Summary:
The purchase price of the practice of a lawyer
taking retirement status pursuant to Rule 4:02 may include a
portion of legal fees earned in the future from representation of
current and former clients of the retiring lawyer. It may not,
however, include a portion of legal fees earned from representation
of new clients referred by the retired lawyer.
Facts: A lawyer
inquires whether in purchasing the practice of a lawyer retiring
pursuant to Rule 4:02, a portion of the purchase price may involve
a percentage of legal fees to be earned from future business of
current and former clients of the retired lawyer. The inquiry also
asks whether some of the contemplated payments may include work
that will result from the referral of new clients by the retired
lawyer.
Discussion: When the Supreme Judicial Court in
1998 adopted Massachusetts Rule of Professional Conduct (MRPC)
1.17, which permits the sale of a "law practice, including good
will," on certain conditions, it left untouched a number of other
Rules that relate to the main issue presented by this inquiry.
In the first place, Rule 4:02(5), by making a retired lawyer
ineligible to practice law, except in a supervised pro bono
setting, indicates that retired lawyers are not lawyers who are
permitted to receive compensation for legal services. Moreover,
MRPC Rule 5.4(a) provides, in relevant part, (a) A lawyer or law
firm shall not share legal fees with a nonlawyer, except that:
- an agreement by a lawyer with the lawyer's firm, partner, or
associate may provide for the payment of money, over a reasonable
period of time after the lawyer's death, to the lawyer's estate or
to one or more specified persons;
- a lawyer who purchases the practice of a deceased, disabled, or
disappeared lawyer may, pursuant to the provisions of Rule 1.17,
pay to the estate or other representative of that lawyer the agreed
upon purchase price;
- a lawyer or law firm may include nonlawyer employees in a
compensation or retirement plan, even though the plan is based in
whole or in part on a profit sharing arrangement; . . .
Rule 5.4(a) states the governing principle that a lawyer may not
share fees with a nonlawyer except in three circumstances, none of
which apply to the facts set forth in this inquiry. The first
scenario clearly does not apply. The second, which applies to sales
of law practice, permits the payment of the purchase price to the
nonlawyer representative of a deceased, disabled, or disappeared
lawyer. It does not include representatives of retired lawyers or
retired lawyers themselves. The third scenario involves the
inclusion of a nonlawyer employee of a law firm or lawyer in a
retirement plan. That is not the scenario of this inquiry.
Rule 7.2(c) provides, in relevant part that "A lawyer shall not
give anything of value to a person for recommending the lawyer's
services, except that a lawyer may . . . (3) pay for a law practice
in accordance with Rule 1.17; [and] (4) pay referral fees permitted
by Rule 1.5(e). . . ." While Rule 7.2(c) makes an exception for the
sale of a law practice, it does not explicitly deal with the issue
of sharing future legal fees.
We are thus faced with reconciling the spare words of Rule 1.17,
permitting sale of a "law practice, including good will" with the
explicit prohibitions that existed prior to the adoption of that
Rule. The New York State Bar Association has recently considered
this very question in its Opinion 961 (2013). Much of its
discussion deals with New York's very different rules relating to
the sharing of referral fees. However, we agree with the underlying
reasoning of the Opinion as its relates to the permission granted
by Rule 1.17 to sell "good will." The Opinion states:
By its nature, the inclusion of "goodwill" in a sale of a law
practice entails a payment on account of legal fees that the buyer
is expected to receive in the future. There is no question that the
parties to the sale could attempt to assign a present value to that
flow of fees and include that value in a lump-sum purchase
price. . . . But it can be very difficult to assign a present
value to an on-going book of business of a law practice, and even
more difficult to estimate what value will flow from new business
that may come to the law practice on account of the reputation and
contacts built up by the selling lawyer over time. And young
lawyers who are the typical buyers of law practices often do not
have access to capital to provide upfront payments for goodwill in
any case. The question presented is the extent to which lawyers can
structure the payment for the law practice as a payout over time
measured by the actual fees earned by the practice after the
sale.
We conclude that Rule 1.17 must be viewed as an exception to
Rule 1.5(g) [New York's referral rule] - that is, that the payment
for "goodwill" that is explicitly permitted by Rule 1.17 permits a
payment that is made in the future after the fees that reflect
"goodwill" are earned. We reach this conclusion for several
reasons. First, we think that Rule 1.17 should be viewed as the
more specific of the two rules - targeted as it is to a particular
setting in which lawyers might wish to share fees - and thus
subject to the interpretive principle favoring the more specific
rule over the more general. Second, a lump-sum payment for goodwill
is intended to be economically identical to the present value of
the actual fees earned over time. The rules should be as
transparent and rational as possible, so in the absence of a strong
reason to the contrary, parties to a sale of a law practice should
be able to use a method of payment that is the economic equivalent
of one that is clearly permitted.
Third, we note that Rule 1.5 itself contemplates payments of
fees over time in the closely analogous setting of a lawyer who
leaves or retires from a law firm and receives a payment for his or
her interest in the firm in the form of a separation agreement or
retirement package. . . . [See MRPC 1.5(e).] Likewise, Rule
5.4(a)(1) permits law firms to agree with lawyers in the firm to
share legal fees with the estate of a lawyer in the firm, or with
anyone else, "over a reasonable period of time after the lawyer's
death." If a lawyer leaving a law firm, or the lawyer's estate, may
receive a portion of future fees earned on account of the goodwill
of the firm that the lawyer helped to build up, we see little
reason why a lawyer retiring from a solo practice should be barred
from structuring a payment similarly. Comment [1] to Rule 1.17
fortifies this analogy. It states, "Pursuant to this Rule, when a
lawyer or an entire firm ceases to practice, and other lawyers or
firms take over the representation, the selling lawyer or firm may
obtain compensation for the reasonable value of the practice, as
may withdrawing partners of law firms." (Emphasis added.) Indeed,
equalizing the treatment of retiring members of law firms and
retiring sole practitioners was the principal purpose of the Rule
permitting sales of law firms. One of the impetuses for adopting
Rule 1.17 was the previous practice of "quickie partnerships,"
whereby a solo practitioner would take on a junior partner for a
short period before retiring under a retirement package that
provided for an extended payout.
We recognize that there are counter-arguments to these points.
One could conclude that the express exception for fees paid as part
of a separation or retirement agreement, when there is not one for
sale of a law practice, means that fees may not be shared in the
latter context. We are not persuaded by that counter-argument,
however, because, as noted above, we perceive no reason for making
that distinction, particularly in light of the policy underlying
the Rule to equalize the treatment of retirements from law firms
and sales of law practices.
We also recognize that the purposes of the prohibition on fee
sharing are implicated, at least in part, by any provision for fee
sharing after sale. For example, one purpose of the prohibition is
to limit the risk of outside influences on a lawyer's independent
judgment. A lawyer with an economic interest in a matter who is not
sufficiently involved in the work and does not take responsibility
for it may press the lawyer handling the matter to cut corners or
settle too early. . . . But these policies have often been
tempered by other considerations, as demonstrated by the exceptions
for retirement plans, separation agreements and agreements for
sharing fees with the estate of a lawyer in a law firm. . . .
After concluding that the permission to sell good will
authorized the sharing of legal fees from future business, the New
York committee went on the state a limitation to the principle:
While we approve in concept that goodwill in a sale of a law
practice under Rule 1.17 may be measured by future fees as actually
earned, we believe that there are necessarily limits to such
arrangements. The extent of fee sharing must bear a reasonable and
bona fide relationship to the value of the "goodwill" involved.
Even the most well-known lawyer's reputation and connections fade
over time. Any provision for fee sharing must therefore be limited
in amount and in time. The parties might agree, for example, that
the selling lawyer will receive 20% of the seller's net income for
three years. If that is a reasonable estimate of the value of the
"goodwill" of the practice, then Rule 1.17 permits it.
We agree with the general concept identified in the New York
Opinion that there is a limit to the amount and time involved in
sale of good will. However, MRPC 1.17 does not consider the details
of the permission granted as they relate to purchase price. Whether
in any particular agreement the receipt of a percentage of future
fees over a period of years constitutes in fact a permitted sale of
"good will" and not a prohibited division of legal fees with
someone not entitled to receive compensation for legal services
will depend on a number of factors, such as the size and income of
the firm being sold and the nature of its clientele. In the absence
of further guidance from the SJC, we are not in any position to
advise further on the specific provisions of any particular
agreement.
We also believe that in view of the tension that exists between
Rule 1.17 and the other Rules cited above, the better
interpretation of "goodwill" is one that is limited to the
potential of future business from the client base as it exists at
the time of sale. Sharing legal fees on account of payment by a
client with whom the retired lawyer had no legal relation either at
or previous to the time of sale seems more like a prohibited
sharing of legal fees with someone not entitled to receive
compensation for legal services than like a receipt from the sale
of good will. As the New York committee put it in its Opinion
961:
While the fact that a new client may have approached the selling
lawyer after the sale may be due to the lawyer's reputation, we are
concerned that permitting sharing of fees if the selling lawyer
refers the business to the buying lawyer implicates the different
set of policies barring payments for referrals under Rule
7.2. . . . Put another way, we do not see a payment for
business referred after the sale as simply a convenient method of
measuring the value of the goodwill of the practice, but rather
more as a payment for the new service of making the referral, and
such a payment is barred.
We conclude therefore that whatever computation is used to fix
the sale price of the good will of the practice being purchased, it
may not include fees earned from persons referred by the retired
lawyer who were never clients before the lawyer retired.
This opinion was approved for publication by the
Massachusetts Bar Association's House of Delegates on May 8,
2014.