HIGHLIGHTS:

  • The California Supreme Court has decided the fate of the unfinished business rule for hourly fee cases in the state with its long-awaited decision in Heller Ehrman LLP v. Davis Wright Tremaine LLP. The court held that a dissolved law firm has no property interest in profits derived from work performed by its former partners, now employed by new firms, on hourly fee matters previously handled by the dissolved firm. In so ruling, the California Supreme Court confirmed that clients, not law firms, own legal matters.
  • The Heller Ehrman court confirmed that, under California law, the client's right to choose its lawyer is paramount and rejected any rule, such as the application of the Jewel v. Boxer unfinished business rule to hourly fee matters, that could impact a client's ability to engage counsel of its choosing. As such, a lawyer cannot assert an ongoing interest in a matter once they have been paid and discharged.
  • Notwithstanding the Heller Ehrman decision, the Jewel unfinished business rule remains the law for contingent fee matters in California as well as for both contingent and hourly fee matters in many other jurisdictions, such that the need for Jewel waivers remains.

The California Supreme Court on March 5, 2018, decided the fate of the unfinished business rule for hourly fee cases with its long-awaited decision in Heller Ehrman LLP v. Davis Wright Tremaine LLP, S236208 (CA March 5, 2018) (Heller Ehrman). Ruling on a request for guidance issued by the U.S. Court of Appeals for the Ninth Circuit in connection with appeals from litigation brought by the post-confirmation plan administrator of Chapter 11 debtor Heller Ehrman LLP, the court held that a dissolved law firm has no property interest in profits derived from work performed by its former partners, now employed by new firms, on hourly fee matters previously handled by the dissolved firm. To the contrary, with respect to hourly fee matters, a dissolved firm may seek recovery only for work related to transferring pending matters to new firms, collecting for work already performed and liquidating the business. In so ruling, the California Supreme Court confirmed that clients, not law firms, own legal matters. While a firm may have an expectation of future business arising from a pending hourly fee matter, this does not amount to a property interest either before or after dissolution.

The Heller Ehrman court further explained that its holding promotes lawyer mobility, by making it possible for former partners of a dissolved firm to take their pending matters to a new firm without fear that the dissolved firm will try to capture some of the profits from those matters after the fact. At the same time, its holding promotes law firm stability – by encouraging partners to remain at a firm to try to work things out rather than jumping ship at the first sign of instability, so as not to be caught in the "unfinished business" trap. These policies likewise protect client choice by eliminating any financial disincentive that potential liability for unfinished business might present to a partner's new firm that might discourage the new firm from taking over an existing matter that the partner had handled at the dissolved firm.

The unfinished business rule arises out of a decision issued by an intermediate California appeals court in Jewel v. Boxer, 156 Cal.App.3d 171 (CA 1st Dist. 1984) (Jewel). In that case, the court considered how to divide the proceeds of unfinished contingent fee matters completed by former partners of a dissolved firm at their new firm. Under the Uniform Partnership Act (UPA), which was then in effect in California, partners were not entitled to additional compensation beyond their regular share for completing the partnership's unfinished business after the partnership dissolved. 156 Cal.App.3d at 176. Accordingly, the Jewel court held that, in the absence of an alternative agreement that would replace the UPA's default rule, the proceeds from unfinished contingent matters had to be divided in accordance with the dissolved firm's partnership agreement regardless of which former partner actually performed the work. Id. at p. 174. Notably, Jewel involved contingent fee matters, as to which the dissolved law firm had not yet received payment at the time the firm dissolved. The Jewel court did not, however, consider whether its analysis should apply to hourly fee matters, as to which the firm presumably would have been paid as the work was performed.

In the years after Jewel was decided, courts in California routinely applied its holding in cases involving contingent fee matters. Although only one California state appellate court applied Jewel to a case involving hourly fee matters, numerous other state and district courts throughout the United States as well as the Bankruptcy Court for the Northern District of California and certain other districts adopted Jewel's unfinished business rule with respect to both contingent and, in some cases, hourly fee matters. This remained true even after the UPA was replaced by the Revised Uniform Partnership Act (RUPA) in California and many other states, even though the RUPA, unlike the UPA, permitted a partner to be compensated for winding up a dissolved firm's business, among other changes. To counter the potential effects of Jewel, some law firms began adopting "Jewel waivers," i.e., agreements to waive any right to collect fees for unfinished business arising out of hourly fee matters post dissolution, as part of their partnership agreements or other governing documents.

Hourly Fee Matters Not Law Firm Property

The Jewel tide began to turn in 2014, when the New York Court of Appeals ruled in a pair of cases arising out of appeals from litigation spawned by the bankruptcies of Thelen LLP and Coudert Brothers LLP that, under New York law, a dissolved law firm has no property interest in profits derived from work performed by its former partners on unfinished hourly fee matters after the firm dissolves. Geron v. Seyfarth Shaw LLP (In re Thelen LLP), 24 N.Y.3d 16 (NY 2014) (Thelen). Thelen likewise confirmed that the client, not the firm, owns its legal matters and rejected any rule that would hamper lawyer mobility, as such a rule would infringe on a client's freedom to select counsel of its choosing. SeeThelen, 24 N.Y.3d at 28-29, 33.

Similar to Thelen, the Heller Ehrman court confirmed that, under California law, the client's right to choose its lawyer is paramount and rejected any rule, such as the application of the Jewel unfinished business rule to hourly fee matters, that could impact a client's ability to engage counsel of its choosing. As such, a lawyer cannot assert an ongoing interest in a matter once they have been paid and discharged. Winding up a law firm's "unfinished" hourly fee business thus is limited to preserving legal matters for transfer to new counsel of the client's choosing or the client itself, effectuating the transfer and collecting for any unpaid work done prior to the transfer. Anything more than that is outside the scope of what may be considered "winding up" the dissolved firm's business.

Is This Really the End? What Law Firms Need to Know

Heller Ehrman puts an end to the reign of Jewel for hourly fee cases in California. The doctrine has seen a similar demise in New York as a result of Thelen. That being said, the Jewel unfinished business rule remains the law for contingent fee matters in California as well as for both contingent and hourly fee matters in many other jurisdictions. While a slow death seems inevitable, that may be a long road. Until the law is changed in those jurisdictions, lawyers can protect themselves by adopting a Jewel waiver at the outset to avoid any difficulties down the road. A partnership or shareholder agreement provision that describes how post-departure and post-dissolution legal fees, related to both hourly and contingent fee matters, will be divided among the former firm and the lawyer who completes the matter remains the best practice and a relatively simple drafting exercise. This decision should once again remind law firms to take a look at the firm's governing documents, address Jewel-type scenarios and further confirm that the documents have kept pace with the firm's growth and reflect its culture.