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End-of-life notice: American Legal Ethics Library

As of March 1, 2013, the Legal Information Institute is no longer maintaining the information in the American Legal Ethics Library. It is no longer possible for us to maintain it at a level of completeness and accuracy given its staffing needs. It is very possible that we will revive it at a future time. At this point, it is in need of a complete technological renovation and reworking of the "correspondent firm" model which successfully sustained it for many years.

Many people have contributed time and effort to the project over the years, and we would like to thank them. In particular, Roger Cramton and Peter Martin not only conceived ALEL but gave much of their own labor to it. We are also grateful to Brad Wendel for his editorial contributions, to Brian Toohey and all at Jones Day for their efforts, and to all of our correspondents and contributors. Thank you.

We regret any inconvenience.

Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Arizona Legal Ethics

1.17   Rule 1.17 Sale of Law Practice

1.17:100   Comparative Analysis of Arizona Rule

1.17:101      Model Rule Comparison

This Rule, which has been in the Model Rules since 1991, was only added to the Arizona Rules of Professional Conduct by the 2003 amendments thereto.

AZ-ER 1.17 and its accompanying Comment are substantially identical to MR 1.17 and its accompanying Comment. In fact, the only difference is that paragraph 4 of the Comment to AZ-ER 1.17 does not contain the final sentence of paragraph 4 of the Comment to MR 1.17.

1.17:102      Model Code Comparison

There was no counterpart to Model Rule ER 1.17 in the former Code of Professional Responsibility

1.17:200   Traditional Rule Against the Sale of a Law Practice

The traditional concerns that have been articulated with respect to transactions involving the sale of all or a separate part of an existing law practice are that they make the practice of law appear to be more of a business than a profession, that they may operate to foreclose or restrict the right of clients to select a lawyer of their own choosing, and that discussions or negotiations concerning the sale of a practice may operate to compromise client confidentiality.

In Arizona Ethics Opinion No. 92-08, the Committee on the Rules of Professional Conduct held that it may be permissible, under certain circumstances, for a firm to "lease" the law practice of a solo practitioner who is taking a year's leave of absence, but the lessor firm may not take over the representation of clients of the departing solo practitioner if the firm was currently representing, or had represented in the past, clients with adverse interests.

New AZ-ER 1.17 attempts to address those concerns while permitting lawyers leaving the practice of law, or abandoning a portion of their existing practice, to recoup the value their efforts have imparted to the practice, and thus be treated similarly to partners who withdraw from law firms. See Comment, AZ-ER 1.17, 1. Under the Rule, the sale of a law practice, or a portion of a practice, is permitted only where the selling lawyer or firm ceases to engage in the private practice of law, or in the area of practice involved, in the geographical area in which the practice has been conducted, after the sale has been consummated. In addition, the Rule imposes strict conditions on the manner in which the sale may be negotiated and consummated that are intended to protect the interests of the clients of the practice or practice area being sold. As the Comment to the Rule explains:

The practice of law is a profession, not merely a business. Clients are not commodities that can be purchased and sold at will. Pursuant to this Rule, when a lawyer or an entire firm ceases to practice, or ceases to practice in an area of law, and other lawyers or firms take over the representation, the selling lawyer or firm may obtain compensation for the reasonable value of the practice as may withdrawing partners of law firms. See ERs 5.4 and 5.6.

Comment, AZ-ER 1.17, 1. The Rule does not apply to "[A]dmission to or retirement from a law partnership or professional association, retirement plans and similar arrangements, and a sale of tangible assets of a law practice . . ." Comment, AZ-ER 1.17, 14.

Where Sale of Law Practice Permissible

Under paragraphs (a) and (b), a sale of all or a discrete portion of a law practice may be accomplished where (1) 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(s) in which the practice has been conducted, and (2) the entire practice, or the entire area of practice, is sold to one or more lawyers or law firms. The price at which the practice is sold may include compensation for good will. While the prospective retirement of a lawyer is one occasion that might precipitate a desire to sell a practice, the Rule is not limited to such situations:

The Rule permits a sale of an entire practice attendant upon retirement from the private practice within the jurisdiction. Its provisions, therefore, accommodate the lawyer who sells the practice on the occasion of moving to another state. Some states are so large that a move from one locale to another is tantamount to leaving the jurisdiction in which the lawyer has engaged in the practice of law. To also accommodate lawyers so situated, states may permit the sale of the practice when the lawyer leaves the geographical area rather than the jurisdiction.

Comment, AZ-ER 1.17, 4.

The requirement that the entire practice or practice area be sold is intended to prevent "cherry picking" of particularly attractive clients from the practice, while leaving others to fend for themselves. As the Comment to the Rule explains:

The Rule requires that the seller's entire practice, or an entire area of practice be sold. The prohibition against sale of less than an entire practice area protects those clients whose matters are less lucrative and who might find it difficult to secure other counsel if a sale could be limited to substantial fee-generating matters. The purchasers are required to undertake all client matters in the practice or practice area, subject to client consent. This requirement is satisfied, however, even if a purchaser is unable to undertake a particular client matter because of a conflict of interest.

Comment, AZ-ER 1.17, 6. Additional client protection is provided by the requirement of paragraph (d) that "fees charged clients shall not be increased by reason of the sale."

The Comment to the Rule indicates that this requirement, as well as the requirement that the seller be leaving the private practice of law, or practice in the area sold, entirely should be given a practical construction:

The requirement that all of the private practice, or all of an area of practice, be sold is satisfied if the seller in good faith makes the entire practice, or the area of practice, available for sale to the purchasers. The fact that a number of the seller's clients decide not to be represented by the purchasers but take their matters elsewhere, therefore, does not result in a violation. Return to private practice as a result of an unanticipated change in circumstances does not necessarily result in a violation. For example, a lawyer who has sold the practice to accept an appointment to judicial office does not violate the requirement that the sale be attendant to cessation of practice if the lawyer later resumes private practice upon being defeated in a contested or a retention election for the office or resigns from a judiciary position.

Comment, AZ-ER 1.17, 2. The requirement will be strictly applied, however, where the sale involves only an area of practice rather than the lawyer's entire practice:

This Rule also permits a lawyer or law firm to sell an area of practice. If an area of practice is sold and the lawyer remains in the active practice of law, the lawyer must cease accepting any matters in the area of practice that has been sold, either as counsel or co-counsel or by assuming joint responsibility for a matter in connection with the division of a fee with another lawyer as would otherwise be permitted by ER 1.5(e). For example, a lawyer with a substantial number of estate planning matters and a substantial number of probate administration cases may sell the estate planning portion of the practice but remain in the practice of law by concentrating on probate administration; however, that practitioner may not thereafter accept any estate planning matters. Although a lawyer who leaves a jurisdiction or geographical area typically would sell the entire practice, this Rule permits the lawyer to limit the sale to one or more areas of the practice, thereby preserving the lawyer's right to continue practice in the areas of the practice that were not sold.

Comment, AZ-ER 1.17, 5.

Conditions for Accomplishing Sale

As a condition for consummating the sale of a practice or practice area, AZ-ER 1.17(c) requires that the seller must give each of the seller's affected clients written notice of the following:

1. the proposed sale;

2. the client's right to retain other counsel or to take possession of the file; and

3. the fact that the client's consent to the transfer of the client's files will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.

Where it is not possible to provide particular clients with this required notice, then "the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction." In addition, paragraph (d) of the Rule is explicit that: "The fees charged clients shall not be increased by reason of the sale."

Requiring notice to clients of the practice being sold provides them with the opportunity to opt to make other arrangements, and is also a precondition to revealing to the buyer information concerning those clients that is protected by AZ-ER 1.6. Where actual notice cannot be given, then court approval is required. As the Comment to this aspect of the Rule explains:

A lawyer or law firm ceasing to practice cannot be required to remain in practice because some clients cannot be given actual notice of the proposed purchase. Since these clients cannot themselves consent to the purchase or direct any other disposition of their files, the Rule requires an order from a court having jurisdiction authorizing their transfer or other disposition. The Court can be expected to determine whether reasonable efforts to locate the client have been exhausted, and whether the client's legitimate interests will be served by authorizing the transfer of the file so that the purchaser may continue the representation. Preservation of client confidences requires that the petition for a court order be considered in camera. . .

Comment, AZ-ER 1.17, 8.

1.17:300   Problems in Sale of Practice

In addition to the traditional concerns that have been articulated concerning sales of law practices [See 1.17:200], the "purchase" of a practice presents the potential problem that it will operate to bring into the purchasing firm disqualifying conflicts of interest. In Arizona Ethics Opinion No. 92-08, the Committee on the Rules of Professional Conduct held that it may be permissible, under certain circumstances, for a firm to "lease" the law practice of a solo practitioner who is taking a year's leave of absence, but the lessor firm may not take over the representation of clients of the departing solo practitioner if the firm was currently representing, or had represented in the past, clients with adverse interests.

Another potential problem area, addressed directly in the Rule only in part, concerns the preservation of the confidentiality of information relating to the representation of clients of the practice or practice area being sold. Where such clients cannot be given actual notice of the prospective sale, and court approval must be secured, paragraph (c) of the Rule provides that: "The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file."

The issue is likely to arise, however, long before this stage of the process is reached. There will be an understandable desire on the part of the purchaser to learn as much as possible about the practice or practice area being purchased, including the identity and nature of its clients, while negotiations concerning a possible purchase are taking place. The Rule addresses the seller's obligation to preserve client confidences during this stage of the process only by necessary implication. The Comment, however, is quite explicit on the point:

Negotiations between seller and prospective purchaser prior to disclosure of information relating to a specific representation of an identifiable client no more violate the confidentiality provisions of ER 1.6 than do preliminary discussions concerning the possible association of another lawyer or mergers between firms, with respect to which client consent is not required. Providing the purchaser access to client-specific information relating to the representation and to the file, however, requires client consent. The Rule provides that before such information can be disclosed by the seller to the purchaser the client must be given actual written notice of the contemplated sale, including the identity of the purchaser, and must be told that the decision to consent or make other arrangements must be made within 90 days. If nothing is heard from the client within that time, consent to the sale is presumed.

Comment, AZ-ER 1.17, 7.