Inquiry 89-3 requests review of two alternate provisions proposed for inclusion in a law firm professional employment contract. The clauses concern the liability of an employee, presumably a partner or associate attorney, upon termination of the law firm employment relationship, for amounts owed to the firm by clients who have requested a transfer of their files to the departing attorney. Specifically, the preferred version of the provision states that the departing attorney shall not represent a client of the law firm unless: 1) the client requests a transfer of the file, and 2) the attorney compensates the law firm for files the attorney is taking with him/her to the extent of the amount owed to the firm by the client for all accounts receivable and unbilled time for these matters. The amount payable is to be calculated at the law firm's regular hourly rates as of the date of notice of employment termination. This method of valuation is to apply all files taken by the attorney, including contingency fee cases and estate matters.
In the event that the Rules of Professional Conduct preclude the use of that provision in the employment contract, an alternate version is proposed which differs from the first only in that the departing attorney may satisfy the amount payable to the law firm with a signed note. The attorney shall remain personally liable, however, for any balance due at the time the files are actually removed from the law firm.
The Pennsylvania Rules of Professional Conduct prohibit a law firm employment contract provision which holds an attorney personally liable upon termination of employment for amounts owed to the firm by clients for matters in which the client has elected to retain the departing attorney.
The proposed employment contract provisions implicate at least four of the Rules of Professional Conduct. Unless otherwise noted, the following comments apply whether the law firm requires immediate payment or a signed note from the departing attorney.
RULE 1.5 - FEES
Subsection (e)(2) of Rule 1.5 prohibits the division of a fee for legal services unless the client does not object and the fee is not illegal or clearly excessive. Assuming clients are advised of and consent to the fee arrangement between the attorney and the law firm, the proposed contract provision would not be prohibited by Rule 1.5 as long as the resulting fees are not clearly excessive.
RULE 1.8 - CONFLICT OF INTEREST: PROHIBITED TRANSACTIONS
Subsection (e) of Rule 1.8 states that, subject to unrelated exceptions, a lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation. Although subsection (e) is pertinent only to litigation matters, subsection (j) forbids a lawyer from acquiring a proprietary interest in any cause of action that the lawyer is conducting for a client other than a contingency fee contract or a lien for fees.
The underlying purpose of Rule 1.8 is to prevent improper influence upon a lawyer potentially caused by a stake in the outcome of representation. In meritorious but close cases, a lawyer's representation may be skewed by his concern to protect his investment. For example, this concern might lead a lawyer to urge acceptance of an inadequate settlement. Hazard and Hodes, The Law of Lawyering at 165 (1988).
The rationale of Rule 1.8 suggests that the employment contract provision proposed in the present instance impermissibly causes the departing attorney, at least indirectly, to advance funds to the client, i.e. by paying the legal fees of the former law firm incurred by the client. Furthermore, whether by direct payment of the client's outstanding bill or by personally guaranteeing payment, the lawyer acquires a stake in the representation which may improperly influence his judgment. Such an arrangement is particularly problematic in the contingency and estate matters encompassed by the proposed clause. As a result, the provision as written contravenes the mandates of Rule 1.8 of the Rules of Professional Conduct. See also Philadelphia Bar Association Professional Guidance Committee Opinions (Guidance Opinions) 86-36 (attorney cannot guarantee client's bank loan); 86-8 (attorney's advancement of funds to client in anticipation of receipt of settlement proceeds prohibited since it would constitute acquisition of proprietary interest).
It should be noted, however, that Rule 1.8 would not prohibit an employment contract provision which guarantees payment to the employer of the client's outstanding bill when and if the attorney receives it from the client, or in a contingency case, when recovery is obtained.
RULE 1.16 - TERMINATION OF REPRESENTATION
Rule 1.16(d) provides that [u]pon termination of representation a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as . . . surrendering papers and property to which the client is entitled . .. . The Comment to the Rule requires a lawyer to take all reasonable steps to mitigate the consequences to the client [of withdrawal or discharge], and notes that client papers may be retained as security for a fee only to the extent permitted by law.
The contract clause in question explicitly states that the attorney is liable for any client balance due at the time the file leaves the law firm. The provision in itself creates a consequence of the client's discharge of the law firm by imposing conditions on successor counsel. While the law firm clearly is entitled to be paid for past services rendered, it may not compel payment by any means which unduly prejudice the client. Moreover, it has been strongly recommended in the past that client files should not be withheld for nonpayment of fees. In Guidance Opinion No. 871, this Committee concluded that, notwithstanding the legality of an attorney's retaining lien, client papers and documents should be withheld only as a matter of last resort, when necessary to prevent 'fraud or gross imposition.' (citing Tennessee Supreme Court Board of Professional Responsibility Formal Opinion 86-F-106, Sept. 26, 1986). See also Guidance Opinions 83-72 (attorney advised that he cannot enforce a lien for fees by retaining the file to the prejudice of the client); 83-79 (same); 86-25 (attorney who represented client on contingency fee basis and wished to withhold files from successor counsel pending quantum merit payment for services was advised to turn over file and look to remedies at law).
Under the clause proposed by the inquirer, the law firm's imposition of personal financial liability upon successor counsel and the potentially prejudicial retention of client files both serve to exacerbate rather than mitigate the consequences of the change in counsel. Accordingly, the suggested contract condition may cause a violation of Rule 1.16 if it results in actual prejudice to the client's case.
RULE 5.6 - RESTRICTIONS ON RIGHT TO PRACTICE
Perhaps the most disconcerting aspect of the proposed employment contract provision is its limitation on the departing attorney's practice of law. Rule 5.6(a) forbids the participation in or offering or making an employment agreement that restricts the right of a lawyer to practice after termination of the relationship. The Comment states that such an agreement limits th[e] professional autonomy of attorneys and limits the freedom of clients to choose a lawyer. Addressing the issue of restrictive employment agreements, this Committee has noted:
[T]he purpose of the applicable provisions of the Rules of Professional Conduct are to ensure that clients may seek the legal advice of a lawyer of their choosing. Although law firms have a right to protect their legitimate business interests, including their client base, they may not do so to the exclusion of the client's preference. It is for this reason that restrictive covenants in the legal profession are prohibited. See generally Dwyer v. Jung, 133 N.J. Super. 343 (1975); ABA Formal Opinion 300 (Aug. 7, 1961).
Guidance Opinion 87-24 (Issued April, 1988). The contract provision presented in the current inquiry does not, on its face, directly restrict the departing attorney's right to practice law. In effect, however, it restricts his/her right to represent selected clients. Moreover, to the extent that the required personal liability of the attorney acts as a disincentive to representing the client, the proposed clause limits the client's ability to retain counsel of choice. The Pennsylvania Bar Association's Ethics Committee reviewed an employment contract provision which required a departing attorney to remit to his/her former law firm twenty percent of fees for services rendered by the attorney to previous clients of the firm. Adopting the language of the District of Columbia Bar Committee on Legal Ethics, the opinion stated:
The quoted portion of the employment contract, while not prohibiting a professional relationship between the withdrawing lawyer and clients of his former firm, is nonetheless a restriction on the right of a lawyer to practice law after the termination of the relationship created by the employment agreement. Its effect is to impose a barrier to the creation of a lawyer-client relationship between the departing lawyer and clients of his former firm. Such a barrier is inconsistent with the concept of the practice of law as a profession and, at least indirectly, interferes with a client's choice of an attorney.
Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility, Opinion No. 86-17, July 11, 1986.
The foregoing commentary is equally applicable to the contract provision presently at issue. Most troublesome is the application of the clause to contingency fee cases. Fee arrangements in contingency matters should be set forth in writing prior to assuming responsibility for the matter. Cf. Rule 1.5(b) (requiring written communication of the bases or rate of fee). In particular, an engagement letter should include the basis of fee calculation upon withdrawal or discharge of the law firm. To require immediate payment for services rendered prior to the resolution of a contingency fee matter, if not previously agreed upon, may penalize and prejudice the client, further limiting his/her ability to retain preferred counsel. See Allegheny Bar Association; Opinion 1-1988 (attorney discharged by client in contingency fee matter may compel reimbursement only when matter is resolved).
With respect to the departing attorney, this Committee's previous rationale again applies:
In a given situation, a disciplinary body reviewing the totality of the circumstances surrounding an agreement could find that the agreement results in a restriction on the right to practice. . . . The higher the post-termination payment, the more at risk is a firm for such arrangements.
Guidance opinion 87-24. The employment contract provision submitted by the inquirer contemplates a post-termination payment for each file taken by the departing attorney which could range from a negligible amount to a sum so substantial as to preclude the attorney's representation of the client. In view of the possible magnitude of post-termination payments, the proposed contract clause operates as a restriction on the right to practice. The right of a law firm to protect its client base from erosion by former employees previously has been acknowledged. See Guidance Opinion 87-24 (approving in certain circumstances contract provisions which require remittance to law firm of percentage of fees earned by former employees for services rendered to law firm's former clients); Joseph D. Shein P.C. v. Myers. et al., 16 Phil. 283 (1987) (fee divisions of one-third are permissible); District of Columbia Bar Association, Opinion 77 (approving liquidated damages provision). The right to protect the firm's client base, however, must be exercised within the scope of the applicable Rules of Professional Conduct.