Ezel / Ethics Opinions / NYSBA
NYSBA 2013-03-13

When a retiring lawyer sells a law practice, can the purchase price be structured as a percentage of fees the buyer earns after the sale?

Short answer: Yes, within limits. Rule 1.17 lets a retiring lawyer take a share of post-sale fees as payment for goodwill if the amount and term fairly reflect the goodwill's value, but the lawyer may not be paid a share of fees on new business he refers to the buyer, which Rule 7.2 treats as a barred referral payment.
Currency note: this opinion is from 2013
Subsequent statutory amendments, court decisions, or later opinions or rule amendments may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Disclaimer: Advisory only. Not binding precedent.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page) is the authoritative source for any reliance.

NY State Bar Ethics Opinion 961: Selling a law practice for a share of future fees

Short answer: A retiring lawyer may sell a law practice and be paid a percentage of fees the buyer earns after the sale, as payment for goodwill, provided the share is reasonable in amount and limited in time so that it fairly reflects the goodwill's value. The lawyer may not condition any payment on fees from new business he refers to the buyer; that is a barred referral payment under Rule 7.2.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

View original opinion

Plain-English summary

A retiring lawyer asked whether the sale of his practice could be paid out as a percentage of legal fees the buyer earns after the sale, across four categories of matters. The committee frames the issue as a tension between Rule 1.5(g), which bars dividing a fee with a lawyer outside the firm except in proportion to work done or on a written joint-responsibility undertaking, and Rule 1.17, which expressly permits selling a practice "including goodwill."

The committee resolves the tension by treating Rule 1.17 as an exception to Rule 1.5(g). It reasons that Rule 1.17 is the more specific rule; that a deferred payout measured by actual fees is economically identical to a lump-sum present value of goodwill, which Rule 1.5(g) would not bar; that Rule 1.5(h) and Rule 5.4(a)(1) already allow law firm retirement, separation, and estate payouts measured by future fees; and that ethics opinions predating Rule 1.17 recognized goodwill could be measured either as a lump sum or as a share of future receipts. The purpose of Rule 1.17 was to equalize the treatment of retiring sole practitioners with that of withdrawing firm partners.

The arrangement has limits. Any fee-sharing "must bear a reasonable and bona fide relationship to the value of the goodwill," and because a lawyer's reputation and connections fade, it must be limited in amount and in time (for example, 20% of net income for three years if that reasonably estimates the goodwill). Applying that to the inquiry, the committee approves a goodwill-based share of post-sale fees from (a) pending matters, beyond the work the seller already did, (b) new matters for the seller's existing clients, and (c) new matters for entities controlled by the same principals as existing clients.

Provision (d) is different. Paying the retired lawyer a share of fees on new clients he refers to the buyer implicates Rule 7.2's bar on payments for referrals. The committee views that as payment for the new service of making a referral, not a measure of goodwill, and so it is not permitted. The committee separately notes, without deciding, that a retiring lawyer might in some circumstances proceed under Rule 1.5(g)(1)'s joint-responsibility clause, but that doing so raises a question whether the required involvement is consistent with "retirement."

In practice

The opinion holds that, under the New York rules as they stood in 2013, a retiring lawyer selling a practice under Rule 1.17 may take a share of the buyer's post-sale fees as payment for goodwill, as long as the share is reasonable in amount and limited in time. The controlling distinction the committee draws is between fees that measure goodwill (permitted for pending matters, new matters for existing clients, and matters for entities with common principals) and a payment tied to referrals the seller sends the buyer after the sale (barred under Rule 7.2). The committee did not resolve whether a retired lawyer could instead qualify under Rule 1.5(g)(1)'s joint-responsibility clause.

Common questions

Q: Can the price for buying a law practice be a percentage of the buyer's future fees instead of a lump sum?

A: Yes. Per paragraphs 4 to 11, the committee treats Rule 1.17 as an exception to Rule 1.5(g) and permits a goodwill payout measured by actual post-sale fees, provided it is reasonable in amount and limited in time.

Q: Which post-sale matters can the retiring lawyer share fees from?

A: Per paragraph 12, pending matters (beyond the seller's own completed work), new matters for the seller's existing clients, and matters for new entities controlled by the same principals as existing clients, because all of those reflect the seller's reputation and connections.

Q: Can the retiring lawyer be paid for new clients he refers to the buyer?

A: No. Paragraph 13 treats a payment tied to referrals as a barred referral payment under Rule 7.2, not a measure of goodwill.

Q: How long and how large can the goodwill payout be?

A: Per paragraph 11, it must bear a reasonable, bona fide relationship to the goodwill's value and be limited in amount and time; the committee offers 20% of net income for three years as an illustration if that reasonably estimates the goodwill.

Background and rules framework

The opinion interprets Rule 1.17 (Model Rule 1.17, sale of a law practice) as an exception to Rule 1.5(g) (Model Rule 1.5(e), division of fees among lawyers not in the same firm), drawing support from Rule 1.5(h) (firm separation and retirement agreements) and Rule 5.4(a)(1) (sharing fees with a deceased lawyer's estate). The referral limit rests on Rule 7.2 (Model Rule 7.2, payments for recommending a lawyer's services).

Citations and references

Rules of Professional Conduct:

  • MR 1.5 / NY Rule 1.5(g), (h) (division of fees; separation and retirement payments)
  • MR 1.17 / NY Rule 1.17 (sale of a law practice, including goodwill)
  • MR 5.4 / NY Rule 5.4(a)(1) (sharing fees with a deceased lawyer's estate)
  • MR 7.2 / NY Rule 7.2 (payments for referrals)

Cases:

  • Aiello v. Adar, 750 N.Y.S.2d 457 (Sup. Ct. Bronx Cty. 2002), on the financial-only nature of "joint responsibility."

Other opinions cited:

  • ABA Formal Op. 266 (1945): barring sale of goodwill measured by future receipts (predating Rule 1.17).
  • N.Y. County 715 (1996): joint responsibility is financial, not supervisory.
  • N.Y. State 699 (1997): retiring lawyer moving to the judiciary could not take a future-fee stream (decided on judicial-conduct grounds).
  • Nassau County 2-12 (2012): "retirement" means ceasing the practice of law for compensation.

See also

Source