Law firms have no property interest in hourly billed client matters, the D.C. Court of Appeals ruled Thursday, undercutting the "unfinished business" claims of bankrupt Am Law 100 firm Howrey.

While Howrey closed its doors in 2011, the unanimous ruling by a three-judge panel has major implications for law firms that have picked up groups of lawyers—and their clients—when other law firms failed or dissolved.

The judge rejected the claims made by Allan Diamond, the managing partner of Diamond McCarthy who is the Chapter 7 trustee overseeing the estate of Howrey, in a case that caught the attention of major national and international law firms and the American Bar Association. Diamond had argued that the estate was owed money from law firms including Jones Day, which hired 22 former Howrey partners who brought with them client matters that originated at Howrey.

Jones Day was one of several law firms Diamond sued as Howrey's trustee. The firm took the lead in opposing the arguments by Diamond, and has done the same in some similar cases around the country "on principle," said Shay Dvoretzky, a Jones Day partner who argued the case before the D.C. court.

"They don't have the right to collect work they didn't perform," Dvoretzky said.

In an issue of first impression, the D.C. court found that this property interest rested with the clients. When partners move between firms, it's up to the clients to decide whether to go with them, the court found. Agreeing to Diamond's argument would not only affect how clients choose their representation, but how lawyers could move from firm to firm, the court added.

"A law firm does not have a 'legitimate claim of entitlement' to hourly-billed client matters because it is the clients who retain the right to control the representation," Chief Judge Anna Blackburne-Rigsby wrote for the panel. "A law firm's belief that it will continue working on such hourly-billed client matters into the future constitutes no more than an 'abstract need' or 'unilateral expectation.'"

As a result, former partners have no duty to remit profits they earned at their new firms back to their prior ones, the D.C. court found.

The D.C. Court of Appeals' finding came in the answer of a certified question posed by the U.S. Court of Appeals for the Ninth Circuit, which has stayed the case proceedings for years. Oral arguments were held before the D.C. court in December 2018. A copy of the D.C. court's finding was filed with the Ninth Circuit on Thursday.

Dvoretzky said the Ninth Circuit reached out to the D.C. court for help because Howrey was founded there.

This is the third time a state high court has rejected the idea that a partner's former firm is owed money from the "unfinished business" that was brought to a new firm. The New York Court of Appeals and the California Supreme Court made similar findings in July 2014 and March 2018 in the bankruptcies of Thelen and Coudert Brothers, and Heller Ehrman, respectively.

Dvoretzky said Jones Day participated in all three cases. "We thought it was important to fight these cases as a matter of principle," he said.

The case—and Diamond's arguments—attracted a lot of attention in the legal community. Jones Day was joined in its brief and in arguments by Hogan Lovells; Kasowitz Benson Torres; Neal Gerber & Eisenberg; Perkins Coie; Pillsbury Winthrop Shaw Pittman; Sheppard Mullin Richter & Hampton; and Seyfarth Shaw. Those firms were represented by their own attorneys.

A total of 25 national and international law firms, as well as the ABA, the Association of Professional Responsibility Lawyers and the D.C. Bar Association filed amicus briefs opposing Howrey's arguments.

|

Read More

Warning Signs: How Big Law's Greatest Failures Unfolded