Editor’s note: This is the final part of a three-part series on the valuation of a law firm. Part 1 discussed operational and financial considerations, and the second part focused on valuation considerations. The series is based on a CLE paper Kramer and White presented at LAJ’s 2017 “Last Chance” CLE program. It was edited for Louisiana Advocates.
The Louisiana Code of Professional Responsibility sets forth rules governing the sale of law firms that may affect their valuation.
For example, upon the sale of an entire law firm,1 which is allowed under certain conditions, the entire law practice or area of law practice must be sold. Firms cannot be sold “piecemeal.” If an area of practice is sold and the selling lawyer remains in the practice of law, that lawyer must cease accepting matters in the area of practice sold, either as counsel or co-counsel.
Bennett, et al., Annotated Model Rules of Professional Conduct, Rule 1.17 cmt [5] has been interpreted to mean that a sole practitioner cannot sell his or her practice and then work as an employee or independent contractor for the purchaser. Me. Ethics Op. 2010 (2014). However, some states (e.g., Nebraska) allow the selling lawyer to serve “of counsel” with the same firm. Neb. Ethics Op. 13-03 (n.d.). (Nebraska’s version of the rule omits the prohibition on continuing in private practice after sale of firm; Louisiana’s rule includes the prohibition.) See Annotated Model Rules, 296.
“The purchasing lawyer is required to undertake all client matters in the practice or practice area, subject to client consent.” Id. at Rule 1.17 cmt [6]. The client’s unqualified right to discharge the lawyer and transfer representation to another continues after the sale. Id. at Rule 1.17 cmt. [9]. The sale may not be financed by an increase in fees; the existing fee structure must be honored by the purchaser. Id. at Rule 1.17 cmt. [10].
Under Rule 1.1, the seller has an obligation “to exercise competence in identifying a purchaser qualified to assume the practice and the purchaser’s obligation to undertake the representation competently. Id. at Rule 1.17 cmt. [11].
Rule 1.17 does not govern admission to or retirement from a law partnership or professional association. Id. at Rule 1.17 cmt. [14]. The rule is not concerned with the sale of tangible assets of a law firm. Id.
Rule 5.42 provides that “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.”
Note that Rule 1.17 does not allow a disbarred or suspended lawyer to sell his or her law practice.
While the sale of an entire law practice usually requires the retirement or resignation from practice of the selling lawyer—restricting their right to practice in the same jurisdiction—the same is not true of a partner simply leaving or joining a law firm.
Noncompetition agreements are not generally permissible in these circum-stances under Rule 5.6.3 Such noncompetition agreements would not only limit the professional autonomy of lawyers, but also prevent clients from exercising their right to select the attorney they desire.
“The Rules are designed ‘to serve the public interest in maximum access to lawyers and to preclude commercial arrangements that interfere with that goal,’ the ‘plain meaning (of Rule 5.6) indicates that any provision, whether direct or indirect, that operates so as to restrict a lawyer’s post-termination practice will contravene the ethical rule.’” Minge v. Weeks, 629 So.2d 545, 547 (La.App. 4 Cir. 1993) (citing Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 607 A.2d 142, 146 (N.J.1992)).
These ethical considerations make the sale of a law firm an all-or-nothing process. In the state of Louisiana, there can be no sale of a law firm without selling the whole practice, or practice area, and retirement of the selling lawyer. Thus, a hypothetical buyer of a law firm would likely consider the impact of the all-or-nothing process in determining the value of the firm, as the hypothetical buyer might consider the risk that other partners in the law firm may not wish to sell the law firm.
Therefore, the hypothetical buyer might reduce the offered price for the law firm to compensate for the risk that other partners may be unwilling to sell the law firm or practice area.
Similarly, a law firm’s hypothetical seller would likely also consider the requirement to sell the whole practice, or practice area, in determining the value of the firm, as the hypothetical seller might be required to sell assets in which the seller would otherwise desire to retain ownership.
Thus, a hypothetical seller might increase the offered price for the law firm to compensate for the sale of additional assets or practice areas not contemplated in the initial agreement.
1. A lawyer or a law firm may sell or purchase a law practice, or an area of law practice, including good will, if the following conditions are satisfied:
- (a) The selling lawyer has not been dis-barred or permanently resigned from the practice of law in lieu of discipline, and permanently ceases to engage in the practice of law, or has disappeared or died;
- (b) The entire law practice, or area of law practice, is sold to another lawyer ad-mitted and currently eligible to practice in this jurisdiction;
- (c) At least ninety (90) days in advance of the sale, actual notice, either by in-person consultation confirmed in writing, or by U.S. mail, is given to each of the clients of the law practice being sold, indicating:
- (1)the proposed sale of the law practice;
- (2) the identity and background of the lawyer or law firm that proposes to acquire the law practice, including principal office address, number of years in practice in Louisiana, and disclosure of any prior formal discipline for professional misconduct, as well as the status of any disciplinary proceeding currently pending in which the lawyer or law firm is a named respondent;
- (3) the client’s right to choose and retain other counsel and/or take possession of the client’s file(s); and
- (4) the fact that the client’s consent to the transfer of the client’s file(s) will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of the notice.
- (d) In addition to the advance notice to each client described above, at least thirty (30) days in advance of the sale, an announcement or notice of the sale of the law practice, including the proposed date of the sale, the name of the selling lawyer, the name(s) of the purchasing lawyer(s) or law firm(s), and the address and telephone number where any person entitled to do so may object to the proposed sale and/or take possession of a client file, shall also be published: 1) in the Louisiana Bar Journal; and 2) once a week for at least two (2) consecutive weeks in a newspaper of general circulation in the city or town (or parish if located outside a city or town) in which the principal office of the law practice is located. The announcement or notice required by this Rule does not fall within the scope of Rules 7.1 through 7.10 of these Rules.
- (e) The fees or costs charged clients shall not be increased by reason of the sale.
- (f)
- (1) A lawyer or law firm that proposes to acquire a law practice may be provided, initially, with only enough information regarding the matters involved reason-ably necessary to enable the lawyer or law firm to determine whether any conflicts of interest exist. If there is reason to believe that the identity of a client or the fact of representation itself constitutes confidential information under the circumstances, such information shall not be provided to the purchasing lawyer or law firm without first advising the client of the identity of the purchasing lawyer or law firm and obtaining the client’s informed consent in writing to the proposed disclosure.
- If the purchasing lawyer or law firm determines that a conflict of interest exists prior to reviewing the information, or determines during the course of re-view that a conflict of interest exists, the lawyer or law firm shall not review or continue to review the information unless the conflict has been disclosed to and the informed written consent of the client has been obtained.
- (2) A lawyer or law firm that proposes to acquire a law practice shall maintain the confidentiality of and shall not use any client information received in connection with the proposed sale in the same manner and to the same extent as if the clients of the law practice were al-ready the clients of that acquiring lawyer or law firm.
- (g) Consistent with Rule 1.16(c) of these Rules, before responsibility for a matter in litigation can be sold as part of a law practice, any necessary notice to and permission of a tribunal shall be given/obtained.
- (h) Notwithstanding any sale, the client shall retain unfettered discretion to terminate the selling or purchasing lawyer or law firm at any time, and upon termination, the selling or purchasing lawyer in possession shall return such client’s file(s) in accordance with Rule 1.16(d) of these Rules. La. St. Bar Ass’n. Art. XVI § 1.17 (emphasis added).
2. a. A lawyer or law firm shall not share legal fees with a non-lawyer, 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 undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer;
- 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; and
- 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; and
- a lawyer may share legal fees as otherwise provided in Rule 7.2(b).
b. A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.
c. A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.
3. A lawyer shall not participate in offering or making:
- a. a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or
- b. an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy. La. St. Bar Ass’n. Art. XVI § 5.6.
