

Q: Why can't the new firm just share the fees with the retired partner under Rule 1.5(e)?

A: Per the opinion, because Rule 1.5(e) requires three conditions: proportionate services by each lawyer (or referral plus joint financial responsibility); client agreement in writing; and a reasonable total fee. The retired partner performs no services (a condition of payment under the proposal), and there is no client agreement. The retirement-agreement Comment 8 exception is also unavailable because the agreement is between the old firm and the retired partner, not the new firm and the retired partner.

Q: Does the Rule 5.6(a) retirement exception ("an agreement concerning benefits upon retirement") save the provision?

A: Per the opinion, no. The opinion cites ABA Formal Op. 06-444 for the proposition that the exception lets the firm restrict the retired lawyer's practice in exchange for retirement benefits; it does not authorize restrictions on the departing lawyer's practice or on the new firm's economic terms.

Background and rules framework

The opinion interprets Illinois Rule 1.5(e) (division of fees between lawyers in different firms; proportionate services, written client agreement, reasonable total fee) and its Comment 8 (which excludes retirement and separation payments from those conditions); and Rule 5.6(a) (restrictions on the right to practice after termination, with a narrow retirement-benefits exception). The committee draws on Illinois case law (Dowd & Dowd v. Gleason; Hoffman v. Levstik), DC Bar opinions interpreting parallel rules, and ABA Formal Op. 06-444.

Citations and references

Rules of Professional Conduct:

• Ill. R. Prof'l Conduct 1.5(e) and Comment 8
• Ill. R. Prof'l Conduct 5.6(a) and Comment 1

Cases:

• Dowd & Dowd v. Gleason, 181 Ill. 2d 460 (1998), Rule 5.6 purposes and analytical frame.
• Hoffman v. Levstik, 369 Ill. App. 3d 144 (1st Dist. 2006), capital-forfeiture provision did not violate Rule 5.6 where client choice was not impaired.

Other opinions cited:

• ABA Formal Op. 06-444: scope of Rule 5.6(a) retirement exception.
• Mass. Bar Ethics Op. 2014-4: purchase price of practice may include future fees from current and former clients but not from new referrals.
• DC Bar Op. 65: financial disincentives in departing-lawyer agreements as Rule 5.6 violations.
• DC Bar Op. 325: merger agreement creating financial disincentives violates Rule 5.6(a).

See also

• NYC Bar Op. 2025-3: Financial Disincentives on Lawyer Departure
• NY State Bar Op. 1295: Solo Practice + NY Firm Job
• NYC Bar Op. 2025-4: Contractual Limits on Attorney Discretion

Source

• Landing page: https://www.isba.org/ethics/opinions/2302