Is a fee-division agreement between a departing lawyer and the firm enforceable under the ethics rules, or is it a forbidden restriction on the right to practice?

Plain-English summary

When Attorney B resigned as an associate from Attorney A's firm, the two signed an agreement: B would take the active client files of clients who chose to follow him, and on each such file he would pay A 50% of the attorney's fee collected, plus reimbursement of costs A had advanced. A fee-dispute arbitration later arose over one personal-injury case, and the arbitrator asked the State Bar whether the agreement complied with the Rules of Professional Conduct. The opinion concludes it did.

The opinion frames the question under Rule 5.6(a), which bars a lawyer from making or offering an agreement that restricts a lawyer's right to practice after the relationship ends, except agreements about retirement benefits. The opinion relies on 2008 FEO 8, which had held that a fee-division provision is permissible if, at the time the agreement is made, the formula is reasonably calculated to compensate the firm for resources it expended as of the lawyer's departure and will not discourage the departing lawyer from taking a case and so deny the client the lawyer of choice. The timing and circumstances of the agreement are central to that analysis.

Applying that standard, the opinion notes the agreement here was negotiated after Attorney B announced he was leaving, as part of a global settlement of departure issues, not as a condition of continued employment as in 2008 FEO 8. It did not deter B from leaving or from continuing to represent clients who followed him; the agreement expressly contemplated that he would. Given the varied stages of the cases at departure, a flat 50% split of contingent fees was not onerous or punitive and would favor B on some files and disfavor him on others. The cost-reimbursement provision tracked what 2008 FEO 8 allows. Finally, Rule 1.5(e), which requires a client's written consent to a fee division between lawyers in different firms, did not apply because the client's fee agreement with the firm preceded Attorney B's departure.

In practice

Under the North Carolina rules as they stood at the time of the opinion, conduct in which a departing lawyer and the firm agree to divide future fees on the lawyer's open files is permitted, so long as the agreement does not operate as a restriction on the right to practice under Rule 5.6(a). Per the opinion, a fixed-percentage division that fairly allocates the value of work done before and after departure, entered when the lawyer leaves rather than as a condition of staying, and that does not deter the lawyer from keeping clients who choose to follow, is a reasonable and permissible way to resolve fee-division questions.

Per the opinion, an agreement of this kind may also require the departing lawyer to protect the firm's interest in reimbursement of advanced costs from any final recovery, and Rule 1.5(e)'s written-consent requirement does not reach a division where the client's fee agreement predated the lawyer's departure.

Common questions

Q: Can a firm and a departing lawyer agree to split fees on the lawyer's ongoing cases?

A: Yes. The opinion concludes such an agreement complies with Rule 5.6(a) where it is reasonably calculated to compensate the firm for work done before the departure and does not discourage the lawyer from continuing to represent clients who choose to follow him.

Q: Does a 50% split of contingent fees count as an improper restriction on practice?

A: Not on these facts. The opinion finds the flat 50% split was neither onerous nor punitive given the various stages of the cases at departure, and that it would favor the departing lawyer on some files and disfavor him on others.

Q: Why did the timing of the agreement matter?

A: The opinion stresses that the agreement was negotiated after the associate announced his departure and was not a condition of continued employment, unlike the agreements found to violate Rule 5.6 in 2008 FEO 8; the circumstances and timing are central to whether an agreement restricts the right to practice.

Q: Did the client have to consent in writing to the fee division?

A: No. The opinion concludes Rule 1.5(e), which requires client written consent to a division of a fee between lawyers not in the same firm, did not apply because the client's fee agreement with the firm preceded Attorney B's departure.

Background and rules framework

The opinion applies North Carolina Rule 5.6 (restrictions on the right to practice, the analogue of Model Rule 5.6) and Rule 1.5(e) (division of fees between lawyers not in the same firm, the analogue of Model Rule 1.5(e)). Rule 5.6(a) prohibits agreements restricting a lawyer's right to practice after termination of a relationship, except agreements concerning retirement benefits; the opinion cites Comment [1] to Rule 5.6 on the rule's purpose of protecting clients' freedom to choose counsel and promoting lawyer mobility. The opinion reads these rules together with 2008 FEO 8, which sets the standard for permissible fee-division provisions on a lawyer's departure.

Citations and references

Rules of Professional Conduct:

• MR 5.6 / NC Rule 5.6(a) (restrictions on the right to practice after a relationship ends)
• MR 1.5 / NC Rule 1.5(e) (division of fees between lawyers not in the same firm; cmt. [9])

Other opinions cited:

• NC 2008 FEO 8: standard for fee-division provisions on a lawyer's departure from a firm.

See also

• ABA Formal Op. 94-381: Restrictions on Right to Practice
• ABA Formal Op. 06-444: Retirement Restrictive Covenants
• ABA Formal Op. 99-414: Lawyers Changing Firms

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2012-formal-ethics-opinion-12/

Original opinion text

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

Inquiry:

Attorney B, an associate in Attorney A’s firm, resigned from the firm effective February 28, 2005. At the time of his resignation, Attorney B signed an agreement with the firm. The agreement provided that Attorney B would take all of the active client files for which the clients had indicated a desire for Attorney B to continue to represent them. The agreement also contained the following provision:

With respect to those files in which the client chooses Attorney B to conclude his or her active claim, upon recovery made by Attorney B on each such file, Attorney B shall forward to Attorney A, at the time of disbursement, 50% of the attorney’s fee collected on each settlement. This will include medical payments fees as well. Attorney B will also pay to Attorney A upon recovery the total amount of expenses due to Attorney A in accordance with [a computer expense printout provided by Attorney A]. Finally, Attorney B will forward to Attorney A a copy of the settlement sheet signed by the client reflecting the disbursements on each such file. All settlements negotiated by Attorney B through February 28, 2005, will be handled through Attorney A’s trust account.

Client entered into an agreement for representation on a personal injury claim with Attorney A’s firm on December 16, 2004, while Attorney B was still with the firm. When Attorney B left the firm in February 2005, Client chose to continue to be represented by Attorney B. The case was concluded in May 2010, with a deputy commissioner’s award to Client.

There is currently an “attorney-attorney” fee arbitration between Attorney A’s firm and Attorney B pending before the fee dispute committee of the local judicial district bar. The distribution of the legal fee from the resolution of Client’s worker’s compensation case is in dispute. The judicial district bar’s bylaws relating to the arbitration of such disputes provides: “The committee shall neither have nor exercise jurisdiction regarding disputes…which involve services that may constitute a violation of The North Carolina State Bar Rules of Professional Conduct, as now in effect or may be hereafter amended.” The presiding arbitrator has requested an opinion from the North Carolina State Bar on the following issue: Does the provision of the agreement quoted above comply with the Rules of Professional Conduct?

Opinion:

Rule 5.6(a) prohibits a lawyer from participating in offering or making a partnership, shareholders, operating, employment, or 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. This prohibition on restrictive covenants protects the freedom of clients to choose a lawyer and promotes lawyer mobility and professional autonomy. Rule 5.6, cmt. [1].

2008 FEO 8 examined provisions in three employment agreements to determine whether the agreements complied with Rule 5.6. Although the opinion ruled that all three agreements violated Rule 5.6, the opinion, nevertheless, encouraged lawyers to enter into agreements that will help to resolve potential disputes about the division of fees. While cautioning that “such agreements may not be so financially onerous or punitive as to deter a withdrawing lawyer from continuing to represent a client if the client chooses to be represented by the lawyer after the lawyer’s departure from the firm,” the opinion held that a lawyer may participate in the offering or making of an agreement that includes a provision for dividing legal fees received after a lawyer’s departure from a firm.

...provided the formula or procedure for dividing fees is, at the time the agreement is made, reasonably calculated to compensate the firm for the resources expended by the firm on the representation as of the date of the lawyer’s departure and will not discourage a departing lawyer from taking a case and thereby deny the client access to the lawyer of his choice.

Thus, the circumstances and timing of the execution of an agreement are important to the analysis of whether the agreement runs afoul of Rule 5.6.

In the current inquiry, the agreement was negotiated and entered into after Attorney B announced that he was leaving Attorney A’s firm. The agreement was, apparently, part of a global settlement of all issues relative to Attorney B’s departure. It was not entered into as a condition of continued employment, as were the agreements analyzed in 2008 FEO 8. It did not deter Attorney B from leaving the firm or from continuing to represent clients who chose to follow him to his new firm. In fact, the agreement specifically contemplated that Attorney B would continue to represent those clients. In light of the various stages of his cases at the time of his departure, a 50% split of the contingent fees to be earned on the cases cannot be viewed as “onerous” or “punitive.” Such a division of fees would favor Attorney B in some cases and disfavor him in others.

A division of fees based upon a fixed percentage that fairly allocates, over the range of cases, the value of the time and work expended before and after a lawyer leaves a firm is a reasonable means of achieving an efficient, equitable resolution of the fee division issues between a departing lawyer and the firm. Provided the lawyers deal fairly and honestly with each other without intimidation, threats, or misrepresentation, this type of agreement should be encouraged.

The provision of the agreement addressing costs advanced is consistent with 2008 FEO 8, which provides that the agreement “may require the departing lawyer to protect the firm’s interest in receiving reimbursement for costs advanced from any final settlement or judgment received by the client.”

Rule 1.5(e) requires a client’s written consent to the division of a fee between lawyers who are not in the same firm. This rule, however, does not apply to the current situation because the fee agreement with the client preceded Attorney B’s departure from the firm. Rule 1.5, cmt. [9].