Christopher Sullivan, Diamond McCarthy

In a case stemming from Heller Ehrman's bankruptcy a decade ago, the California Supreme Court grappled with a matter of California law that could impact how Big Law hires partners from dissolved law firms in the Golden State.

Heller Ehrman's trustee is seeking millions of dollars in profits from unfinished client business that its former partners took to their new firms. Heller attorney Christopher Sullivan is arguing that the defunct firm's former employees, associates and other creditors had a right to the profits that other firms earned from that business. The case has drawn amicus briefs from the American Bar Association, bar associations in San Francisco and Los Angeles and 32 Big Law firms.

“Why should Heller be paid for work it didn't do?” asked Associate Justice Mariano-Florentino Cuéllar at oral arguments on Thursday in Los Angeles.

Christopher Sullivan of San Francisco's Diamond McCarthy insisted that the answer was clearly outlined in California's partnership laws, which were amended in 1996 but continue to recognize the “unfinished business rule.” Those laws laid out the duties of partners during the “winding up of the partnership business.”

He said partners have fiduciary duties to work on the case after they've left, even if it means the profits go to their dissolved firm. But the justices appeared skeptical about whether that was realistic.

“Law firms are in the business of making money—unless they dissolve,” said California Court of Appeal Justice Nora Manella, sitting tempore on the panel. “Then they don't.”

Lawyers for Orrick, Herrington & Sutcliffe and Jones Day, two of the firms fighting Heller's claims, countered that a dissolved firm has no property interest in unresolved matters. They also relied on ethics rules to make their case and had amicus support from the Association of Professional Responsibility Lawyers.

“The central principle that resolves this case is that law firms get paid for the work they do,” said Jones Day's Shay Dvoretzky, a Washington partner representing his firm.  Eric Shumsky, a Washington partner at Orrick, made separate arguments on behalf of his firm.

They also relied on a New York Court of Appeals decision that ruled against the trustees of Thelen and Coudert Brothers. Dvoretzky, who represented Jones Day in the New York case, said that court recognized a potentially “perverse run on the bank mentality” that could come if the trustee won: Partners could jump early ship to avoid liability.

But the California justices hardly spoke about the Thelen case. And though they acknowledged the “perverse incentives” that could arise should they rule for Heller's trustee, they asked whether such calamities were a foregone conclusion. Dvoretzsky acknowledged there weren't any real examples.

“This is a novel theory that's not been pursued before,” he said. “This is a reasonable prediction of what might happen.”

The case originated when Heller's trustee sued 16 law firms that recruited its former partners after it filed for bankruptcy in 2008. All but four of the firms settled. The four remaining firms—Orrick, Jones Day, Davis Wright Tremaine and Foley & Lardner—won a court ruling in 2014 in federal court.

But Heller's trustee appealed, and the U.S. Court of Appeals for the Ninth Circuit last year certified a question for the state's highest court: Under California law, does a dissolved law firm have a property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, when the dissolved law firm had been retained to handle the matters on an hourly basis?

Several times on Thursday, panelists asked lawyers on both sides to define “winding up.” Specifically, they wanted clarity as to whether that included unresolved client matters for which Heller had been charging billable hours. They also asked how billable hours differed from contingency fees, which defense attorneys argued were the main focus of the court cases on which Heller relied.

Sullivan said there was little difference; the dissolved law firm would have an interest in both under contract law.

“Doesn't that seem speculative?” asked Chief Justice Tani Cantil-Sakauye.

Dvoretzky, who called them “fundamentally different,” also got pushback from Associate Justice Goodwin Lin, who responded: “Isn't that a matter of degree?”

Panelists also asked about the rights of clients, who were noticeably absent from the case.

“Does the legal matter belong to the client or the partner?”  Associate Justice Ming Chin asked Sullivan.

“I don't think it's a client's choice,” Sullivan responded, noting that clients aren't involved in how a law firm's profits get dispersed.

Dvoretzky said clients would suffer if their work got disrupted.

Both sides, representing AmLaw firms, agreed on one thing: That the value of client business belonged not to the individual partner but to the law firms themselves.

“These are not matters handled by individual lawyers,” Dvoretzky said. “They are handled by firms.”