You're done with the practice of law and want to sell your practice. What ethical considerations must you take into account?
The ABA's Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 468, Facilitating the Sale of a Law Practice, in 2014. The opinion provides an overview of rules related to selling a law practice, and provides additional guidelines on two issues.
Model Rule 1.17
As discussed in the opinion, under Model Rule 1.17, Client Lawyer Relationship, an attorney is authorized to sell or buy a law practice, including the goodwill of the practice, but only if certain conditions are met. This rule was enacted in 1990. Prior to the adoption of Rule 1.17, attorneys were only allowed to sell the physical assets of a law firm, such as furniture, office equipment, and books. In adopting the new rule, the ABA sought to deal with the issue of what happened to the clients of sole practitioners when the sole practitioner left the practice of law. The rule also helped level the playing field between sole practitioners and law firm partners, because sole practitioners could now sell the goodwill of the practice and not just the physical assets.
The conditions required by 1.17 include:
1. The seller must stop engaging in the private practice of law, or in the area of practice that has been sold, in the relevant jurisdiction or geographic area.
2. The entire practice or area of practice is sold.
3. The seller gives written notice to each of the seller's clients advising them of: the proposed sale, the identity of the proposed buyer, the client's right to retain another attorney or take possession of the file, and the fact that the client's consent to the transfer of the client's files will be presumed if the client does not act or object within 90 days of receiving the seller's notice. If the seller can't give notice to a client, representation can be transferred to the buyer by court order.
4. Fees charged clients shall not be increased by reason of the sale.
Comment 7 to Rule 1.17 clarifies that the written notice must be provided before the seller provides access to the client's files. Comment 10 advises that the buyer must honor existing arrangements between the seller and the client as to fees and the scope of the work. Attorneys involved in the sale of a law practice are also subject to all of the ethical requirements an attorney has when representing clients, including competence, avoiding conflicts of interest, obtaining informed consent where required, and maintaining confidentiality.
ABA Formal Opinion 468
The ABA's Formal Opinion 468, Facilitating the Sale of a Law Practice, provides further guidelines regarding transitioning client matters and charging clients for time spent on transitioning matters.
1. Transitioning Client Matters
First, the Opinion notes that neither the rule nor the comments deal with the timing of when a seller ceases to engage in the private practice of law for purposes of the rule, or whether the seller can be involved in the practice to assist in the orderly transition of client matters. The comments make clear that a selling attorney must stop taking new cases immediately upon the closing of the sale. But how does the timing of ceasing to practice apply to the transition of clients?
The Committee compared the selling sole practitioner to a law firm partner who leaves practice. In the law firm context, the partner can assist other partners in the transition of the client matter to another firm attorney. Since the enactment of 1.17 was meant to address the disparity of treatment between sole practitioners and law firm partners, the Committee reasoned that a selling attorney should be placed in the same position as a departing law firm partner. Therefore, a selling attorney may assist in the transition of active client matters, for a reasonable time after the closing of the sale.
How long is a "reasonable time after the closing of the sale?" One month? Six months? The opinion says that it will necessarily depend on the circumstances, so it makes no sense to impose a specific time limitation.
2. Charging Clients for Time Spent on Transitioning Matters
Secondly, the Opinion clarifies that neither the seller nor the buyer may bill clients for time spent on transitioning client matters "that does not advance the representation or directly benefit the client." Instead, if there is any compensation to the seller for time spent transitioning matters, it is an item to be negotiated between the parties as part of the sale of the practice.
Check Your Jurisdiction
Each state may have its own rules for selling a law practice depending on whether it adopted the Model Rules or has its own approach. For example, in California, the sale of a law practice is governed by California Rule of Professional Conduct 2-300. The California Bar also offers practical guidelines for closing or selling a law practice.