Can a law firm require a departing lawyer to pay a percentage of fees on transferred cases to repay the firm's advertising costs?

Plain-English summary

A plaintiff personal-injury firm spends heavily on advertising. When lawyers leave and take contingent-fee cases with them ("Transferred Cases"), the firm already seeks a quantum meruit share of any recovery. The firm asked whether it may add a contract clause requiring the departing lawyer to pay an additional 25 percent of the fee recovery on Transferred Cases to reimburse advertising costs. The Board concludes it may not.

On the right to practice, the opinion explains that Prof.Cond.R. 5.6(a) bars employment agreements that restrict a lawyer's right to practice after the relationship ends, except for retirement benefits or the sale of a practice. The Board notes that many jurisdictions treat agreements that act as a financial deterrent to competition as impermissible, and that courts have struck down clauses requiring departing lawyers to pay 12.5 to 15 percent of fees (citing Denburg and Eisenstein), while even jurisdictions that allow some financial penalty require it to be reasonable and tied to actual loss. Applying its own Adv. Op. 2019-04 standard (a provision is impermissible if it gives the lawyer significantly less discretion to pursue future claims) and Cincinnati Bar Assn. v. Hackett (a 95 percent clawback held to create an improper economic deterrent), the Board finds the proposed 25 percent is a financial disincentive disguised as cost repayment: it captures fees for post-departure work already covered by quantum meruit, appears arbitrary and untied to actual advertising loss, and could yield a windfall, leaving the departing lawyer less discretion to keep representing clients.

On fee splitting, the opinion explains that Prof.Cond.R. 1.5(e) permits fee division between lawyers not in the same firm only on specified conditions (proportional to work or joint responsibility, written client consent, signed closing statement for contingent fees, and a reasonable total). Comment [8] allows division of future fees for work done while lawyers were associated, but the advertising-cost charge is not a fee for "work done" at the firm (that is the quantum meruit payment); it would impose a fee division without client consent or continued joint responsibility, which the rule does not allow.

In practice

Under this opinion, an Ohio firm may recover the quantum meruit value of work it performed before a lawyer's departure, but may not bolt on a percentage-of-recovery charge framed as advertising-cost reimbursement. The opinion treats the 25 percent add-on as both a restriction on the departing lawyer's right to practice under Prof.Cond.R. 5.6(a) and an impermissible fee division under Prof.Cond.R. 1.5(e).

The opinion's reasoning turns on whether the charge is tied to actual, demonstrated loss and whether it reduces the departing lawyer's discretion to continue representing clients; a charge that is arbitrary, duplicative of quantum meruit, or a potential windfall fails on both fronts.

Common questions

Q: Can an Ohio firm make a departing lawyer repay advertising costs out of transferred-case fees?

A: The opinion concludes a firm may not require a departing lawyer to pay 25 percent of fee recoveries on transferred cases, on top of quantum meruit, to reimburse advertising costs.

Q: Why is the charge a restriction on the right to practice?

A: Per the opinion, the charge is a financial disincentive that gives the departing lawyer significantly less discretion to keep representing clients, which violates Prof.Cond.R. 5.6(a) and can impair the client's right to choose counsel.

Q: Can the firm recover anything when a lawyer leaves with cases?

A: Yes. The opinion recognizes the firm's quantum meruit claim for the value of work it performed before the departure; what it cannot do is add the percentage-based advertising charge on top.

Q: Why does the charge also violate the fee-splitting rule?

A: The opinion explains the add-on is not a fee for "work done" at the firm (that is covered by quantum meruit), so it would impose a division of the client's fees under Prof.Cond.R. 1.5(e) without client consent or continued joint responsibility.

Background and rules framework

The opinion interprets Ohio Prof.Cond.R. 5.6(a) (Model Rule 5.6(a); restrictions on the right to practice in employment agreements) and Prof.Cond.R. 1.5(e) (Model Rule 1.5(e); division of fees between lawyers not in the same firm), including Comment [8]. It builds on Ohio Adv. Ops. 2019-04 and 2021-07.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.6(a) / Ohio Prof.Cond.R. 5.6(a) (restriction on right to practice)
• Model Rule 1.5(e) / Ohio Prof.Cond.R. 1.5(e) (fee division between lawyers in different firms)

Cases:

• Cincinnati Bar Assn. v. Hackett, 129 Ohio St.3d 186, 2011-Ohio-3096, 95 percent clawback created an improper economic deterrent
• Kala v. Aluminum Smelting & Refining Co., 81 Ohio St.3d 1, 1998-Ohio-439, public interest in continued representation by chosen counsel
• Denburg v. Parker Chapin Flattau & Klimpl, 604 N.Y.S.2d 900 (1993); Eisenstein v. David G. Conlin PC, 827 N.E.2d 686 (Mass. 2005), departure-fee clauses unenforceable

Other opinions cited:

• Ohio Adv. Op. 2019-04 (impermissible-restriction standard) and Adv. Op. 2021-07 (percentage of post-departure fees)

See also

• Ohio BPC Op. 2024-04: Fee Arbitration Between a Departed Lawyer and the Former Firm
• ABA Formal Op. 489: Notice When Lawyers Change Firms
• ABA Formal Op. 06-444: Restrictive Covenants and Retirement Benefits

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2023/08/Adv.-Op-2023-08-Final.pdf

Original opinion text

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

OPINION 2023-08
Issued August 4, 2023

Departing Lawyer Reimbursing Firm for Advertising Costs

SYLLABUS: The Rules of Professional Conduct prohibit a law firm from adding a clause to its standard employment contract requiring a departing lawyer to pay the firm the quantum meruit value of work completed prior to the lawyer's departure, plus 25 percent of the overall recovery of attorney fees on any transferred cases to reimburse the firm for its advertising costs. The addition of 25 percent of the overall recovery of attorney fees is an impermissible restriction on the departing lawyer's right to practice after termination of the employment relationship. The additional fee is also an impermissible division of attorney fees by lawyers not in the same firm.

APPLICABLE RULES: Prof.Cond.R. 1.5, 5.6

QUESTION PRESENTED:

May a law firm add a clause to its standard employment contract requiring a departing lawyer to pay the firm the quantum meruit value of work completed prior to the lawyer's departure, plus 25 percent of the overall recovery of attorney fees on any transferred cases to reimburse the firm for its advertising costs?

OPINION:

A law firm concentrates its practice on plaintiff personal injury cases and spends a large amount of money each year on advertising to attract new clients. From time to time, lawyers leave the firm and take contingency fee cases of the firm with them ("Transferred Cases".) The Transferred Cases are subsequently settled or tried to verdict by the departing lawyer. When a settlement or verdict is reached on a Transferred Case, the firm seeks a quantum meruit portion of the settlement or verdict.

The firm wants to add a clause to its standard employment contract that requires a departing lawyer to pay the firm 25 percent of any recovery of attorney fees on a Transferred Case to reimburse the firm for its advertising costs. This charge would be in addition to the firm's quantum meruit claim.

Restriction on right to practice

Prof.Cond.R. 5.6(a) prohibits a lawyer from offering or making an employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except regarding benefits upon retirement or upon the sale of a law practice. Prof.Cond.R. 5.6(a), cmt. [1], [3]. The rationale behind the rule is that restrictive covenants can limit a lawyer's professional autonomy and a client's freedom to choose a lawyer. Id. at. cmt. [1] and Adv. Op. 2021-07. The Supreme Court has recognized that there is a strong public policy interest in permitting a party's continued representation by counsel of his or her choice. Kala v. Aluminum Smelting & Refining Co., 81 Ohio St.3d 1, 1998-Ohio-439; Adv. Op. 2021-07. Beyond prohibiting restrictions related to competing within a specific geographic area, for a specified period of time, or in certain practice areas, the majority of jurisdictions prohibit agreements that serve as a financial deterrent to competition or as an economic penalty because it could lead to some lawyers declining to represent certain clients. ABA/BNA Lawyer's Manual on Professional Conduct, 51 Conflicts of Interest, 51:1201.40.10 Restrictions of Right to Practice (2022).

Only a few jurisdictions permit an employment agreement to impose a reasonable financial penalty for a departing lawyer to discourage competition. ABA/BNA Lawyer's Manual on Professional Conduct, 91 Types of Practice, Private Firm, 91:701.20.180.30 Withdrawal and Termination (2022). The higher the percentage to be paid to the former firm, the more likely the rule will be violated. Id. Courts have found employment agreements requiring a departing lawyer to pay 12.5 to 15 percent of fees received from former clients to the law firm unenforceable. Id. (citing Denburg v. Parker Chapin Flattau & Klimpl, 604 N.Y.S.2d 900 (N.Y. 1993) and Eisenstein v. David G. Conlin PC, 827 N.E.2d 686 (Mass. 2005)). Even in the limited jurisdictions that permit a departing lawyer to share fees from clients who leave with them, the amount "must be reasonable and reflect the actual financial loss or harm to the firm that can be expected from the lawyer's departure." ABA/BNA Lawyer's Manual on Professional Conduct, 51 Conflicts of Interest, 51:1201.40.20 Restrictions of Right to Practice (2022).

In Adv. Op. 2019-04, the Board addressed Prof.Cond.R. 5.6 in the context of settlement provisions. The Board observed that even when a provision may not directly bar future representation by a lawyer, it may have the practical effect of limiting the lawyer's right to practice and thus violate the rule. Id. The Board further reasoned, "[a]n analysis of less obvious restrictions under Prof.Cond.R. 5.6 requires a determination of whether the lawyer is given significantly less discretion in pursuing future claims than a lawyer not subject to the agreement. In those instances, the provision constitutes an impermissible restriction on the practice of the lawyer." Id.

In Cincinnati Bar Assn. v. Hackett, 129 Ohio St.3d 186, 2011-Ohio-3096, the Supreme Court addressed an employment agreement wherein the departing associate was required to pay the firm 95 percent of the attorney fees generated on cases in which the clients followed the departing lawyer, regardless of the proportion of work each attorney performed. The Court observed that a client's absolute right to discharge a lawyer or law firm, at any time with or without cause, subject to compensation for services rendered, would be meaningless if the discharged attorney could prevent other attorneys from representing the client. Id. at ¶8. The Court concluded that if the employment agreement were enforced, it would create an "economic deterrent for the departing attorney that would adversely affect the clients' right to retain an attorney of their own choosing." Id. at ¶9.

In the Board's view, the proposed additional 25 percent of attorney fees recovered here is a financial disincentive disguised as the repayment of operating expenses of the law firm. First, this Board has already opined that a law firm cannot require a departing associate to pay the firm a percentage of fees generated from work occurring subsequent to departure. Adv. Op. 2021-7. By seeking 25 percent of the total attorney fees recovery on top of any quantum meruit claim, the law firm will receive a percentage of the legal fees earned for work completed after the lawyer departs the law firm.

Second, the percentage requested by the law firm to purportedly reimburse the firm for advertising costs appears to be arbitrary. While the law firm indicates that it spends a "large amount of money" each year on advertising, the firm makes no attempt to demonstrate the reasonableness of the percentage or tie the amount to any actual financial loss to the firm. For example, there is no indication that the suggested percentage reflects a prorated amount of per client advertising costs. If one or two clients with the potential for a large recovery on a contingent fee case follow the departing lawyer, the law firm could receive a windfall that may surpass the law firm's actual annual expenditure for advertising.

The departing lawyer has significantly less discretion in agreeing to continue to represent the client than a lawyer not subject to the agreement. The percentage places a burden on the departing lawyer in a way that may impair the client's right to choose counsel if the departing lawyer is not willing to continue representing the client knowing his or her fee will be reduced by the 25 percent owed to the former firm. This is an impermissible restriction on the lawyer's right to practice after termination of the employment relationship.

Fee Splitting

The proposed employment agreement also implicates Prof.Cond.R. 1.5(e), which provides that lawyers not in the same firm may only divide fees if: 1) the fees are divided in proportion to the services performed or both lawyers agree to be jointly responsible for the representation; 2) the client gives written consent to the division of fees; 3) in the event the fee agreement is contingent, both lawyers and the client sign the closing statement; and 4) the total fees are reasonable. Comment [8] to the rule indicates that it does not prohibit or regulate the division of fees to be received in the future for work done when lawyers were previously associated in a law firm. The rule and comments are silent as to payment for work done after departure or of reimbursement for any additional or "costs" associated with a lawyer's employment and then departure from a firm. This additional proposed fee to reimburse the firm for advertising costs cannot be considered an attorney fee for "work done" when the lawyer was previously associated with the law firm given that the firm will receive a quantum meruit payment for that same work. If the employment agreement were enforced, it would operate to impose the division of attorney fees paid by the client without input from the client. The client would not be required to consent to the disposition of his or her fees and the law firm would have no requirement to maintain joint responsibility for a matter which was ongoing and from which the firm may ultimately benefit financially.