Can a Texas lawyer and an associate sign an employment agreement covering who keeps a contingent-fee client and how the fee is split when the associate leaves?

Plain-English summary

A lawyer with a contingent-fee trial practice hires associates (never partners) and, when they leave, faces disputes over which clients go with the associate, whether the firm can enforce its contingent-fee agreements, and how fees are handled. The lawyer wants a standard employment contract that anticipates a client wanting a departing associate to keep handling the case and that provides for dividing fees and reimbursing the firm's expenses.

The Committee starts with Rule 5.06(a), which bars a partnership or employment agreement that restricts a lawyer's right to practice after the relationship ends (except for retirement benefits). Relying on its earlier Opinions 422 and 459, the Committee confirms an agreement may not bar a departed associate from soliciting the firm's current clients (if the solicitation otherwise complies with the rules) or from accepting employment by them, and may not require the departed associate to pay the firm a percentage of fees he later earns from those clients.

The Committee then explains what the agreement may do. Rule 1.04(f)'s limits on dividing fees between lawyers of different firms do not apply to payments to a former associate under a separation agreement, because Rule 1.04(g) exempts payment to a former partner or associate pursuant to a separation or retirement agreement. So the agreement may provide a formula under which the employing lawyer pays the departed associate a portion of a contingent fee collected after departure. If the departing associate solicits the firm's contingent-fee clients, he must comply with Rules 7.01-7.07 and Rule 1.03(b) and make full disclosure (citing Opinion 523 and Willis v. Maverick), including that the firm's contingent-fee agreement may still be enforceable, that any fee must satisfy Rule 1.04 (including the bar on unconscionable fees under Rule 1.04(a)), and that disputed funds may have to be held in trust under Rule 1.14. The Committee expressly declines to address an agreement using a financial disincentive to competition instead of a solicitation ban, and declines to address general employer-employee law principles.

In practice

Under this opinion, and under the Texas rules as they stood at the time, a lawyer and an associate may use an employment agreement to address continued representation of clients and the treatment of fees collected after the associate leaves. The opinion holds the agreement may set a formula for paying the departed associate a share of a contingent fee collected later (Rule 1.04(g)), but may not in any manner restrict the departed associate's right to practice, including by barring solicitation of the firm's clients or requiring the associate to pay the firm a share of fees earned after departure (Rule 5.06(a)).

Common questions

Q: Can a firm's employment agreement stop a departing associate from taking firm clients?

A: Per Opinion 546, no. Relying on Opinions 422 and 459, the Committee holds an agreement may not bar a departed associate from soliciting the firm's current clients (if the solicitation otherwise complies with the rules) or from accepting their business, because Rule 5.06(a) prohibits restricting a lawyer's right to practice after the relationship ends.

Q: Can the agreement divide a contingent fee between the firm and a departed associate?

A: Yes. The Committee concludes Rule 1.04(f)'s division-of-fees limits do not apply here because Rule 1.04(g) exempts payments to a former associate under a separation agreement, so the agreement may set a formula for paying the departed associate a share of a fee collected after departure.

Q: Can the agreement require the departing associate to pay the firm a cut of fees he earns later?

A: No. The Committee holds, following Opinion 459, that an agreement may not require a departed associate to pay the firm a percentage of fees he earns after leaving from former firm clients who engage him.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 5.06(a) (restrictions on the right to practice, ABA Model Rule 5.6) and Rule 1.04 (fees, ABA Model Rule 1.5), especially Rule 1.04(f) (division of fees between lawyers not in the same firm) and the Rule 1.04(g) exception for payments to a former partner or associate under a separation or retirement agreement. It also references Rule 1.14 (safekeeping disputed funds), Rule 2.01 (advisor), Rule 1.03(b) (keeping the client informed), and Rules 7.01-7.07 (solicitation). The analysis turns on separating a permissible fee-division formula from an impermissible restriction on the departed associate's practice.

Citations and references

Rules of Professional Conduct:

• MR 5.6 (restrictions on right to practice)
• MR 1.5 (fees; division of fees)
• Texas Disciplinary Rules 5.06(a), 1.04(a), 1.04(f), 1.04(g), 1.14, 2.01, 1.03(b), 7.01-7.07

Cases:

• Willis v. Maverick, 760 S.W.2d 642 (Tex. 1988), lawyer's fiduciary duty of full and fair disclosure to the client

Other opinions cited:

• Tex. Ethics Op. 422 (Nov. 1984): agreement may not bar a departed associate from soliciting or being engaged by the firm's clients
• Tex. Ethics Op. 459 (Oct. 1988): agreement may not require a departed associate to pay the firm a percentage of later-earned fees
• Tex. Ethics Op. 523 (Oct. 1997): lawyer's fiduciary duty of full and fair disclosure of material facts

See also

• TX Ethics Op. 563: Departing Lawyer Taking a Firm Client on Contingent Fee
• TX Ethics Op. 590: Restrictive Agreement on a Departing Lawyer's Client Solicitation and Fees
• TX Ethics Op. 551: Former City Lawyer and a Two-Year Bar on Practice Before the City

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-546/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_546.pdf

Original opinion text

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

QUESTION PRESENTED

Is it permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer and an associate employed by the lawyer to enter into an employment agreement providing for the continued representation of, and a division of fees collected from, a contingent fee client following the termination of the associate’s employment?

STATEMENT OF FACTS

A lawyer engages in a trial practice that typically involves arrangements, reduced to written agreements, providing for the payment of fees contingent on the outcome of the matter. In the typical case, this contingent fee practice requires the lawyer to bear the cost of handling the particular case until its ultimate resolution. These contingent fee agreements are intended to create rights and obligations as between the lawyer and the clients.

To assist with the handling of contingent fee matters over the years, the lawyer has hired other lawyers as associates, none of whom has ever become the employing lawyer’s partner. In the past, when such associates left the employ of the lawyer, issues have arisen concerning the rights of the employing lawyer's clients to select counsel of their own choosing, the rights of the employing lawyer to enforce contingent fee agreements with those clients, and the rights of departing associate lawyers to request, or respond to client requests, that cases be transferred to them.

In the past there have been circumstances in which the associate lawyer has developed a closer professional relationship with the client than the employing lawyer has developed. Under these circumstances, it is reasonable to expect that some clients might want their cases transferred to the departing associate if that associate has been handling their cases for a period of time. If a case is transferred to a departing associate, in the absence of an agreement with the employing lawyer, the employing lawyer believes that he has the right to seek enforcement of the contingent fee agreement if he has not been discharged by a particular client for good cause. The employing lawyer could seek to have the agreement enforced, but the employing lawyer would like to avoid the necessity of trying to enforce a contingent fee agreement under the circumstances here described if there is a permissible alternative. In this connection, the employing lawyer would like to develop a form of employment contract to be executed by associate lawyers upon their employment which acknowledges the possibility that a client may want a departing associate to continue handling the client’s case upon termination of the associate’s employment and which provides for an appropriate division of fees between the departing associate and the employing lawyer and for reimbursement of expenses theretofore incurred by the employing lawyer.

DISCUSSION

A written employment agreement attempting to define the relationship between the lawyer and the associate in these circumstances raises several issues under the Texas Disciplinary Rules of Professional Conduct (the “Rules”).

An agreement that purports to prescribe which clients a lawyer may and may not represent could easily violate Rule 5.06(a), which prohibits a lawyer’s participation in offering or making “a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . . .”

The predecessor to Rule 5.06(a), Disciplinary Rule 2-108(A) of the Texas Code of Professional Responsibility as in effect prior to 1990 (which contained similar but not identical language to the present Rule), is the subject of two prior ethics opinions, Opinion 422 (November 1984) and Opinion 459 (October 1988), which discuss prohibitions in agreements following termination of a lawyer’s employment.

Opinion 422 concludes (correctly, the Committee believes) that it is not proper for an employment agreement to prohibit a departed associate from soliciting the law firm’s current clients, provided the solicitation comports with other applicable rules, nor is it proper for such an agreement to prohibit a departed associate from accepting employment by any such clients. Nevertheless, as discussed below, the departed associate will have a significant disclosure obligation in connection with any such solicitation or employment.

Opinion 459 confirms (correctly, the Committee believes) that it is not proper for a law firm to have an employment agreement with an associate which provides that upon termination, the associate would be required to pay to the law firm a percentage of fees earned thereafter by the departed associate and paid by former clients of the law firm who engage the departed associate. Therefore, in the circumstances here described, if the departed associate continued to represent the lawyer's contingent fee client, the employment agreement could not contain a provision obligating the departed associate to pay the employing lawyer some or all of a fee earned by the departed associate after he left the firm of the employing lawyer.

On the other hand, the qualified prohibition in current Rule 1.04(f) against dividing fees between lawyers of different firms does not apply to payments to formerly associated lawyers pursuant to a separation agreement. See Rule 1.04(g), which provides that Rule 1.04(f) “does not prohibit payment to a former partner or associate pursuant to a separation or retirement agreement.” In the circumstances here presented, therefore, an employment agreement could provide that the employing lawyer would pay to the departed associate a portion, calculated by a formula set forth in the employment agreement, of a contingent fee that was collected after the associate departed.

If the departing associate solicits clients who have contingent fee agreements with the lawyer, the departing associate is obligated to comply with the Rules applicable to the solicitation of clients and should explain to the client the entirety of the circumstances and the implications of the courses of action available to the client. See generally Rules 7.01-7.07 and Rule 1.03(b). With respect to the requirement that full disclosure must be made, Opinion 523 (October 1997) observed that “the relationship between an attorney and client is a fiduciary relationship that obligates an attorney to 'render a full and fair disclosure of facts material to the client's representation.' (Willis v. Maverick, 760 S.W. 2d 642, 645 (Tex. 1988)).” In this connection, the associate would have to explain that the contingent fee agreement may be enforceable, depending on the circumstances, in which case the client would be obligated to the lawyer under that agreement in addition to whatever amount the departed associate might charge the client. Whether a particular contingent fee contract is enforceable or can be terminated by the client depends on the circumstances there presented, all of which should be disclosed. See Rule 2.01. All legal fees charged to the client, however, must meet the requirements of Rule 1.04, including the requirement of Rule 1.04(a) that fees not be unconscionable.

An employment agreement should contemplate that any disputes over distribution of settlement or other funds might be subject to the requirement that disputed funds be held in trust by the lawyer or lawyers receiving such funds pending the outcome of the dispute. See Rule 1.14. Disclosure of this circumstance should also be made.

This opinion does not address the propriety under the Rules of an agreement that includes, instead of a prohibition against solicitation of the employing lawyer’s clients, a financial disincentive to competition by a departing lawyer with the employing lawyer. Nor does this opinion address the applicability to the circumstances presented of a number of other legal principles, including principles generally applicable to employer-employee relations.

It is permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer and an associate employed by the lawyer to enter into an employment agreement addressing the representation of clients and the treatment of fees collected after the employed associate lawyer leaves the employ of the employing lawyer. Such an agreement may not restrict, in any manner, a departed associate’s right to practice law, for example, by restricting the departed associate's right to solicit the employing lawyer's clients or by requiring the departed associate to pay to the employing lawyer a portion of fees earned by the departed associate after departure.

CONCLUSION

It is permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer and an associate employed by the lawyer to enter into an employment agreement addressing the representation of clients and the treatment of fees collected after the employed associate lawyer leaves the employ of the employing lawyer. Such an agreement may not restrict, in any manner, a departed associate’s right to practice law, for example, by restricting the departed associate's right to solicit the employing lawyer's clients or by requiring the departed associate to pay to the employing lawyer a portion of fees earned by the departed associate after departure.

Tex. Comm. On Professional Ethics, Op. 546 (2002)