California Supreme Court Rules on Law Firm Dissolution Dispute

SAN FRANCISCO (CN) – The California Supreme Court ruled Monday that dissolved law firms are not entitled to a portion of the earnings partners take to their new jobs in a case with broad implications for the legal community.

“What we conclude is that a dissolved law partnership is not entitled to profits derived from its former partners’ work on unfinished hourly fee matters,” wrote California Justice Mariano-Florentino Cuéllar in a unanimous ruling.

The case involved Heller Ehrman, which at one time rated as one of the most powerful global law firms with a roster of more than 700 attorneys. Founded in San Francisco in 1890, the firm ran into financial troubles after some of its intellectual property partners defected to a competing firm.

Heller Ehrman filed for Chapter 11 Bankruptcy and confirmed its dissolution in December 2008. The dispute before the state Supreme Court issued from the dissolution and centers on the question of whether the firm is entitled to a cut of the profits related to cases pending at the time of the dissolution.

Partners who fled the crumbling firm said Heller Ehrman had no property interest in the revenue it derived from clients. Ultimately, the Supreme Court agreed.

“Any expectation the law firm had in continuing the legal matters cannot be deemed sufficiently strong to constitute a property interest allowing it to have an ownership stake in fees earned by its former partners, now situated at new firms, working on what was formerly the dissolved firm’s cases,” Cuellar wrote.

Heller Ehrman originally sued 16 different law firms which had poached its lawyers, saying it was owed a cut of the revenue derived from cases that began on its watch. All but four of the firms settled, with Jones Day; Foley & Lardner; Orrick, Herrington & Sutcliffe and Davis Wright Tremaine taking the dispute to federal court, where they won a ruling from U.S. District Court Judge Charles Breyer.

Breyer, similar to the state Supreme Court, held dissolved firms retain no ongoing property interest in cases.

Heller appealed the ruling to the Ninth Circuit, which kicked the case to the Supreme Court, asking the justices to decide whether or not Breyer’s decision conforms to state law.

Cuellar seemed to acknowledge the broader implications of the ruling, including “the extent of partners’ fiduciary obligations to their firm or the efforts partners make to secure business on behalf of their firm.”

But the justice said the matter in front of the court was restricted to the property interest of dissolved firms, saying the relationship between lawyers, clients and firms is more akin to shared interest.

“A dissolved law firm therefore has no property interest in the fees or profits associated with unfinished hourly fee matters,” Cuellar wrote. “The firm never owned such matters, and upon dissolution, cannot claim a property interest in the income streams that they generate.”

The justice said to rule otherwise would elicit a host of difficulties including hindering lawyer mobility, restricting client choice in representation.

Heller was not the only firm to attempt to recoup unfinished business claims upon dissolution, with large firms paying millions of dollars to newly defunct ones for the right to continue cases that began on their watch.

However, the California Supreme Court’s decision likely represents the end of that practice.

The writing on the wall first appeared in 2014, after a U.S. Court of Appeals upheld a federal court decision in New York that held the Coudert Brothers law firm was not entitled to unfinished business claims after its 2005 dissolution.

 

 

%d bloggers like this: