A new and perhaps final chapter has been written in the long-running saga of the 2008 collapse of the Thelen firm. The New York Court of Appeals has held that when lawyers exit defunct firms for greener pastures, the trustee of the old firm may not “claw back” profits earned on hourly-fee cases that those lawyers take with them to their new firms.
The ruling squarely rejects application of the “unfinished business doctrine” to law firms and lawyers. It comes on the heels of a California district court’s refusal to allow the administrator for the bankrupt Heller Ehrman firm to claw back profits from former partners. That ruling is on appeal to the Ninth Circuit.
The unfinished business doctrine comes from agency law, and provides that even after a partnership dissolves, profits on then-uncompleted contracts remain the property of the dissolved partnership.
In the well-known Jewel v. Boxer decision, the California state court of appeals in 1984 held that whether an engagement was hourly or based on a contingent fee, the estate of a dissolved law firm was entitled to recover the profits earned on cases that began at the firm, even when they were completed at a lawyer’s new firm.
The unfinished business doctrine led many firms to add “Jewel waivers” to their partnership agreements, in order to circumvent the rule. Disputes over such waivers and the application of the unfinished business doctrine were common, exemplified by the Thelen case and others.
Now, at least under New York law, the unfinished business doctrine will not apply when law firms break up, and attorney-client relationships will not be considered the dissolved firm’s property or be subject to claw-back from the firms where the dissolved firm’s former lawyers might land.
The court said:
Treating a dissolved firm’s pending hourly fee matters as partnership property … would have numerous perverse effects, and conflicts with basic principles that govern the attorney-client relationship under New York law and the Rules of Professional Conduct.
Under those principles, clients have an “unqualified right to terminate the attorney-client relationship at any time,” and are responsible only for paying their former lawyers for “completed services.” The court reaffirmed long-standing New York law that lawyers must be free to migrate to other firms without undue financial restrictions, and that preserving client choice means that clients must be free to follow their chosen lawyers to their new firms.
Watch for further developments in other jurisdictions; many have partnership law and ethics rules similar to the ones that the court considered in the Thelen case.