The D.C. Court of Appeals puts to rest the question of who owns the unfinished business from Howrey’s meltdown, and it’s not the estate.
It’s the third appellate ruling that bankrupt or dissolved law firms don’t have a property interest in hourly billed client matters former partners brought with them to their new firms.
New York, California, and Washington, D.C., where the vast majority of AmLaw 200 law firms operate, agree it’s the client who owns the business, not the firm.
The ruling also ends a 35-year-old doctrine that influenced law firm bankruptcies and lawyer mobility across the country until the 2008 Great Recession shook up the industry and the rule.
“This is the death knell to the unfinished business doctrine,” said Leslie D. Corwin, co-author with Arthur J. Ciampi of Law Firm Partnership Agreements (2014).
“It took how the Great Recession hit some of our major household law firms to result in three litigations which have now finally clarified this issue,” said Corwin, managing partner of the Eisner’s New York office and a restructuring specialist.
Howrey specialized in antitrust litigation and had more than 700 lawyers worldwide and $573 million in revenue at its peak. Overexpansion, declining productivity, and lax management of client billings were all reasons cited for its dissolution in 2011.
The D.C. court echoed the conclusions of the other two state courts, as well as arguments by eight law firms that sued in the U.S. District Court for the Northern District of California over a bankruptcy court ruling favoring Howrey.
Howrey filed for bankruptcy in 2011 and sued dozens of law firms and lawyers for a cut of business not completed when the lawyers left.
The firms, which included Morrison & Foerster; Hogan Lovells US; Jones Day; Sheppard, Mullin, Richter & Hampton; Seyfarth Shaw; Perkins Coie; Pillsbury Winthrop Shaw Pittman; and Kasowitz, Benson, Torres & Friedman, argue clients have the right to choose their counsel. The district court agreed that a defunct firm shouldn’t get a pay day for work it can’t do.
“Absent the client’s consent, to allow a law firm to share in profits that it has not earned would reduce clients’ freedom of choice,” the D.C. court said.
Hourly billed client matters aren’t partnership property and former partners owe no duty to their former firms to remit new profits earned, the Feb. 13 ruling said.
The ruling returns the Howrey case to the U.S. Court of Appeals for the Ninth Circuit, which is hearing the estate’s appeal.
The Ninth Circuit in February 2018 asked the D.C. court to answer how much interest the first partnership has in client matters started at one firm that later dissolves and completed at another.
The Ninth Circuit also asked to what extent the new firm has to account for profits to the dissolved firm’s estate. Howrey was incorporated in D.C. and filed for bankruptcy in San Francisco.
It was the latest stop for Jewel v. Boxer. The decision held that absent a partnership agreement, attorneys’ fees received on cases in progress upon dissolution must be shared by the former partners.
The doctrine first fell in New York with the Thelen LLP bankruptcy and then in California with the Heller Ehrman LLP implosion.
The decision comes as lawyers increasingly are changing firms and bringing their practices including other lawyers and support staff with them, said Robert Hillman, a retired University of California Davis law professor and expert on lawyer mobility.
It also follows the American Bar Association’s December ethics opinion that lawyers have the right to leave a firm and practice at another.
“There really isn’t much that law firms can do from a drafting or legal perspective to address mobility losses. If there is a solution, it lies in management of the law firm” and how firms resolve competing factions, said Hillman.
“It’s not just a question of drafting a clever clause in your law partnership agreement. The issues are much deeper and more profound,” Hillman said.
Neither Shay Dvoretzky, with Jones Day in Washington who argued for the firms, nor Christopher Sullivan, Diamond McCarthy partner in San Francisco who argued for the trustee, could be reached for comment.
Case is Diamond v. Hogan Lovells US, LLP, D.C. Ct. App., No. 18-SP-0218, 2/13/20.