Does North Carolina's sale-of-practice rule apply when a firm's founding lawyers transfer the practice to younger lawyers already employed there, and can the firm keep its name?

Plain-English summary

Founding lawyers, all shareholders in a professional association, wanted to transfer the practice over time to younger lawyers already employed by the firm while continuing to practice as employees themselves. They asked whether two transfer structures would trigger Rule 1.17, which requires a lawyer who "sells a law practice" to cease the private practice of law in North Carolina.

The opinion concluded Rule 1.17 applies only to the sale of an entire law firm to a purchasing lawyer or law firm that is not a current member of the firm. Under the first method (younger lawyers buy shares with capital contributions and the firm redeems the founders' shares), the founders need not cease practicing law, because the rule does not govern the transfer of shares of a professional corporation to existing employees. The opinion pointed to Comment [15], which excludes admission to or retirement from a partnership or professional association, retirement plans, and similar arrangements from the rule, and explained the rule's purpose is to protect clients from breaches of confidentiality, conflicts of interest, and other abuses when an outside lawyer purchases a firm's good will.

The opinion reached the same result for the second method (the younger lawyers form a new professional association that buys substantially all the firm's assets, including good will and the right to use the name), treating it as essentially a retirement plan or similar arrangement not governed by Rule 1.17, because there is no potential harm to client interests when current employees acquire the firm. On the firm name, the opinion concluded that under either method the existing name may continue because there is a continuing succession in the firm's identity (Rule 7.5, Comment [1]), consistent with the professional-corporation naming regulations and RPC 13; a retired principal's name may be used only if that principal has ceased the practice of law. Finally, because Rule 1.17 does not apply, its paragraph (g) barring the seller from having "any say regarding the purchaser's conduct of the law practice" also does not apply, so the founders may advise the younger lawyers after retiring.

Currency note

This opinion was issued in 1998, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the rules under the numbering then in effect (Rule 1.17(a), (g); Rule 7.5). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific requirement mentioned here.

Common questions

Q: Does North Carolina's sale-of-practice rule apply when a firm is transferred to its own employed lawyers?

A: No. The opinion concluded Rule 1.17 governs only the sale of an entire firm to a purchasing lawyer or firm that is not a current member; transfers to existing employees fall under Comment [15]'s carve-out for retirement and similar arrangements.

Q: Do the founding lawyers have to stop practicing law if they transfer the firm to younger employees?

A: No. The opinion concluded that because Rule 1.17 does not apply to either structure (stock redemption or asset purchase by a new entity owned by current employees), the founders need not cease the private practice of law in North Carolina.

Q: Can the firm keep its existing name after the transfer?

A: Yes. The opinion concluded the name may continue under Rule 7.5, Comment [1] because there is a continuing succession in the firm's identity; a retired principal's name may remain only if that principal has ceased practicing law.

Q: After retiring, may the founders advise the younger lawyers on running the practice?

A: Yes. The opinion concluded that since Rule 1.17 does not apply, its paragraph (g) prohibiting the seller from having any say over the purchaser's conduct of the practice is also inapplicable.

Background and rules framework

The opinion applied North Carolina Rule 1.17 (sale of a law practice) and Rule 7.5 (firm names and letterhead), the analogues to Model Rules 1.17 and 7.5, to the transfer of a firm to its own employed lawyers. It also relied on Comment [15] to Rule 1.17, the State Bar's professional-corporation naming regulations (7 NCAC 1E, Rule .0102(a)), and prior opinion RPC 13 on continued use of a retired attorney's name.

Citations and references

Rules of Professional Conduct:

• MR 1.17 (sale of law practice) / NC Rule 1.17(a), (g)
• MR 7.5 (firm names and letterhead) / NC Rule 7.5

Other opinions cited:

• RPC 13: continued use of a retired attorney's name in a firm name

See also

• NC State Bar Op. 2004 FEO 9: Trade Name Implying Affiliation with Financial Planning Company
• NC State Bar Op. 2007 FEO 5: Use of the Title 'Doctor' in Academia

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/98-formal-ethics-opinion-6/

Original opinion text

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

Inquiry #1:

Founding Lawyers have practiced law together for many years. Each Founding Lawyer is a shareholder in A, B, & C Law Firm, P.A., a professional association (the "firm"). The firm employs Younger Attorneys who have expressed an interest in taking over the practice from Founding Lawyers. Younger Attorneys are not currently shareholders in the firm. Founding Lawyers anticipate retiring from the practice of law at different times over the ensuing years. They are interested in transferring the practice to Younger Attorneys and continuing to practice law as employees of the firm.

Founding Lawyers are considering two different ways of transferring the firm to Younger Attorneys. By the first method, Younger Attorneys would make sizable capital contributions to the firm in exchange for shares in the firm and the firm would, in turn, redeem the shares of Founding Lawyers. Under Rule 1.17(a) of the Revised Rules of Professional Conduct, a lawyer who sells a law practice is required to "[cease] to engage in the private practice of law in North Carolina." If the firm is transferred to Younger Attorneys by this method, will Founding Lawyers be required to cease to engage in the private practice of law in North Carolina?

Opinion #1:

No. Rule 1.17 applies to the sale of an entire law firm to a purchasing lawyer or law firm. The rule does not apply to the transfer of shares of a professional corporation to existing employees of the firm in exchange for capital contributions to the firm. As noted in Comment [15] to Rule 1.17, "[a]dmission to, or retirement from, a law partnership or professional association, retirement plans and similar arrangements…do not constitute a sale or purchase governed by the rule." The rule is intended to protect clients from breaches of confidentiality, conflicts of interests, and other abuses that may occur when a lawyer who is not a current member of a law firm purchases the good will of the law firm. Therefore, the sale of all of the shares of a professional association of lawyers to a lawyer who is not a member of the firm or a law firm that includes principals who are not members of the firm is subject to the requirements of the rule.

Inquiry #2:

In the second method of transferring the firm to Younger Attorneys under consideration, the Younger Attorneys will form a new professional association and own 100% of the stock of the new professional association. The new professional association will purchase substantially all of the assets of A,B &C Law Firm including the good will and the right to use the name of the firm. If the firm is transferred to Younger Attorneys by this method, will Founding Lawyers be required to cease to engage in the private practice of law in North Carolina?

Opinion #2:

No, see opinion #1 above. Although structured like a purchase of assets by a third party, the second method of transfer is essentially a retirement plan or "similar arrangement." As noted above, these are not governed by Rule 1.17. When the assets of a firm are purchased by a professional association of lawyers who are all current employees of the firm, there is no potential for harm to the interests of the clients of the firm due to conflicts of interests, breaches of confidentiality, or abuse of fee agreements.

Inquiry #3:

Is there any prohibition against the continued use of the firm's present name, regardless of the method of transfer used, as long as Founding Lawyers continue as employees of the professional association or, when they leave the firm, they retire from the practice of law in North Carolina?

Opinion #3:

Regardless of the method of transfer employed, there is no prohibition on the continued use of the firm's present name because "...there [is] a continuing succession in the firm's identity…." Rule 7.5, Comment [1]. See also "Regulations for Professional Corporations and Professional Limited Liability Companies Practicing Law," 7 NCAC 1E, Section .0100, Rule .0102(a)("The name of every professional corporation shall contain the surname of one or more of its shareholders or of one or more persons who were associated with its immediate corporate, individual, partnership, or professional limited liability company predecessor in the practice of law….") As noted in RPC 13, "[a] law firm may continue to include in the firm name that [sic] of a retired attorney who practiced with the firm up to the time of his retirement." However, the name of a retired principal in a firm "may be used in the name of a law firm only if the [principal] has ceased the practice of law."

Inquiry #4:

Founding Lawyers may finance the purchase of the firm by Younger Attorneys. Regardless of how the purchase is financed, after their retirement, Founding Lawyers want to provide advice and input to Younger Attorneys as to the conduct of the law practice. Will Founding Lawyers assistance to Younger Attorneys violate Rule 1.17(g)'s provision that "[t]he seller…shall have no say regarding the purchaser's conduct of the law practice"?

Opinion #4:

No. As noted in opinion #1 above, Rule 1.17 does not apply to the purchase of a law firm by lawyers who are currently members of the firm. Therefore, the prohibition in paragraph (g) of Rule 1.17 is also inapplicable.