When You’re a Law Firm, Breaking Up is Hard to Do

Law firm splits and attorneys’ lateral moves present practical, ethical, and insurance issues for all involved. At the ABA Fall 2017 National Legal Malpractice Conference in Colorado Springs, Colorado, a diverse panel comprised of an insurance underwriter, an ethics and professional liability lawyer, and a legal recruiter, gave the audience a blueprint for combating these issues. They discussed what lawyers and law firms should be thinking about during transitions, dove into hypothetical scenarios, and provided invaluable advice based upon their real-world experiences.

The Four Key Forces of Authority/Considerations

Thomas Mason, a partner with Harris Wiltshire & Grannis LLP in Washington, D.C., and Chair of its Legal Malpractice and Ethics Group, kicked off the discussion by stressing that, for lawyers on the move, it is not all about making more money and being happy. According to Mason, a high number of legal malpractice cases arise from lateral hires, and lawyers and law firms must be careful. Transitions should be governed by: (1) the wording of the law firm’s partnership agreement; (2) adherence to ethical principles; (3) fiduciary duties; and (4) insurance needs.

Adam Weiss, Principal of Lateral Lawyer Group LLC in New York City, stated that, shockingly, law firm partners are not familiar with the terms of their own partnership agreements and, in some cases, do not even have copies of their agreements. Weiss said law firms are increasingly holding withdrawing partners to the notice provisions in the partnership agreements. Partners should be aware of those provisions and comply with them when departing.

Although it is important to abide by the partnership agreement, Mason emphasized that clients come first. To adhere to ethical principles, laterals must communicate with their clients and tell them that they are leaving the firm. They must perform conflicts checks and structure their departure so that they can handle ongoing matters with competence and diligence. Mason understands that law firms and their departing partners may fight about a lot of things, but they should not fight about continuing to service clients.

Mason also stated that partnership agreements sometimes push ethical boundaries. For example, partnership agreements may require that clients who follow withdrawing partners to a new firm must pay their bill in full. This is not necessarily ethical.

The panel noted that a partner’s lateral move involves conflicting fiduciary duties. The departing lawyer owes a fiduciary duty to the client but also must be loyal to the firm. A partner leaving a firm must give notice to the firm before speaking to anyone else about the departure, Weiss advised.

Talking About The Move

Through a hypothetical scenario, the panel discussed whether, and to what extent, laterals should discuss their move. A partner at Firm X is considering a move to Firm Y, and a colleague and partner at Firm X walks into the prospective lateral’s office. Can the lateral tell the partner about his departure to Firm Y?

If the lateral gave notice of his departure to Firm X, he can talk about it with Firm X, Weiss said. There is no clear answer, however, if the partner who walks into the lateral’s office is not an equity partner, but a contract partner. Mason said that a lateral can tell other equity partners about the move, but the lateral should not tell others just for fun because they can be a source of information for the firm. Weiss said that a lateral should not divulge a departure to an associate before giving notice to the firm, but, as a practical matter, these discussions happen all the time.

Mason instructed that departing partners should not talk to clients about moving with them to the new firm until notice is given to the soon-to-be old firm. “If you don’t know who is coming with you, you shouldn’t be leaving,” said Mason. Notifying the firm first is also the honorable thing to do.

An audience member asked whether there may be a breach of fiduciary duty or an ethical problem in notifying clients of a departure immediately after emailing the equity partners about the departure. Mason recommended that, in addition to following the partnership agreement’s provisions regarding withdrawal, the lateral should give notice in person, even if it is not effective notice under the partnership agreement. Once the lateral tells an equity partner in person, she is allowed and ethically required to contact her clients. With respect to the old firm, it needs a rapid-response team. It must start calling clients and competing for them.

The panel also talked about whether to disclose information to the potential new firm. Weiss stated that the new firm will undoubtedly want to know who your clients are, and there is a lot of pressure on the potential lateral partner to get some assurance from the clients. A questionnaire given by the new firm to a potential lateral may ask the lateral to give references. Rather than disclosing current clients, the lateral should respond, “References to be provided at an appropriate time.”

Am I Covered?

Noreen Calisto, vice president at Axis Insurance in New York City, has many years of underwriting experience and at least 10 years’ experience writing legal malpractice insurance. She has noticed that attorneys leaving firms are simply not thinking about their insurance needs. Weiss and Mason agreed that departing partners never ask them about insurance coverage. The failure to consider insurance leads to gaps in coverage that may compel lawyers to pay their own way in defending expensive professional liability claims.

If a lateral is considering a move, she should ask the new firm whether she will be receiving retroactive coverage, Calisto advised. The new firm can purchase an endorsement to its insurance policy to provide retroactive coverage, including full-career coverage, coverage from a specific date, and coverage relating to the applicable statute of limitations. Most firms, however, do not agree to this.

If the new firm does not provide prior acts coverage, the lateral, through the definition of “insured” in the old firm’s insurance policy, may get coverage for work she did at the prior firm. It is important to note that insurance companies may rely on the widely-used exclusion of “prior knowledge,” which permits insurance companies to deny coverage when the insured knows of, or reasonably should have known of, a claim. In light of this exclusion, the lateral should report known or suspected claims to her former firm.

If the language of the old firm’s professional liability policy is unfavorable to the lateral, the lateral may purchase an extended reporting period, which is an additional period of time in which to report a claim. This is also called tail coverage.

Calisto discussed a scenario in which the lateral brings a client from the first law firm to the second law firm, and a malpractice claim arises from the lateral’s work at the first law firm and continuing at the second law firm. The lateral should report the claim to both firms and put any insurance carrier that may provide coverage for that claim on prompt notice, she advised. Calisto stressed the importance of knowing one’s reporting requirements and avoiding a late-notice situation at all costs.

Client Files

The panel discussed whether a lateral can download her client’s files to a thumb drive to take to the new firm. As a practical matter, others in the firm will know immediately if the lateral does so, Weiss said. The files are the client’s property, and only the client can consent to the lateral taking the files to the new firm, he said. Moreover, a lateral cannot go fishing in other clients’ files to get sample forms and transactional documents to bring along to the new firm.

Conflicts Checks

Most firms have disclosure forms for departing partners that ask the partner to identify the clients, provide information regarding billing, and state the likelihood of the clients moving with the departing partner. The new law firm will run these disclosures through its conflicts check. This practice is permitted as an exception to Rule 1.6 of the Model Rules of Professional Conduct, which requires that lawyers maintain client confidences. The exception allows a lawyer to reveal a client’s identity when changing firms, as long as doing so doesn’t compromise the attorney-client privilege or otherwise prejudice the client. Disclosing a client’s identity for the purpose of avoiding conflicts would certainly not be prejudicial. Weiss noted that at least one state, Oregon, specifically permits client information to be revealed to a potential new firm. Mason warned that the lateral should pay attention to highly confidential or sensitive matters when making these disclosures.

What Can the New Firm Get?

The lateral’s prospective firm will undoubtedly want references, but the new firm should not contact the lateral’s clients. Weiss does not see a problem in calling the lateral’s former clients, so long as there is no disclosure that the lateral is leaving her current firm.

Frequently the new firm will also seek past client billings. The lateral partners that Weiss deals with disclose client identities, billings, and collections on a year-by-year basis. In Weiss’s view, this practice is acceptable because it relates to one’s ability to practice law. The ethical justification, in Mason’s opinion, is that the ethics rules promote lawyer mobility.

Law Firm Mergers

A firm’s decision to acquire the intellectual property team of another firm, for example, may have insurance implications. One issue is whether the new addition is considered a material change under the policy language. Another issue is whether the new hires change the company’s risk profile. Typically, insurers associate degrees of risk with different areas of practice. An example of a “risky” practice is entertainment law. The firm should ask its insurer and consult the mergers and acquisitions clause that appears in most policies. Furthermore, when a firm increases in size, the firm usually must satisfy certain conditions and give written notice to the underwriter.

Starting a New Firm

Mason senses that lawyers’ departures to create brand new firms are less contentious than lawyers’ lateral moves, because brand new firms won’t be seen as direct competitors. In terms of insurance, though, the new firm is considered a start-up that is riskier than an established firm. A prospective insurer, in assessing the risk, will consider many factors, including the new firm’s areas of practice, years of experience, claim history, the clients, and whether the new firm is properly capitalized and financially stable.

Be Cordial

The panel concluded the session by emphasizing the importance of maintaining a good relationship during and following a breakup. The lawyers involved should consider themselves former colleagues and not enemies, and departing partners should never disparage their old firm. Following an amicable breakup, the lateral may send work back to the old firm, and the former firm will be more willing to cooperate with a lateral if a malpractice claim comes in.