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Case Summary: In the legal profession, the general rule is that lawyers cannot enter into agreements that restrict their right to practice after leaving a firm, except for retirement benefits. However, there is ambiguity in interpreting what constitutes a restriction. A recent Maryland appellate case, Jamie Bennett v. Ashcraft & Gere!, LLP, delved into this issue. The court held that a “Prenuptial Agreement” between Bennett and her former firm, which outlined a formula for dividing fees for cases that started at the firm but were resolved after her departure, did not violate professional conduct rules or restrict Bennett’s ability to represent clients. The court found the agreement enforceable under Maryland law and deemed it a reasonable attempt to predict a fair fee division. As a result of the ruling, Bennett will forfeit approximately $700,000 in disputed fees. This case provides insight into how different jurisdictions handle such agreements. Michigan, Minnesota, New Jersey, Louisiana, North Carolina, and the District of Columbia have all approved similar fee division agreements, as long as they are deemed fair and avoid unnecessary disputes. While the outcome is unfortunate for Bennett, who now owns her own law firm, she can take comfort in the fact that all the legal fees generated by her cases will now be hers to keep.
“You can’t take it with you” may be true for the afterlife – but what about for lawyers who depart their firms to start their own?
As a general rule, ABA Model Rule 5.6 provides that lawyers may not enter into
a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement
Thus, a firm can’t forbid lawyers from taking clients with them when they leave the firm by withholding pay or other benefits (except when it comes to retiring lawyers, which is a topic for another post because the Rule 5.6 and Formal Opinion 06-444 very likely violates the FTC’s proposed rule prohibiting non-competes)
Still, there’s a lot of ambiguity when it comes to interpreting whether an agreement “restricts” a lawyer from practicing after leaving a firm. Whether an agreement is unduly restrict was the subject of a recent Maryland appellate court case,
Jamie Bennett v. Ashcraft & Gere!, LLP. Attorney Bennett, a former partner at Ashcraft, challenged the enforceability of what the court referred to as a “Prenuptial Agreement” – i.e., a contract between the attorney and her former firm that provided a formula for division of fees for cases that began at the law firm but were resolved after the attorney’s departure. Bennett argued that the agreement, which awarded her roughly twenty five percent of the fee, restricted her ability to represent clients.
The court disagreed, holding that:
- The “Prenuptial Agreement” between Bennett and her former law firm Ashcraft, which provided a formula for dividing contingency fees for cases that departed attorneys took with them, did not violate the Maryland Attorneys’ Rules of Professional Conduct. The agreement did not restrict Bennett’s right to practice law or represent the firm’s former clients. Nor did it limit clients’ freedom to choose counsel.
- The Prenuptial Agreement was enforceable under Maryland common law and did not constitute an unlawful penalty. It represented a reasonable attempt to forecast a likely quantum meruit fee division. The court also observed that the firm had invested substantial resources in the case so the division was equitable.
With a ruling in favor of the firm, Bennett will forfeit around $700,000 of the disputed fees.
Mileage may vary in other jurisdictions. I asked Anthropic’s Claude to extract the other state cases from the opinion which have ruled on the validity of agreements like the Prenuptial Agreement for dividing contingency fees when attorneys depart a firm. Here’s the summary:
- Michigan – Upheld a sliding scale agreement dividing fees based on the stage of litigation when the attorney departed as a reasonable attempt to relate the firm’s fee entitlement to work done before departure. (McCroskey)
- Minnesota – Upheld a 50/50 fee split as not restricting an attorney’s practice, penalizing competition, or limiting client choice of counsel. Reasoned such agreements promote firm stability. (Barna)
- New Jersey – Approved a 50/50 fee split, distinguishing it from penalties for competition. Stated such agreements avoid disputes over fees when attorneys depart with contingent fee cases. (Kancher)
- Louisiana – Stated it approves of agreements that allow orderly division of fees upon a law practice breaking up and avoid unnecessary litigation between attorneys. (cited in Kancher)
- North Carolina – Approved agreements that include a formula for dividing fees based on time the client was with the firm before the attorney’s departure, as long as reasonably calculated to compensate the firm for resources expended. (Formal Ethics Opinion 2008-8)
- District of Columbia – Approved a sliding scale agreement dividing fees based on time case with the firm before departure and time with departing attorney before fee was realized. Stated it avoids disputes when attorneys take contingent fee cases. (Formal Opinion 221)
It’s an unfortunate outcome for Attorney Bennett but not a surprising outcome. Both the ABA Model Rules and judges seek to protect established firms. Still, Bennett can take solace in the fact that now that she’s a law firm owner, 100 percent of the legal fees for cases she generates will belong to her.