Does goodwill follow client to new firm?

Edward Poll, The Daily Record Newswire

If you think that we would see a lot of progress in the span of thirty years, you would be wrong. At least, you would be wrong in the realm of clawback cases. Recently, I discussed a 2014 clawback case and how its ruling differed, for the worse, from that of a 1984 clawback case. I think it's worth looking in more detail at the goodwill aspect of those cases.

Background

To review, in Jewel v. Boxer, 156 Cal. App. 3d 171 (1984), the appellate court held that a dissolved law firm is entitled to a share of the profits realized by a successor law firm for work performed on "unfinished business." Hence, the term clawback. In Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP, Case No. 3:14-cv-01239-CRB (N.D. Cal. 2014), the court held that the lawyer, as opposed to the bankrupt firm, holds all rights to the client.

In other words, the Jewel court recognized that a case lands with a firm. Even if the reputation of a lawyer attracts the client, the firm, not the lawyer, should "own" the client matter until such time as the client may choose to go elsewhere. Furthermore, each lawyer owes a fiduciary duty of loyalty, noncompetition, and good faith and fair dealing to the firm in addition to all other obligations individually owed to the client under the Model Rules of Professional Conduct.

Goodwill of the firm

The language of the Heller case and all other cases that claim to look at this issue from the perspective of the client are misguided. That is a ruse. It is a given that the client has a right to his files at any time, the client has the right to counsel of his own choosing at any time, and the client has no interest in the profits derived by work performed on his case.

However, there is also the element of the goodwill of the firm that must be taken into account. A firm has a structure and overhead that supports the pursuance of the objectives of the collective clientele. Marketing efforts in making the client aware of both the individual lawyer and the law firm are only the first element of the structure we call a "firm." Then the work has to be performed. In matters such as were handled by the firm in Jewel, staff such as partners, associates, paralegals, and others had to be retained. In addition to the people, a level of technological proficiency was required, which cost the firm money in terms of installation and development. All of these elements and more make up the goodwill of the firm. Goodwill does not evaporate and get reduced to zero even in the case of reorganization or bankruptcy.

Thus, the Jewel court correctly suggested that the new firm owed an obligation of some sort to the old firm. More than just the client's body and spirit-and paper files-were acquired when the new firm took on the unfinished matter. The Heller court erred when it concluded that "unfinished business profits are not a property interest" of the old firm. After all, the client as part of the old firm's business is not the Immaculate Conception. The client still has benefits (goodwill) accrued from the old firm's relationship with the client. The new firm receives the benefits expended on behalf of the client by the former firm and should compensate the former firm, or its estate, to some degree.

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Edward Poll, J.D., M.B.A., CMC, is a law practice management thought leader and contributor to this publication. His website is at www.lawbiz.com.

Published: Tue, Sep 09, 2014

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