Arthur J. Ciampi

"It is not so long ago that a member of the Diplomatic Body in London, who had spent some years of his service in China, told me that there was a Chinese curse which took the form of saying, 'May you live in interesting times.' There is no doubt that the curse has fallen on us."

- Sir Austen Chamberlain

By all accounts, 2019 has been an amazingly tumultuous political year whose day-to-day "interesting times" often seem to eclipse all else. Nonetheless, as we have steadfastly done every November since 2006, we celebrate the passing of the year by reviewing, in the annual roundup, some authorities from the year relevant to law firm partnerships.

2019 saw some "interesting" decisions and opinions concerning the plusses and minuses of law firm arbitration provisions, lawyer restrictive covenants, the sale of a law firm, and law firm dissolutions.

Law Firm Arbitration

In February, the U.S. District Court for the Eastern District of Pennsylvania issued a decision concerning the break-up of an environmental and toxic tort class action law firm and the resultant dispute over the division of legal fees. Cuker v. Berezofsky, 2019 WL 689592 (E.D. Pa. 2019). After an arbitration panel's finding and a motion to the arbitration panel for reconsideration, the District Court affirmed the panel's ruling. The District Court's decision reinforces the deference afforded to arbitration panels and provides an admonition, which is worth repeating, to lawyers who include arbitration provisions in their agreements. District Judge Kearney succinctly warned in Cuker: "Lawyers choosing final arbitration over a federal jury's decision because they assume it may be more efficient and less costly are often incorrect in their assumption … ." Id. at 9.

Restrictive Covenants

Restrictive covenants concerning lawyers, with the exception of bona fide retirement plans, are generally unenforceable pursuant to New York law. New York Rules of Professional Conduct Rule 5.6. New York public policy also favors the broad interpretation and enforcement of arbitration clauses in agreements. This rule equally applies to arbitration provisions in law firm partnership agreements.

In the past, these two policies have conflicted, and in Hackett v. Milbank Tweed Hadley & McCloy, 86 N.Y.2d 146, 152 (1995), the Court of Appeals, in 1995, enforced an arbitrator's award which found the restrictive covenant in Milbank's partnership agreement enforceable mainly as a result of the public policy requiring courts to defer to an arbitrator's ruling.

In April, the New York County Commercial Division's decision in Selendy v. Quinn Emmanuel Urquhart & Sullivan, 2019 WL 1782358 (2019) addressed both of these concerns. In Selendy, several of Quinn Emmanuel's partners withdrew from the firm in January and February 2018 to form their own partnership. The Quinn Emmanuel partnership agreement included a provision requiring withdrawing partners, who, within 18 months of their withdrawal, performed legal services within 100 miles of any firm office for certain firm clients, to pay 10% of the total fees billed to Quinn Emmanuel. The Quinn Emmanuel partnership agreement also provided that any disputes were subject to arbitration under California law.

Quinn Emmanuel filed a demand for arbitration in California to enforce the restrictive covenant. In May 2018, the petitioners commenced a proceeding in New York State Supreme Court to permanently stay and enjoin the arbitration proceeding. Quinn Emmanuel moved to dismiss the petition.

The New York State motion court granted Quinn Emmanuel's motion and dismissed the petition. In its analysis, the court examined the relevant New York law concerning lawyer non-compete agreements stating: "New York courts, for example, have denied enforcement of anticompetition clauses as violative of public policy. See Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989) (denying the enforcement of a provision that exacted a substantial financial penalty for competing with the former firm, because the provision restricts the right of a former lawyer to practice in violation of rule 5.6); Denburg v. Parker, Chapin, Flattu & Klimpl, 82 N.Y.2d 375 (1993) (same)."

The motion court then discussed the Hackett decisions. Hackett was a Milbank partner who, upon his withdrawal, sought supplemental payments from his former firm. Milbank refused, citing the firm's partnership agreement, and demanded arbitration. Hackett filed a petition to stay claiming public policy exempted the dispute from arbitration because the Milbank agreement contained a forfeiture for competition provision.

While both the motion court and the Appellate Division approved the stay, as their rulings held that the Milbank agreement violated public policy, the Court of Appeals ruled that an arbitrator should decide the issue in the "first instance." Hackett, 80 N.Y.2d at 871. An arbitration was held and the arbitrator ruled in favor of Milbank. Ultimately, the Court of Appeals upheld the arbitrator's ruling, finding that the stronger public policy was that of arbitration, and thus deference to the arbitrator's ruling should be given.

In light of Hackett, the motion court in Selendy concluded: "Although Petitioners submit competent proof supporting their argument that section 5.1(a)(ii) of the Partnership Agreement is anticompetitive under New York law … it is for the arbitrator in the first instance to consider these submissions when determining whether the provision at issue is an unenforceable forfeiture-for-competition clause." Selendy, 2019 WL 1782358 at *5.

Sale of a Law Firm

In May, the New York State Bar Association Committee on Professional Ethics issued Opinion 1168 (05/13/2019), which revisited and addressed some issues related to the sale of a law firm. In short, the Opinion found that a lawyer affiliated with a firm may purchase a firm consistent with New York Rules of Professional Conduct Rule 1.17 and may use the name of the seller's firm provided doing so is not misleading. In addition, Opinion 1168 clarified some issues regarding the application of the term "retired" as used in Court of Appeals Rules and in Rule 1.17 and concluded that, for purposes of a sale of a law firm, the term "retired" is that which is used in Rule 1.17.

Opinion 1168

The potential seller or "Owner" in Opinion 1168 intended to cease practicing law in one geographic area, and to commence practicing law thereafter in counties distant from New York City, where the Owner's offices had been located prior to the sale. Accordingly, the Owner would comply with Rule 1.17 and could sell his practice.

The Opinion indicated, however, that "[t]he use of the Owner's name in the purchased entity presents a closer question owing to a tension between Rule 1.17 and Rule 7.5(b)." NYSBA Opinion 1168, ¶8. The Opinion also noted that Rule 1.17 also permits the purchase of a law firm's good will, which includes, among other things, a firm's name. As Opinion 1168 stated: "We have long recognized that the name of a law firm is central to its good will." NYSBA Opinion 1168, ¶10.

Opinion 1168 reasoned that Rule 1.17 "suggests that any lawyer, whether or not previously affiliated with the acquired firm, is free to adopt some or all of the acquired firm's name as its own." NYSBA Opinion 1168, ¶11. The Opinion then properly identified the problem and stated: "Therein lies the rub with Rule 7.5(b) … ." NYSBA Opinion 1168, ¶11.

Rule 7.5(b), as Opinion 1168 concluded, "serves to protect the public from being deceived about the identity, responsibility, or status of those who use the firm name." NYSBA Opinion 1168, ¶12. The Opinion continued: "We think it is important to address a potential tension between Rules 1.17 and 7.5(b), because we can envision circumstances in which, without full disclosure, the entry of a stranger to a firm, operating under the firm's name, could generate the public confusion that Rule 7.5(b) … is intended to prevent. Rule 7.5(b) is explicitly addressed to firm names, whereas Rule 1.17 is intended to facilitate the sale of a law business." NYSBA Opinion 1168, ¶13.

Opinion 1168 then concluded: "We believe that a lawyer with a pre-existing and bona fide affiliation with a law firm—reflective of a continuation of the practice—may acquire that law firm and use its name provided that all the other requirements of Rule 1.17, including notice to clients and maintenance of client confidences, are respected." NYSBA Opinion 1168, ¶13.

Law Firm Dissolutions

In August, the Fourth Department, in In the Matter of Ross M. Cellino, Jr. v. Cellino & Barnes, P.C., 2019 NY Slip Op. 06365 (4th Dept. 2019), permitted a hearing to be conducted concerning the dissolution of the law firm of Cellino & Barnes, P.C. and denied a motion to dismiss a petition to dissolve the firm. The court permitted a hearing despite that the law firm continued to operate at a profit. In so doing, the court held:

[W]e reject respondents' contention that the court erred in denying their motion insofar as it sought summary dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC has continued to function effectively and prosperously. The determination whether a corporation should be dissolved is within the discretion of the court … and "the benefit to the shareholders of a dissolution is of paramount importance" in making that determination (§1111[b][2]). Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law §1104 simply because the corporate business has been conducted at a profit (see §1111[b][3]) or because the dissension has not yet had an appreciable impact on the profitability of the corporation […]

Here, the record contains ample evidence of dissension and deadlock between petitioner and Barnes, and we conclude that, in opposition to respondents' showing that the PC continues to operate profitably, petitioner raised issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders. In a close corporation like the PC, "the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation."…When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders … and we agree with the court's determination that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue.

Id.

Conclusion

We wanted to thank the readers of this column for the very kind and encouraging words we heard throughout 2019. We hope this year's columns have been helpful and even somewhat enjoyable. They are a labor of love and their writing remains a privilege.

Arthur J. Ciampi is the coauthor of the treatise 'Law Firm Partnership Agreements' and is the managing member of Ciampi LLC. Maria Ciampi, Of Counsel to Ciampi LLC, assisted in the preparation of this article.