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July 2nd, 2014
New York Court of Appeals Refuses to Apply “Unfinished Business” Doctrine to Law Firms
In a decision with far reaching implications for law firms and their clients, the New York Court of Appeals firmly rejected the application of the "unfinished business" doctrine - an important principle of partnership law - to lawyers and law firms. Under the "unfinished business" doctrine, the profits to be earned on uncompleted contracts are considered the "property" of the partnership, even if earned after the partnership dissolves. The question before the Court of Appeals was whether this rule applies to hourly fee matters handled by a law firm. Specifically, if a lawyer starts working on a matter on an hourly fee basis at Firm A, which subsequently dissolves, and then completes the matter at new Firm B, does she have to return the profits earned on the case at Firm B to the estate of Law Firm A?
Courts in California, particularly in the famous decision Jewel v. Boxer, had answered this question "yes," regardless of whether the engagement was hourly or contingent. Yesterday, the Court of Appeals, ruling in In re Thelen LLP, came to a different conclusion. The "unfinished business" doctrine, the Court ruled, does not apply to law firms; and a firm's attorney-client relationship, whether hourly or contingent, is not considered the law firm's "property" under New York law. Indeed, said the Court, that concept would be antithetical to the notion that clients have "'the unqualified right to terminate the attorney-client relationship at any time," and are obligated to compensate their former attorney only for 'completed services.'" If the attorney-client relationship belongs to anyone, the Court held, it belongs to the client.
The implications for lawyers involved in partnership dissolutions and bankruptcies are significant. No longer will law firms have to squabble over "Jewel waivers," as partnership agreement provisions intended to circumvent the Jewel v. Boxer rule are called; the Court said these are no longer necessary. No longer will partners leaving dissolving firms have to worry that other law firms won't hire them because they would have to disgorge the profits from their work. And, most importantly, no longer will clients have to be concerned that they will lose their lawyer of choice because that lawyer cannot convince her new firm to take on a matter from which the firm will earn no profit.
The implications for lawyers and clients are even broader. The Court of Appeals re-affirmed the basic principle, asserted 25 years ago in Cohen v. Lord Day & Lord, that lawyers should be as free as possible to move from firm to firm, without unwarranted financial restrictions. It reaffirmed that this principle of lawyer mobility takes precedence over the need to hold law firms together. And, most importantly, it reaffirmed that a client controls the attorney-client relationship and should be permitted to retain his or her lawyer of choice if at all possible, regardless of the consequence to the lawyer's partners, employees or creditors.
Ronald Minkoff, the head of the Frankfurt Kurnit Legal Ethics and Professional Responsibility Group, was a co-author of the amicus brief filed jointly on behalf of the New York State Bar Association, the New York City Bar Association and the New York County Lawyers' Association.
If you have any questions about law firm partnership matters, or any other legal ethics matters, please contact Ron Minkoff at (212) 705 4837 or email@example.com, Nicole Hyland at (212) 826 5552 or firstname.lastname@example.org, Richard Maltz at (212) 705 4804 or email@example.com or any other member of the Frankfurt Kurnit Legal Ethics & Professional Responsibility Group.
Other Legal Ethics and Professional Responsibility Alerts
California Supreme Court Holds that Conflict Invalidates Firm’s Engagement Letter But Says Firm Still May be Able to Get Paid
Last week, the California Supreme Court issued its decision in Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., a decision which lawyers and law firms anxiously awaited for months. Read more.
September 4 2018
N.Y. State Bar Ethics Committee Takes On Avvo Legal Services, Says Model Violates Ethics Rules
Recently the New York State Bar Ethics Committee issued a pair of opinions about the limitations on a lawyer's ability to take advantage of certain on-line legal marketing services. Read more.
August 31 2017
Non-Party Has Sufficient Interest to Disqualify Law Firm from Second Circuit Case
At the request of a non-party, the US Court of Appeals for the Second Circuit recently disqualified the law firm BakerHostetler LLP ("Baker") from representing its client Prevezon Holdings Ltd. ("Prevezon"). Read more.
October 24 2016