Succession Planning: Professional conduct rule may impede firm succession

In the last two articles we looked at some of the forces restraining law practice succession planning. In this article we will look in depth at Rule 1.17 of the Rules of Professional Conduct. Believe it or not, Rule 1.17, which deals with the sale of a law practice, is a restraining force in law practice succession planning. There are good reasons for this rule, such as putting our clients’ interests before our own, but no other profession faces the restrictions an attorney has when selling a law practice.

Does a law practice have a value that includes “good will?” I have asked several attorneys that question and received different answers. Let’s look at our profession’s history to clear up this confusion.

Before 1990, an attorney couldn’t buy or sell a law practice, and a law practice did not have any “good will.” An attorney could only sell tangible assets — e.g. buildings, books, furniture and equipment. However, in 1990, the American Bar Association adopted Model Rule of Professional Conduct 1.17 on the sale of a law practice. This new rule rejected the prior prohibition on the sale of a law practice and allowed an attorney or a law firm to sell or purchase a law practice or a portion of a law practice, including its “good will,” if certain conditions are met. Indiana did not adopt a version of Model Rule 1.17 until 1998, so unless an Indiana attorney admitted prior to 1998 learned of Rule 1.17 and the changes it made in the selling of a law practice, they would believe that their law practice has no “good will” to sell.

Let’s take a closer look at the conditions under which Indiana’s Rule 1.17 would allow for the sale of a law practice. First, the selling attorney or law firm must cease to engage in the private practice of law in the geographic area in which the practice has been conducted. If only a portion of the practice is being sold, the attorney or law firm must cease to engage in that area of law in the geographic area in which the practice has been conducted.

Second, the entire or a portion of the law practice must be sold to one or more lawyers or law firms. It may not be sold to nonlawyers or businesses that are not law firms governed by Indiana’s Rules of Professional Conduct.

Third, Rule 1.17 requires the selling attorney to give written notice to each client of the proposed sale that includes an explanation of the client’s right to retain other counsel or take possession of their file. The client has 90 days to object to his or her files being transferred to the acquiring attorney or law firm or their consent to the transfer is presumed

Finally, the fees charged to the acquired clients shall not be increased by reason of the sale.

These requirements are understandable and were instituted to protect our clients. However, two of them pose substantial obstacles to a succession plan that involves the sale of an entire or part of a law practice.

The written notification can act as a restraining force to succession planning. As attorneys, we understand that we provide personal services and we can’t sell our clients. Rule 1.17 puts the clients’ interests first by requiring written notice to them of the prospective sale and inviting them to seek other counsel if their original attorney wants to sell that law practice. Determining who requires notice and providing that notice can be an overwhelming administrative undertaking. Do you only give notice to current clients or all former clients? The rule and the accompanying comments are silent on determining which clients are to be notified. Additionally, the potential of clients choosing to employ other counsel also lessens the value of a law practice.

The restriction on increasing fees because of the sale of the practice also acts as a restraining force to succession planning. Such a restriction fails to recognize that senior attorneys have often stopped increasing their rates with the market during their later years of practice, so such rates may be drastically below market rates.

There are some law practice succession planning options that can work around the requirement of giving written notice to clients but embody the spirit of Rule 1.17’s protection of clients and their interests. Instead of an outright sale, the practitioner might consider merging a practice with another attorney or law firm, or moving to an of counsel role with another attorney or law firm and continue with that law practice for a year or more. This would preserve Rule 1.17’s requirement for open communications with clients about the merger or attorney’s changing role while also allowing for a transition over time where the clients’ legal needs can be adequately serviced. The new attorney or law firm can be introduced to the other attorney’s clients and their matters carefully transitioned.

If a law practice succession plan includes the outright sale of a law practice, Rule 1.17 and its comments should be carefully examined and followed. In recent years, there have been some open questions about Rule 1.17. In October 2014, the ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 468 — Facilitating the Sale of a Law Practice. This formal opinion addressed Rule 1.17’s impact on solo practitioners and the transition of client matters when a practice is sold.

In our next article we will seek to answer the question, “What are my options when it comes to developing a succession plan?”•

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• Don Hopper is the founder of Hopper Legal Consulting Services and a partner at Harrison & Moberly LLP. His focus is serving solo and small law firms in developing law practice succession plans that will continue their legal legacies in their Indiana communities. The opinions expressed are those of the author.