In a decision with far reaching implications for law firms and their clients, the New York Court of Appeals firmly rejected the application of the "unfinished business" doctrine - an important principle of partnership law - to lawyers and law firms. Under the "unfinished business" doctrine, the profits to be earned on uncompleted contracts are considered the "property" of the partnership, even if earned after the partnership dissolves. The question before the Court of Appeals was whether this rule applies to hourly fee matters handled by a law firm. Specifically, if a lawyer starts working on a matter on an hourly fee basis at Firm A, which subsequently dissolves, and then completes the matter at new Firm B, does she have to return the profits earned on the case at Firm B to the estate of Law Firm A?
Courts in California, particularly in the famous decision Jewel v. Boxer, had answered this question "yes," regardless of whether the engagement was hourly or contingent. Yesterday, the Court of Appeals, ruling in In re Thelen LLP, came to a different conclusion. The "unfinished business" doctrine, the Court ruled, does not apply to law firms; and a firm's attorney-client relationship, whether hourly or contingent, is not considered the law firm's "property" under New York law. Indeed, said the Court, that concept would be antithetical to the notion that clients have "'the unqualified right to terminate the attorney-client relationship at any time," and are obligated to compensate their former attorney only for 'completed services.'" If the attorney-client relationship belongs to anyone, the Court held, it belongs to the client.
The implications for lawyers involved in partnership dissolutions and bankruptcies are significant. No longer will law firms have to squabble over "Jewel waivers," as partnership agreement provisions intended to circumvent the Jewel v. Boxer rule are called; the Court said these are no longer necessary. No longer will partners leaving dissolving firms have to worry that other law firms won't hire them because they would have to disgorge the profits from their work. And, most importantly, no longer will clients have to be concerned that they will lose their lawyer of choice because that lawyer cannot convince her new firm to take on a matter from which the firm will earn no profit.
The implications for lawyers and clients are even broader. The Court of Appeals re-affirmed the basic principle, asserted 25 years ago in Cohen v. Lord Day & Lord, that lawyers should be as free as possible to move from firm to firm, without unwarranted financial restrictions. It reaffirmed that this principle of lawyer mobility takes precedence over the need to hold law firms together. And, most importantly, it reaffirmed that a client controls the attorney-client relationship and should be permitted to retain his or her lawyer of choice if at all possible, regardless of the consequence to the lawyer's partners, employees or creditors.
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