On October 8, 2014, the American Bar Association Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 468, Facilitating the Sale of a Law Practice. The opinion discusses ABA Model Rule 1.17, which requires in part than when a lawyer or law firm sells their practice, the seller must stop practicing in that area of the law in the private sector, at least in the jurisdiction or geographic area of the practice being sold. But the opinion now says that the seller may assist the buyer in the orderly transition of active client matters for a reasonable period of time after the sale, thus helping to facilitate the sale of law practices.
The opinion notes that part of the reason the Rule was changed in 1990 to permit sale of a law practice under certain circumstances was to address the disparity between sole practitioners and law firm partners; since solo lawyers could not sell their law practices, their clients were at a disadvantage when the lawyer retired from the practice. Because a solo practice could not be sold to another lawyer, clients of that practitioner were left essentially on their own to find new representation.
By contrast, when a law firm is sold, generally there are other lawyers within the firm who are familiar with and can handle those matters without the client being forced to find new representation. Similarly, when a law firm partner retires from the practice, they are often able to continue to receive compensation in some form from the firm (in part for the “goodwill” they have established with clients), while sole practitioners were limited to the sale of the firm’s physical assets.
In part, the opinion states:
…[I]t seems reasonable to conclude that the transition of pending or active client matters from a selling lawyer or firm to a purchasing lawyer or firm need not be immediate or abrupt.
For example, one of the purposes stated by the sponsors of new Rule 1.17 was to address the disparity of treatment of clients of sole practitioners and law firms. Lawyers retiring or withdrawing from law firms are not precluded from assisting their former colleagues in the transition of responsibility for pending matters from the retiring or withdrawing lawyer to another firm lawyer. Where appropriate, a selling lawyer or firm should be given a similar opportunity, for a reasonable period of time after the closing of the sale, to assist in the transition of active client matters.
Neither the seller nor the buyer may charge the client for activities specifically related to transitioning, as opposed to activities that advance the client’s matter. However, according to the opinion, “The compensation, if any, to the selling lawyer or law firm for time spent on transitioning matters should be a matter of negotiation between the seller and the buyer in determining the consideration for the sale.”
The New York State Bar Association Committee on Professional Ethics has not provided an opinion similar to that in ABA Formal Opinion 468, although the New York Rules of Professional Conduct, Rule 1.17(a) states in part,
Retirement shall include the cessation of the private practice of law in the geographic area, that is, the county and city and any county or city contiguous thereto, in which the practice to be sold has been conducted.
It remains to be seen whether New York will adopt the same position with regard to transitioning client files from the selling firm to the purchasing firm.
Last year, The New York State Bar Association Committee on Professional Ethics addressed the sale of a law practice in Opinion 961 in which the Committee addressed the issue of the selling lawyer receiving a percentage of legal fees collected by the purchasing lawyer after the sale was completed.
The Committee found that,
A retiring lawyer may sell his or her law practice contingent upon receipt of a percentage of legal fees collected by the purchaser for services provided after the sale where the payment is in proportion to the services performed by the selling lawyer prior to the sale or fairly represents the value of the "goodwill" of the retiring lawyer. A provision requiring payment of fees for business that the selling lawyer refers to the buying lawyer after the sale is not permitted. (emphasis added)
New York practitioners who want more information about planning to retire or sell their law practice might be interested in the video webcast replay of a 2012 program, Selling Your Law Practice.