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Syllabus
Appropriate arrangements for a responsible successor or successors may be made by lawyers whether they are practicing as sole practitioners, as partners or as members of a professional corporation provided that necessary safeguards are observed and payments from the successor or successors are limited to payments for tangible assets and accounts receivable. In no event may payments be measured by future earnings, and it is ethically improper to sell or attempt to sell good will or the right to represent clients.
Facts
The question with which this Opinion is concerned arose when an advertisement appeared in a national business newspaper circulated widely in the Denver metropolitan area, indicating that the practice of a Denver lawyer was for sale. In addition, there exist various other means of making known the desire for the sale of the practice of a given lawyer or law firm, including practice brokers. Frequently older lawyers desiring to retire from the practice or representatives of estates of attorneys who have died while having an active practice desire to sell a law practice.
Question
May a lawyer ethically sell his practice to another lawyer or may a lawyer ethically agree to pay the estate of a deceased lawyer for the practice of that deceased lawyer?
Discussion
Sale of more than tangible assets is improper. It has been widely concluded that no sale of clients' files or good will is ethically proper, and that any sale of more than the tangible assets is improper. Such sales appear to violate a number of Canons, including 2, 3, 4, 5, and 7, and have been condemned by all ethics committees considering the matter (e.g., ABA Committee on Professional Ethics, Opinions No. 300 (1961) and 266 (1945); Association of the Bar of the City of New York, Committee on Professional Ethics, Opinions No. 633 (1943) and 588 (1941), printed in Opinions of the Committees on Professional Ethics of the Association of the Bar of the City of New York and the New York County Lawyer's Association (1956)). Such sales will ordinarily not be enforced by the courts (O'Rear v. Commissioner, 80 F.2d 473, 474-5 (6th Cr. 1935) (dictum); Little v. Caldwell, 101 Cal. 533, 36 P. 107, 109 (1894); Lyon v. Lyon, 246 Cal. App.2d 519, 54 Cal. Rptr. 829 (1966); In re Martin's Estate, 178 Misc. 43, 33 N.Y.S.2d 81 (Sup. Ct. 1941)).
It has been considered proper, however, for a lawyer who is a member of a partnership or his estate to receive, by making appropriate advance arrangements, compensation on his death or retirement or separation from the law partnership of which he is a member, which compensation is for his interest in the partnership (DR 2-107(B) and DR 3-102(A)(1)).
This distinction has had the effect of allowing lawyers practicing in a partnership ethically to achieve in part what sole practitioners may not achieve at all. Heretofore, justification for this distinction has been based on the existence of safeguards present in a partnership but absent from a sole proprietorship. We believe, however, that the propriety of arrangements should be determined by whether the actual transaction, regardless of the form of practice, affords the clients and the public substantial protections which meet the tests of the Code of Professional Responsibility.
A sale of practice involves certain aspects beyond the sale of tangible assets. These typically include, in order to make the sale effective: (a) turning over client files to the successor; (b) advising the clients of the change, which advice includes either direct or indirect suggestions or recommendations that the successor is a worthy replacement; (c) restrictive covenants on the selling lawyer, if he is alive; and (d) payment of an amount of money which, whether it is a fixed sum or percentage of fees, reflects a value for the right to represent or to in effect solicit the clients of the selling lawyer.
A clear case can be made that such a transaction threatens the interests of clients in several ways. It may create a situation where the selling lawyer is recommending the successor when the selling lawyer has a personal, financial stake in the success of the purchasing lawyer--a clear conflict of interest. Although Canon 2 states that the lawyer has the duty to assist in making legal counsel available, it is equally clear that his advice and recommendation must be disinterested, and that he cannot accept compensation for his recommendation (EC 2-8), nor can such compensation be paid to him by his successor (DR 2-103(B)). If it is considered that he is rendering a service to his client in recommending a successor, any fee for this service should come directly from the client, unless full disclosure of third-party payment is made (EC 2-21).
The second difficulty is that the transfer of a client's file breaches the duty of a lawyer to preserve the secrets and confidences of a client as required by Canon 4. Ethical Consideration 4-6 makes clear that this Canon prohibits a sale of a law practice and also makes clear that a lawyer's duty to preserve secrets and confidences survives his termination of practice.
Finally, such a sale may well result in fee-splitting of a kind prohibited by the Canons. Attorneys may share fees only on the basis of services or responsibilities and only with the full consent of a client, and the total fee shall not exceed the reasonable compensation for all legal services rendered (DR 2-107(A)). Payment by an attorney of part of his fee to another as a percentage for the purchase of a practice very likely results in violation of the above disciplinary rule. It also may tend to induce the second attorney to overcharge either by setting the fee higher than he would otherwise set it or by hurrying through the work and rendering service of low quality.
Duties to the public. The Canons make clear that lawyers have certain duties to the public as well as to their individual clients. The public has an interest in ensuring that lawyers will be independent and that individuals will not be misled when selecting attorneys. These interests are threatened when a selling attorney solicits clients for his successor or agrees to adhere to restrictive covenants as part of the sales agreement or when the purchasing attorney practices under a misleading name.
When a retiring lawyer recommends a successor under the above circumstances, he becomes in effect a solicitor of business for the successor and is being paid for doing that. If a recommendation is to be given to a layman, the recommendation should be free of influence from the designated attorney (EC 2-3, 2-4, 2-6, 2-7, 2-8). Likewise, an attorney is forbidden from requesting recommendations (DR 2-103). Thus, the recommendation by the seller and the acceptance of the fruits of the recommendation by the buyer in the circumstances of such a sale are unethical. Restrictive covenants, designed to make the sale effective by protecting the purchaser against the seller's setting up practice in the vicinity and continuing to serve his clients, are prohibited (DR 2-108). The only exception relates to a partnership situation.
Finally, purchase of the practice often includes a right to continue to use the name of the seller of the practice. Sometimes this even entails the brief association together of the two men in practice. Unless it is a true partnership, such an arrangement is misleading and violates the prohibitions of the Code against such practices (EC 2-11). It is also contrary to previous opinions of this committee (Opinions 8 and 9).
Practices permissible in a partnership. The situation is said to be substantially altered when a true partnership practice situation exists. Although a partner may not sell his interest to an outsider any more than a sole practitioner may, and for substantially the same reasons (N.Y. City Bar Ass'n. Opinions, No. 633 (1943)), he may ethically achieve much the same result by prior arrangement with his partners.
The Code specifically allows payment to be made to a retired partner pursuant to a prior agreement (DR 2-107(B)), or to a deceased partner's estate (DR 3-102(A)(1)). Ethical Consideration 3-8 states that the pecuniary interest of a deceased partner's interest in his law firm may be paid to the estate and ABA Opinion No. 327 holds that it is permissible under the Code for a law firm to:
make payments to a retired partner or for a fixed period to the estate of a deceased partner in accordance with a pre-existing retirement plan, the amount of those payments being measured by subsequent earnings of the firm.
If a partnership dissolves as a result of the death or retirement of a partner, the survivors may attempt to persuade the clients of the firm to remain with them because they are clients of the firm and, in fact, the survivors have a duty to take care of the affairs of these clients. Partners may disclose the affairs of the clients among themselves and their associates (EC 4-2) and, therefore, no difficulties in preserving confidences and secrets are present when one partner dies or withdraws, since the secrets are or could properly be known to the remaining partners.
The Code permits partners of a firm to restrict the right of a retiring member to practice law as a condition of the payment of retirement benefits (DR 2-108(A)).
Finally, partners may retain the name of a former partner in the firm if he does not continue in practice elsewhere (EC 2-11).
Succession in partnership and sole practice distinguished. The Code makes clear that a substantial distinction is drawn between sole practitioners and lawyers who practice in partnership. The distinction is justified on the basis of the fact that the differences between practice in the form of a partnership and in the form of a sole practitioner are significant and provide real and different protections to the client.
A conflict of interest may be present in the sole practitioner's choice of a successor. The risk is that the seller of a one-man practice may be more interested in obtaining a successor who is willing to pay the higher price rather that one who is best suited to his clients. The clients of a lawyer who has practiced in a partnership, however, are not imperiled by the payment of retirement or death benefits as a condition of succeeding to the representation of the departing lawyer's clients for two reasons. The first is that a partnership's process of choosing a new member ensures that in most cases points of view other than those of the retiring partner (or of the deceased partner's estate) will be represented. The death or retirement of a partner, unlike that of a sole practitioner, does not require the immediate selection of a successor with the bargaining inherent in such a procedure. Furthermore, retirement or death benefits are determined by the partnership long before there is actual need to pay them.
Secondly, the interests of a partnership in selecting a new member are generally the same as the interests of its clients because the existing partners' financial success and reputation depend upon the quality of performance of the new partner with whom they must practice for a number of years. In addition, where the partnership operates in true partnership fashion and the other members and associates have at least occasionally handled the client's affairs, the client probably is not only acquainted with the work of the remaining partners, but also fully aware of the qualifications of the firm as a whole and has probably contracted with the firm as a whole.
The retention of a partner's name in a partnership is not misleading to the public if it is the custom in the community for the partnership to retain the name of the retired or deceased partner because typically the reputation and prestige attached to the partnership name which includes the name of the retired or deceased partner is the product of the efforts of all of the members whether or not they are named and the quality of representation and the continuity of it are not likely to be significantly altered. This is generally not true of a sole proprietorship.
The position of this Committee. The first and natural inclination of this Committee is to follow the apparently unanimous precedent and recognize and rely on the distinction drawn by the Code of Professional Responsibility for the reasons outlined above. We have concluded, however, that to rely solely on the distinction in form of practice ignores the important issue of whether necessary safeguards are actually present. A sole practitioner, no matter how carefully he considers the acts or plans for the benefit of his clients on his retirement or death, is deprived of financial benefits which become available to him if he has the legal form of a partnership. A sole proprietor could, under the decisions cited earlier, achieve all the financial objectives of a sale by the simple expedient of making the purchaser his partner for six months.
We are aware that there exist law "partnerships" wherein each partner has a separate and independent practice and earnings are tied solely to the individual partner's fee, and in which the only element of partnership is the joint and several liability to the general public. In such a case the existence of joint liability does appear to guarantee that sound judgment about integrity and professional competence will be exercised in selecting partners, but it is difficult to justify the distinction between partnership and sole proprietorship on this basis alone.
Accordingly, the Committee does not base its opinion on the formal difference between partnership practice and a sole proprietorship. We recognize that the Code of Professional Responsibility has allowed partners to achieve certain financial goals on retirement and we accept this fact. We feel, however, that sole proprietorships should be able to achieve the same goals without the formality of the partnership form provided certain standards are observed and safeguards are present. Further, we feel that many sole proprietors are just as concerned to assure that their clients will have the services of a competent successor on their retirement from the practice as are partners choosing younger partners.
We conclude therefore that a sole proprietor may enter into arrangements with a successor lawyer to make the services of the successor available to his clients. He may receive payments from the successor over a period of time, which payments may have their source in fees earned by the successor. The amount of the payment, however, must be based on and limited to accounts receivable due to the retiring lawyer, the value of services already performed and not yet billed, the value of tangible assets transferred, and a reasonable interest factor for time payments. Under no circumstances may the payment be based on or measured by future fees from clients served by the successor, nor may it contain any element for good will or going business value.
We further conclude that the arrangements in a partnership allowed by ABA Opinion 327 are not proper. ABA Opinion 327, allows in a partnership what we here condemn in a sole proprietorship. We disagree with Opinion 327 because it allows payment for clients or good will by allowing payments to be based on or measured by future fees. Selling clients is prohibited by the Professional Code, and this amounts to selling clients. It is just as improper for a partnership as it is for a sole proprietorship. We are of the opinion that no partnership may properly measure retirement benefits by fees earned after retirement any more than a sole proprietor may sell on that basis.
Conditions for transfer. We feel these limits on the amount and measure of payment provide substantial protection against the abuses otherwise feared to be present in the transfer of clients by a sole proprietor upon retirement. However, other safeguards must be observed. The choice of a successor must be accomplished with dignity and decorum and may not be achieved through commercial advertisements, practice brokers, or other commercial arrangements for locating successors. A dignified announcement in professional journals or bar publications seems appropriate, but there should be no element of commercialism in the transaction.
The sole proprietor has an ethical obligation to assure himself, by diligent effort, of the integrity and professional competence of any proposed successor. He must take reasonable and effective steps to investigate and ascertain these qualities in the successor. If he cannot satisfy himself about these qualities, he is not justified in proceeding forward. Having done so, he is justified in assuring his clients of the integrity and competence of the successor, so long as it is only an assurance and not a sales effort.
He may advise his clients of his intended retirement and proposed successor and allow his clients to authorize him to communicate with his proposed successor concerning their matters. He must, however, make clear the clients' right to refuse such authorization and their right to take their business elsewhere.
A sole proprietor may not allow the continued use of his name by the successor, nor may he enter into agreements restricting his own right to practice law. It should be noted that by this opinion we approve the transfer of a practice by a sole proprietor only under the circumstance of complete and permanent retirement from the practice of law in the geographical area of his practice. Thus the question of restrictive covenants is made irrelevant.
With respect to the unanticipated death of a sole proprietor and the transfer of his practice, we believe that a foresighted lawyer should make arrangements with another lawyer or lawyers whom he trusts and respects to act in his place in locating a successor. Whether or not such a person is designated, the transfer of the practice is subject to the conditions stated in this Opinion and can be made only under the supervision of a practicing attorney who is bound by and observes the ethical standards for such a transfer as outlined herein. We recognize that this means that a spouse or children cannot achieve such a transfer without the assistance of someone who is bound by these standards of ethics. We feel, however, that the protection of the public generally requires this, and it would be improper for an attorney to undertake to succeed a deceased lawyer in his practice where the foregoing conditions have not been met.
The subject of this Opinion has received much attention lately and we suggest that for a more elaborate treatment of the subject James K. Sterrett's article, "The Sale of a Law Practice," 121 University of Pennsylvania Law Review 308 (Dec. 1972) be consulted. The article is also summarized in The Practical Lawyer for May of 1973. | 
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