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ETHICS: Selling a Law Practice

by Evie Cogan and David Grunfeld

Spring 2002, Vol. 65, No. 1

Last year the Pennsylvania Supreme Court amended the Rules of Professional Conduct, adding Rule 1.17, Sale of a Law Practice.

New Rule 1.17 permits the personal representative or estate of a deceased lawyer or a lawyer disabled from the practice of law to sell, for consideration, the client representations and the goodwill of the deceased or disabled lawyer's practice. An important part of the rule is that it requires a single purchaser and prohibits the piecemeal sale of a practice, thereby protecting those clients whose matters are perceived to be less lucrative and who might otherwise find it difficult to retain representation. The purchaser of the law practice is required to undertake all client matters subject, of course, to client consent and other pertinent rules such as Rule 1.7, conflict of interest.

The rule outlines the notice requirements that must be given to all clients: notice of the proposed sale identifying the purchasing lawyer; notice that the client has the right to representation under the pre-existing fee arrangement; notice that the client has the right to retain other counsel or to take possession of the file; and a statement that the client's consent to the transfer of representation will be presumed if the client does not object or take any other action within sixty days of receipt of the notice. The rule is silent on who should advise the client of the proposed sale; therefore, the purchasing lawyer, the disabled lawyer or the personal representative might give the notice. No single method of giving notice is required, but the comment to the rule suggests that for many clients certified mail with return receipt requested will be adequate. To effectuate the sale of a law practice, it may be necessary to reveal client information that would otherwise be confidential pursuant to Rule 1.6. Accordingly, the Pennsylvania Supreme Court amended Rule 1.6(4), to permit disclosures to the extent "reasonably necessary" to carry out the sale.

Another interesting ramification of the new rule deals with its impact on Rule 5.4, which prohibits sharing legal fees with a nonlawyer. With the adoption of Rule 1.17, Rule 5.4(a) (4) was added to allow the purchaser of a law practice to pay a sum of money to a deceased lawyer's estate or other eligible entity, thus recognizing the existence of goodwill as a business asset.

Two other rules were impacted by the addition of Rule 1.17 and were amended accordingly for the purpose of consistency. Rule 5.6(a) was amended to exclude one of these transactions from the provision prohibiting restrictions on the right to practice. And Rule 7.2(c), which deals generally with advertising, was amended to exclude one of these transactions from the provision prohibiting the giving of anything of value to a person for recommending the lawyer's services.

Many lawyers feel that Rule 1.17 does not go far enough. For example, it does not permit a sole practitioner to sell a practice upon leaving the private practice of law, such as to retire, ascend the bench, or work elsewhere, perhaps in public interest law or as corporate counsel, or in the business world.

Until this new rule, the representative of the estate of a deceased lawyer, or of a disabled lawyer, could not sell the practice for consideration, and a breach of confidentiality was a risk run by any party involved in the transfer of a file. Even with this new rule, a sole practitioner must still form a partnership or a professional corporation with another shareholder, or take in an associate, in order to create a "firm" that would appear to continue his or her practice. The "firm" remaining would then pay out the leaving lawyer in accordance with any internal agreement. The formation of this "quickie" relationship may run afoul of confidentiality Rule 1.6, as has been found by a disciplinary body in at least one other jurisdiction.

Query the ethical duty of a sole practitioner to ensure an orderly succession? Succession planning to assure continuity of service to clients is an unstudied issue. It could be solved in part by adoption by the Pennsylvania Supreme Court of a broader rule covering the sale of a private practice, as adopted by the Model Rules and as has been suggested by the Pennsylvania and Philadelphia bar associations and others.

Perhaps "half a loaf" is better than none.