Do’s and Don’ts of Attorney Lateral Movement: Managing the Risks
Article courtesy of Hinshaw & Culbertson, LLP – © 2012 – Used with permission
Lawyer movement from one law firm to another has become commonplace, almost routine. Associates often change firms several times before finding a professional “home”; partnerships seldom last the length of an attorney’s career, as was the norm for earlier generations. In the current economic environment, these trends are exacerbated as firms downsize to cut costs, or dissolve, so that attorney departures are often involuntary. Because of the sometimes conflicting legal, financial, and ethical implications of lateral attorney movement, a large body of literature has developed on this topic. In 1998, the late Steven Krane wrote about the legal and ethical principles that are in play when partners change firms, and reviewed the developing case law surrounding the disputes between departing partners and their former firms.
Given that lawyer mobility has only increased in the intervening years, this, the first of two articles, will commence a review of the developments since 1998. These articles will seek to distill the legal and ethical principles that have emerged from the growing body of case law and commentary on lateral movement, and provide guidance both for departing lawyers and the law firms that are either losing or acquiring an attorney.
Communication With Clients
Departing Lawyer. Departing lawyers owe fiduciary duties to their current firms. Departing partners owe other partners in the firm duties as a matter of partnership law, and departing associates owe duties to their employers as a matter of agency and employment law. Business and tort litigation against departed lawyers has mushroomed in recent years. In the last two decades, courts have analyzed solicitation of clients by lawyers making lateral moves in the context of fiduciary duties, and in a number of cases have found that lawyers violated those duties.
In Meehan v. Shaughnessy, the Massachusetts Supreme Judicial Court found that departing partners breached their fiduciary duties of good faith and loyalty to their former firm by unfairly acquiring consent from clients to remove cases. While denying that they had plans to leave the firm, the departing partners made preparations for obtaining removal authorizations from clients. The Court reasoned that by virtue of their actions, the departing partners had obtained an unfair advantage over their former partners.
The New York State Court of Appeals decision in Graubard Mollen Dannett & Horowitz v. Moskowitz remains the bedrock authority in New York concerning the consequences of improper pre-departure client solicitation. In a unanimous decision, the Court found that “…as a matter of principle, preresignation surreptitious ‘solicitation’ of firm clients for a partner’s personal gain is actionable.” While reaffirming this principle, the Court left open the precise parameters of when and how a departing lawyer can (and in certain situations, must) contact clients, noting, “it is unquestionably difficult to draw hard lines defining lawyers’ fiduciary duties to partners and their fiduciary duty to clients. That there may be overlap, tension, even conflict between the two spheres is underscored by the spate of literature concerning the current revolving door law firm culture.”
Breach of fiduciary duty or employment obligations are not the only claims that may arise following premature notification of a lawyer’s intent to depart from her current firm. Recently, the New York Supreme Court, New York County, applied the Graubard decision to uphold a claim of tortious interference brought by a law firm against a departing law firm associate for pre-departure solicitation of clients. In Raymond H. Wong, P.C. v. Xue, an associate solicited at least three longstanding clients of the firm prior to his departure.
The court found that an action for tortious interference with contractual and business relationships could lie, even though contracts between a law firm and its clients are terminable at will, if the soliciting attorney violates his ethical duties or governing law. This represents a marked divergence from Krane’s view that “there can be no cause of action against a lawyer for tortious interference with an attorney-client relationship, which is terminable at will.”
Whatever the underlying cause of action, it is clear from these cases that departing attorneys should generally not discuss their departure plans with clients before telling their current firms about their upcoming withdrawal, and should not seek to sign up clients to the new firm prior to notifying the current firm of intent to depart. While the precise scope of permissible communication with clients on the part of the departing lawyer has not yet been established with complete clarity, and the law in this area continues to evolve, prudence cautions against any contact with clients, other than for routine business, until after formal announcement of a lawyer’s departure.
There is one possible exception to this default proposition, which gains some traction from the Graubard case. There may be exigent circumstances, such as a case about to go to trial, or a transaction a week away from closing, in which it may be appropriate to tell the client of the impending departure before having notified the firm. If the client may be harmed by a lawyer’s sudden move at a critical moment, the client’s interest in having maximum flexibility and freedom to choose its counsel going forward, the duty to help (and not to harm) the client may outweigh the duty to the current firm.
In 1999, the American Bar Association (ABA) Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 99-414, titled “Ethical Obligations When a Lawyer Changes Firms.” The ABA Opinion, discussed in depth in the next section, lends support to the idea that in some circumstances it may be appropriate to give notice to clients first.
As mentioned in the Graubard decision, attorneys have obligations to their clients that must be balanced against their fiduciary duties to and employment by their current firms. Under New York Rule of Professional Conduct (RPC) 1.4, a lawyer must promptly inform the client of “material developments in the matter.”10 This Rule has been interpreted to mean that a lawyer and law firm must notify a client of the departure of the attorney actively handling the client’s matter. According to ABA Opinion 99-414, “[t]he departing lawyer and responsible members of the law firm who remain have an ethical obligation to assure that prompt notice is given to clients on whose active matters she currently is working.”
Although the ABA Opinion also states that a lawyer making a lateral move may, at least in some circumstances, ethically inform clients of the move prior to resignation, provided that the lawyer does not solicit the clients’ business or disparage his current firm, we recommend that, other than in exigent circumstances, lawyers first inform their firms and then promptly inform their clients. As prominent ethicists have noted, what constitutes improper “solicitation” as opposed to permissible “notice” is up for debate. The Court of Appeals in Graubard did not define the term “solicitation.” New York’s Judiciary Law prohibits solicitation by attorneys, but likewise does not define it. And both the ABA Opinion and the Graubard case indicate that the better course is for the departing lawyer first to notify his current firm, and then for the firm and departing partner to give joint notice to the lawyer’s clients.
When notifying clients (after announcing the intended departure to the current firm), avoid disparaging the current firm or its attorneys. ABA Formal Op. 99-414 specifically cautions attorneys not to disparage their current firms when speaking with clients. The ABA Committee on Ethics and Professional Responsibility has issued two informal opinions bearing on this subject.14 In both opinions, the ABA concluded that whether attorneys’ proposed letters to clients as to whose matters they were responsible conformed to prevailing ethical guidelines would depend and be conditioned in part on the fact that the letters did not urge the clients to sever their relationships with the former firms, but rather left the decision to the clients.
Current Firm. Whenever possible, a departing lawyer’s current firm should send a letter jointly with the departing attorney to all clients with whom that lawyer had significant personal contacts. As ABA Formal Op. 99-414 emphasizes, law firms also have an ethical obligation to their clients to notify them that an attorney who had been actively working on their matters is leaving. While joint notice is not always feasible, it is the best practice whenever possible. The client must be informed that the choice of whether to stay with the firm or go with the departing lawyer (or to an entirely different firm) is the client’s alone, and that there will be no adverse consequences from the client’s decision.
A joint letter ensures evenhanded treatment of both the departing lawyer and the firm, and reduces the risk that either side will later accuse the other of misconduct. Lawyer and law firm break-ups can often result in acrimony, but it is in the firm’s best interest to work with the departing lawyer, if possible, to minimize the potential for disputes and focus on prompt and accurate disclosure to clients. Some firms include requirements for such joint letters in their partnership agreements and their policy and procedures manuals.
We recognize that there may be circumstances in which joint notice is not possible. In those cases, the firm may be required, and may in any event wish to send its own letter to all clients with whom the departing lawyer had significant personal contacts, apprising them of the attorney’s departure and informing them that they have the choice whether or not to remain with the firm. The firm should also avoid disparaging the departing attorney. If the attorney’s departure resulted from some kind of misconduct, illness or disability, the firm may have a duty to notify its clients, but this too must be balanced against the firm’s duty not to unlawfully disparage its former employee. In these situations, we recommend that the firm seek advice from an employment lawyer, and, in some situations, a defamation lawyer, as these are as much issues of employment and tort law as they are of legal ethics.
New Firm. Firms should beware of assisting the incoming attorney in soliciting clients of his former firm prior to notification to the former firm of the intent to depart. Hiring firms may face potential liability to laterally hired lawyers’ former firms premised on theories of aiding and abetting the departing lawyers’ alleged breach of duty, or tortious interference with the former firms’ business, if hiring firms assist departing lawyers in impermissible pre-departure solicitation.
Even something short of assistance, such as rendering advice to a prospective incoming counsel about his or her solicitation of existing clients, could expose the hiring firm to liability for conduct for which it otherwise would not be responsible. Because of this possible exposure, we recommend that hiring firms consider whether it may be appropriate to advise the prospective lateral hire to seek the advice of independent counsel regarding these issues. A number of firms routinely do so already. Counsel engaged by the laterally moving lawyer will likely also need to review the lawyer’s present firm’s partnership (or equivalent) agreement and policies.
Departing Lawyer. Departing lawyers should be prepared to continue to service, bill, and collect from clients of the current firm until the time of departure, and thereafter use reasonable efforts to continue to assist in the collection process of fees owed to the now former firm.
Departing lawyers remain fiduciaries to their current firms until they actually leave, not just until they announce their departure, and in some respects those duties continue even after departure. Accordingly, departing lawyers have an obligation to keep working and to keep billing and collecting from clients after notification but prior to actual departure. Departing lawyers may not steer money to their new firm or delay billing on behalf of the firm they are about to leave so that payments due to that firm are paid instead to the new one.
There are case law-based restrictions on a departing lawyer’s recruitment of employees of a current firm until after the point of departure. It is permissible for departing partners to recruit other partners in their current firms to move to their new firms, but it is not permissible to recruit non-partners. Because departing partners remain fiduciaries until they leave, pre-departure recruitment of associates or staff may be deemed a violation of their fiduciary duties, or create other liability. In Gibbs v. Breed, Abbott & Morgan, even though the departing partners had not discussed with firm employees the possibility of moving with them prior to their departure, they indicated to their new firm the employees in whom they were interested before departing, and one of the departing partners specifically testified that he refrained from telling one of his partners about his plans to recruit specific associates and support staff from the partnership.17 The Appellate Division, First Department found that such conduct was sufficient to uphold the lower court’s finding of breach of fiduciary duty. Gibbs, which mandates that no recruitment, even indirectly, should take place prior to the actual date of departure, should serve as a cautionary tale for lawyers.
One question that is not resolved by the case law, but which is frequently in issue, is where non-equity or contract partners fit within this structure. Arguably, since they are held out as partners rather than employees, they should be treated as partners in this regard, and therefore be free both to invite, and be invited by, other partners to depart together. However, as this is not settled, departing non-capital partners who may be deemed to be employees should act with caution.
Other than in order to identify possible conflicts of interest, take care not to disclose confidential or proprietary information about the current firm or its clients when interviewing with a prospective new firm. When a lawyer seeks to move laterally to a prospective new firm, that firm will inevitably need and request information regarding the prospective hire’s practice. Lawyers seeking to move may provide personal financial information, and information about any partners who are also seeking to move to the same firm. Lawyers may talk about their typical billing rates, and speak generally concerning total expected receivables, but should take care not to provide the hiring firm with more information about a client than is necessary for a conflicts check, or that is confidential or proprietary to the lawyer’s current firm, such as associate rates or salaries, or other firm specific financial information.
Disclaimer: This article is written from an insurance perspective and is meant to be used for informational purposes only. It is not the intent of this article to provide legal advice, or advice for any specific fact, situation, or circumstance. Contact legal counsel for specific advice.