Firms May Disappear, But Goodwill Remains

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I recently discussed a 2014 "clawback" case and how its ruling differed, for the worse, from that of a related case from 1984. I think it's worth looking in more detail at the goodwill aspect of those cases.

To review, in Jewel v. Boxer, 156 Cal. App. 3d 171 (1984), the 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 court in Jewel recognized that a case lands with a firm. Even if the reputation of an attorney 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.

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

However, the element of firm goodwill must also 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."

The work has to be performed. In matters such as those handled in Jewel, partners, associates, paralegals and other staff 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 those 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 one. 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 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 correspondingly compensate the former firm, or its estate, to some degree.

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