Dissolved and De-Clawed: California Supreme Court Clarifies that a Dissolved Law Partnership Has No Right to Profits Generated from Hourly Billed Work by Other Firms

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In the recent case of Heller Ehrman LLP v. David Wright Tremaine LLP (March 5, 2018) No. S236208, the California Supreme Court held that a dissolved law partnership has no right to claw back profits generated by hourly billed work performed by former partners of the dissolved firm (and their new firms), on matters that had started at the dissolved firm.  As explained below, in light of this case, law firms should review their partnership or shareholder agreements to determine the ongoing need or applicability of a “Jewel v. Boxer waiver” in the agreements.

The case arose from adversary proceedings filed in the bankruptcy proceeding of Heller Ehrman LLP against firms that departed partners had joined.  The U.S. Ninth Circuit Court of Appeals certified to the California Supreme Court the issue of “what property interest, if any, a dissolved law firm has in the legal matters, and therefore the profits, of cases that are in progress but not completed at the time of the dissolution.”

In a line of cases starting with Jewel v. Boxer (1984) 156 Cal.App.3d 171, the California appellate courts had developed case law that granted a firm some property rights in profits generated by work on some cases by partners who had departed the firm at which the case had originally been worked up.  In Jewel, the appellate court had held that, in accordance with the California partnership statute in effect at the time and absent an agreement providing for a different arrangement, fees generated from contingency matters pending when a law firm dissolved had “to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution.”  Later cases followed Jewel consistently, and one case, Rothman v. Dolin (1993) 20 Cal.App.4th 755, applied it to fees generated in hourly billed matters.

The California partnership statute was revised after these cases, and it changed some provisions, in part to remove the prohibitions against partners receiving compensation for services in winding up the affairs of a dissolved partnership.  In Heller, the California Supreme Court weighed the application of the revised statute against the scope of a dissolved partnership’s property rights to fees in hourly billed matters pending at the time of dissolution and the interests of clients in retaining some of the former attorneys of the dissolved firm.

The Court determined that a law partnership does not have a property right in fees generated from work on matters existing at the time it ceases to handle the matters.  “A property interest grounded in [an] expectation [of a law partnership to perform continuing hourly billed work on legal matters] requires a legitimate, objectively reasonable assurance rather than a mere unilaterally-held presumption.”  Because such an expectation by a dissolved firm “is unlikely to be shared by either reasonable clients or lawyers seeking to continue working on these legal matters at a client’s behest,” that expectation is “best understood as essentially unilateral.”

Ultimately, “hanging over all agreements involving legal representation – especially those involving work paid on an hourly basis – is the possibility that a client will change the nature of the work requested, the terms on which the work is to be performed, or the lawyer the client prefers.” [T]he client legitimately retains flexibility to change the terms of the bargain for legal services after a lawyer has been retained.”  While law partnership attorneys “feel some shared interest in each other’s work,” such an interest does not amount to a property right.  Hopes that Heller Ehrman would continue to work on unfinished hourly fee matters and be compensated for future work “were speculative, given the client’s right to terminate counsel at any time, with or without cause.”

To conclude otherwise, i.e., that a firm has a property interest in hourly matters, would impinge upon the statutorily and judicially recognized right of a client to discharge an attorney at will.  “The clients’ ability to retain their preferred counsel is a weighty interest, even if counterbalanced by an interest in partnership stability.”

In accordance with the provisions in the current California partnership statute that partners are entitled to compensation for work winding up the affairs of the dissolved partnership, the Court further held that a partner is entitled to compensation for (1) preserving legal matters for transfer to the client’s new counsel or the client itself, (2) effectuating such a transfer; and (3) collecting on work done pre-transfer.  Therefore, Heller Ehrman was entitled to recover fees for such work, including filing motions for continuances, noticing parties and courts that it was withdrawing as counsel, arranging for shipment of client files, and helping new attorneys get up to speed on pending matters.  Other substantive legal work was not compensable, because it went beyond winding up the partnership’s affairs.

The Court did not address whether its holding in Heller Ehrman would extend to contingency fee cases, such cases involve other issues, including but not limited to an assessment of the value of a former firm’s work as compared to the current firm’s efforts, in obtaining the amount recovered.

The partnership or shareholder agreements of law firms often contain a so-called “Jewel v. Boxer waiver,” a provision whereby the firm and its partners or shareholders waive their rights to any fees generated by work performed by a shareholder after he or she has left the firm or after the dissolution of the firm.  Firms should review the need, breadth and applicability of such provisions to address the impact of the Heller Ehrman decision.

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