Retention of Clients After Law Firm Breakup

When a couple breaks up, they face the daunting task of dividing up their mutual assets. When a law firm breaks up, the division of tangible assets is relatively more straightforward, but who gets the profits from matters still pending? The Supreme Court of California weighed in on that question in a March 3, 2018 opinion in Heller Ehrman LLP v. Davis Wright Tremaine LLP, holding that under California law, “a dissolved firm has no property interest in legal matters handled on an hourly basis, and therefore, no property interest in the profits generated by its former partners’ work on hourly fee matters pending at the time of the firm’s dissolution.“

Heller involved the dissolution of a large law firm (Heller Ehrman LLP) on its way to bankruptcy. At the time of the dissolution, Heller, by way of a Jewel waiver, (named after Jewel v. Boxer (1984) 156 Cal.App.3d 171) waived any rights and claims it had to seek any legal fees for its hourly fee matters which were generated after the departure date of the lawyer who was continuing or taking over the representation. After Heller’s bankruptcy case was filed, the bankruptcy court appointed an administrator who sought to set aside the Jewel waiver, claiming that under the Bankruptcy Code, the waiver was a fraudulent transfer of the Heller’s rights. The administrator sought to recover from the lawyers’ new firms the profits generated by hourly fee matters which were pending when Heller dissolved. The district court reversed the bankruptcy judge’s decisions in favor of Heller, holding instead that Heller did not have a property interest in the hourly fee matters pending at dissolution. On appeal, the Supreme Court of California agrees.

In justifying its holding, the Court references various policy issues at play: clients’ choice of counsel, encouraging labor mobility, and minimizing firm instability. While courts have consistently held that in pending contingency cases partners have an equal share to the profits after dissolution of the partnership, the Court notes that only once has the same been applied to hourly fee cases (and the case so holding was decided before the enactment of the Revised Uniform Partnership Act).

Ultimately, the Court found that property law could not support a holding that a dissolved firm still has a right to fees for hourly cases. Neither could the Revised Uniform Partnership Act, which allows only for activities upon dissolution which are necessary to wind up a business. The Court held that “while Heller was a viable, ongoing business, it no doubt hoped to continue working on the unfinished hourly fee matters and expected to receive compensation for its future work. But such hopes were speculative, given the client’s right to terminate counsel at any time, with or without cause. As such, they do not amount to a property interest.”