Rise in Firm Sales Prompts Questions About Rules

Published on: 
03/06/2014
American Bar Association Rule 1.17 governing the sale of a law practice was adopted in 1989 and provides that:

"A lawyer or a law firm may sell or purchase a law practice, or an area of law practice (added later), including good will, if the following conditions are satisfied:

"(a) The seller ceases to engage in the private practice of law, or in the area of practice that has been sold, [in the geographic area] [in the jurisdiction] (a jurisdiction may elect either version) in which the practice has been conducted; (b) The entire practice, or the entire area of practice, is sold to one or more lawyers or law firms….”

The rule does not include the definition of "sale,” nor the definition of "private practice of law.” Some have argued that the provision requires that the selling lawyer cannot practice law even one day after the sale. Good lawyers can take either side of the argument.

However, it would seem that the primary objective of the creators of the rule was to insert a covenant not to compete with the buyer; in other words, the buyer should obtain that for which he bargained.

While most jurisdictions either prohibit or provide very restrictive provisions in covenants not to compete with selling a business, the rule at hand seems to include such a covenant by requiring the selling lawyer to cease practice.

The question is whether continuing to work and/or consult with the buyer is equivalent to "private practice of law.” Also, when is a "sale” complete? Is the sale complete on the close of escrow, assuming there is an escrow? Can an escrow, by its terms, be extended for many months, time sufficient to give the seller an opportunity to transition the practice and its clients to the buyer?

Those are open questions, though I am aware of no litigation in which it has been an issue. Currently, there is a proposal being circulated to modify 1.17 to reflect that a lawyer can continue to practice law if he is associated with the buyer of the law practice.

That obviously removes any question about the issue being raised. However, the concern is that once we open up the rule for modification, well-meaning lawyers will get their sticky hands in the bowl and modify the simplicity and clarity of the rule as it now exists.

The ABA model rule is just that - a guide. If you are considering selling your practice, be sure to consult state rules.

What is clear is that selling a law practice is becoming a more popular alternative to maintaining the practice as we get older. It’s also the preferred alternative to merely closing the practice either voluntarily or involuntarily (by death or disability). In either such event, errors can cost tens and even hundreds of thousands of dollars.

The goodwill created by lawyers over decades of carrying out diligent work can, and should be, monetized for the benefit of one’s family. I am a firm believer that every competent and principled lawyer has a valuable reputation that should translate into salable goodwill.

I’d suggest that it is almost negligence per se, or criminal, if the lawyer does not arrange for the sale of the law practice, or for the transition of the law practice at death, to protect his or her family.

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