Can a law firm require a departing associate (or the associate's new firm) to pay it a percentage of fees later earned from former clients, and treat its clients as firm property?

Plain-English summary

A firm asked whether it could put a clause in an associate's employment contract requiring that, after the associate left for any reason, the former associate or the associate's new employer pay the former firm liquidated damages equal to the percentage of any fee the former firm would have received had the work been done during the associate's employment, for legal services later provided to the firm's clients. The firm also asked whether it could characterize its clientele as firm property to support that arrangement.

The Committee concluded the fee clause violated DR 2-108(A), which bars a partnership or employment agreement that restricts a lawyer's right to practice after the relationship ends, except as a condition of retirement benefits. Even though the agreement said it imposed "no restriction" on the departing lawyer's right to practice, interjecting a fee owed to a third party was a real restriction: it would discourage the lawyer and the new firm from serving former clients at reduced effective rates, pressuring the lawyer to decline the work and depriving the client of the lawyer of choice. The Committee added that the retirement-benefits exception did not save the clause, because a restrictive covenant using a fee-splitting mechanism also violated the fee-division rule (rendered "DR 107(A)" in the opinion text). That rule allows dividing fees among lawyers who are not in the same firm only with client consent after disclosure, in proportion to services and responsibility (or with a forwarding lawyer), and only if the total fee is reasonable. The arrangement required no client consent, the former firm rendered no services and assumed no responsibility, and it risked inflating fees to make the payment to the former firm economically viable.

On the second question, the Committee concluded that characterizing clients and their files as firm property whose loss to a departing lawyer triggers liquidated damages was improper. Quoting ABA Formal Opinion 300 (1961) that "clients are not merchandise" and lawyers are not tradesmen, the Committee held that because clients are free to seek the lawyer of their choice, an attempt to recognize a proprietary interest in clients is improper.

Currency note

This opinion was issued in 1988, under the former Texas Code of Professional Responsibility, which the Texas Disciplinary Rules of Professional Conduct replaced effective January 1, 1990. The Disciplinary Rules have since been amended, including the comprehensive 2021 revisions adopted by Texas Supreme Court order, and Texas never adopted the ABA's Ethics 2000 framework. Subsequent rule changes 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 rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm make a departing associate pay it a percentage of fees later earned from former clients?

A: The Committee concluded no. Even though framed as liquidated damages rather than a practice ban, the fee owed to the former firm is a real restriction on the right to practice that violates DR 2-108(A) and the fee-division rule.

Q: Does the retirement-benefits exception save a fee-clawback clause?

A: Per the opinion, no. The Committee concluded the retirement exception does not apply to a restrictive covenant that uses a fee-splitting mechanism, because that mechanism independently violates the fee-division rule.

Q: Can a firm treat its clients and their files as firm property?

A: The Committee concluded no. Quoting ABA Formal Opinion 300, it held that clients are not merchandise and are free to choose their own lawyer, so claiming a proprietary interest in clients is improper.

Background and rules framework

The opinion interprets DR 2-108(A) of the former Texas Code of Professional Responsibility (no agreement restricting the right to practice after termination, except as a condition of retirement benefits; analogous to ABA Model Rule 5.6) together with the rule on dividing fees among lawyers who are not in the same firm (rendered "DR 107(A)" in the opinion text; analogous to ABA Model Rule 1.5(e)). The Committee treats a fee-clawback mechanism as a disguised practice restriction and a defective fee-division arrangement, and rejects the premise that clients can be owned.

Citations and references

Rules of Professional Conduct:

• MR 5.6 (restrictions on a lawyer's right to practice)
• MR 1.5(e) (division of fees between lawyers not in the same firm)
• DR 2-108(A), Texas Code of Professional Responsibility (no restriction on right to practice except retirement benefits)
• DR 2-107(A), Texas Code of Professional Responsibility (division of fees among lawyers; rendered "DR 107(A)" in the opinion text)

Other opinions cited:

• ABA Formal Opinion 300 (1961): clients are not merchandise; no proprietary interest in clients
• Texas Ethics Opinion 422 (Nov. 30, 1984): restrictive covenants based on geography or clientele
• D.C. Opinion 65 (March 14, 1979) and Illinois Opinion 628 (Dec. 9, 1978): similar restrictive covenants held improper

See also

• TX Ethics Op. 466: Restricting a Departing Lawyer's Practice and Continued Use of the Firm Name
• TX Ethics Op. 656: Of-Counsel Agreement Restricting Practice After Departure
• ABA Formal Op. 06-444: Restrictive Covenants and Retirement Benefits

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-459/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_459.pdf

Original opinion text

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

QUESTION PRESENTED

The questions presented deal with the propriety of a restrictive covenant in an employment contract between a lawyer employed as an associate of a law firm as employee, and a law firm, as employer.
Specifically, the inquiries required for a resolution are:
Is it proper for a firm to have a contract of employment with an associate lawyer providing that, following termination of the associate's employment for any reason and in the event the former employee or his subsequent employer provides legal services for compensation to any clients of his former employer, the former employee or his subsequent employer shall be required to pay to the former employer, as liquidated damages, a sum equal to the same percentage of such fee as the former employer would have received if said work had been done during the associate's employ?
Is it proper, in order to facilitate the agreement, to characterize the firm's clientele as property of the firm?

DISCUSSION

Although a restrictive covenant providing for the division of fees between an attorney or his current firm, and the attorney's former employer is a question of first impression before the committee, the general question of a restrictive covenant based upon limitations on geographic areas of practice or clientele have been dealt with, as set forth in Ethics Opinion 422 (Nov. 30, 1984), specifically in answers to Queries 1 and 3.

Controlling the question is DR 2-108(A), which reads as follows: "A lawyer shall not be a party to or participate in a partnership or an employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits."

Such restrictive covenants were seen to violate DR 2-108(A) in two ways. First, they are clear violations of the explicit prohibition against attorneys entering into an agreement restricting the right of an attorney to practice law, which recognizes no exceptions for limitations of geography or time. Secondly, they violate a basic tenet of the professional responsibility of all lawyers that every person have ready access to the independent professional services of a lawyer of integrity and competence. EC 1-1. In order to accomplish this, a potential client must have free access to the attorney of his choice.

The agreement in question is deceptive in its wording. Although it purports to hold "that there shall be no restriction upon Employee's right to practice law" the statement is followed by a very real restriction. The interjection of a fee to a third party obviously impairs the creation of a lawyer-client relationship between the departing lawyer and clients of his former firm. The impairment arises on both sides of the transaction. The attorney may be unwilling to work at substantially reduced rates for even his best clients, and pressure against acceptance in favor of clients paying full value to the firm would rise within the new employer. The attorney would thus be compelled to decline employment and the client would be deprived of the attorney of his choice. The restrictions may not be explicit, but the result clearly violates DR 2-108(A).

We note that the prohibition of any restriction extends to partnership agreements under DR 2-108(A) and our opinion is equally applicable thereto. Additionally, although DR 2-108(A) provides an exception for agreements dealing with the payment of retirement benefits, the exception will not apply for restrictive covenants utilizing a fee splitting mechanism due to the violation of DR 107(A), as discussed below.

The division of fees among attorneys who are not partners, or associates of, a firm is inappropriate unless: (1) The client consents to the employment of the other lawyer after a full disclosure that a division of fees will be made. (2) The division is made in proportion to the services performed and the responsibility assumed by each, or is made with the forwarding lawyer. (3) The total fee of the lawyers does not exceed reasonable compensation for all legal services they rendered the clients. DR 107(A). The agreement clearly violates the first two provisions. No request for consent of the client is required nor even contemplated. The former firm renders no service to the client, nor assumes any responsibility for the prompt and proper completion of the task required. Again, these are violations of the explicit wording of the rule. Additionally, however, such an arrangement may lead to the abuse contemplated by the third provision as a firm desiring to retain the work may be enticed to raise their fee beyond that which is reasonable in order to make it economically viable, considering the substantial fee to be paid the former employer.

Our result comports with the decisions of bar associations that have considered the ethical nature of similar restrictive covenants. D.C. Opinion 65 (March 14, 1979) as cited in Olavi Maru, 1980 Supplement to the Digest of Bar Association Ethics Opinions 125, Log No. 10761, (1982) and Opinion No. 628 (December 9, 1978), 67 Ill. B.J. 380 (February, 1979).

Question No. 2 relates to the characterization of clients. If clients and their related files are characterized as property of the firm with their loss from the firm to a former employee giving rise to liquidated damages, the characterization is improper. In dealing with the restrictive covenant based upon geography of practice, the ABA has noted: "Clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. An attempt, therefore, to barter in clients, would appear to be inconsistent with the best concepts of our professional status." ABA Formal Opinion 300 (1961)

Since clients are not merchandise and are free to seek the lawyer of their choice, an attempt to recognize a proprietary interest in clients is improper.

CONCLUSION

It is not proper for a firm to have a contract of employment with an associate, or a partnership agreement with a partner, providing that, upon leaving the firm the associate or partner would be required to pay to his/her former employer a percentage of fees earned thereafter from clients brought from his/her former employer.
It is not proper for a firm and a partner or associate thereof to enter into an agreement that categorizes clients and their related files as property of the firm which could give rise to a claim for damages for the purpose of inhibiting a former employee or partner in accepting employment from any such client.

Tex. Comm. On Professional Ethics, Op. 459 (1988)