The Second District holds that termination payment provisions in partnership agreements are not fee divisions subject to the Rules of Professional Conduct.
When Anderson, McPharlin & Connors (AMC) admitted Steven R. Yee into the partnership he agreed to pay damages if he left the firm with open files according to a formula set forth in the partnership agreement that required payment of 25% of revenues from open files. After he left the firm with files AMC sued for damages under the partnership agreement. Yee maintained that the damages provision was an unenforceable fee splitting agreement under California Rules of Professional Conduct, Rule 2- 200(A) which requires informed written consent by the client. The trial court held that the damages provision was not a fee splitting arrangement because it did not obligate a departing partner to pay revenue generated by an open file but instead obligated the departing partner to pay damages measured by the revenues generated by the files. This could not be defined as “fee splitting” because the parties were partners at the time the contract was made.
Rule 2-200(A) applies to fee-splitting arrangements between lawyers who are not partners. The fact that the damages provision in the partnership agreement would not be operative until an attorney had left the partnership is immaterial because the Rules of Professional Conduct does not preclude such agreements. Both the State Bar and the Supreme Court permit fee splitting agreements between partners without client consent.
Even if Rule 2-200(A) applied the damages provision is not a “fee splitting” agreement but a measure of damages due to the firm. When Yee joined the partnership he acknowledged that the firm would suffer damages if he left and took open files with him. He agreed the damages would be difficult to calculate and to the damages formula in the partnership agreement. The clients were originally those of the firm and knowingly elected to follow Yee upon his departure; there was no issue about the client’s right to know.
The court rejected Yee’s characterization of the damages formula in the partnership agreement as a prohibited “referral fee” and agreed with the law firm’s characterization of the fee as a “termination payment.” The firm did not maintain that Yee breached the partnership agreement by leaving and taking files, the breach was in failing to compensate the law firm for the loss of the files measured by the agreed upon formula.
Finally the court did not regard the required payment as an unlawful forfeiture. Yee reaped the benefits of other departing partner’s payment to the firm under the same partnership provision and could not escape the burdens of the bargain he struck.
Comment: While courts will require strict compliance with the Rules of Professional Conduct when attorneys seek to enforce fee contracts, this case reveals one court’s reluctance to allow attorneys in disputes with each other over firm revenues to use the Rules of Professional Conduct to escape partnership obligations.