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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.

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Ohio Legal Ethics Narrative

I. CLIENT-LAWYER RELATIONSHIP

1.17 RULE 1.17 SALE OF LAW PRACTICE

1.17:100 Comparative Analysis of Ohio Rule

1.17:101 Model Rule Comparison

While MR 1.17 and Ohio Rule 1.17 both provide for the sale of a law practice, they differ in significant ways. Among the more important differences, Ohio allows only the sale of an entire practice, whereas the Model Rule would also allow the sale of an area of practice. Compare Ohio Rule 1.17(a) with MR 1.17(a) & (b). Ohio also requires greater disclosure to the seller's clients about the sale and provides more detail on how the notice should be given than does the Model Rule counterpart. Compare Ohio Rule 1.17(e) with MR 1.17(c). Ohio's Rule deals explicitly with issues of confidentiality and limiting liability that arise in the sale of a law practice, while the Model Rule does so at best in comments. Compare Ohio Rule 1.17(c) & (i) with MR 1.17 cmts. [7] & [11].

1.17:102 Ohio Code Comparison

The following section of the Ohio Code of Professional Responsibility is listed in the Correlation Table (Appendix A to the Rules) as related to Ohio Rule 1.17: DR 2-111.

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

For many years, the former OHCPR had no express provision on the sale of a law practice. Nevertheless, such sales were thought to be improper as they would violate several general provisions of the Code. Bd. of Comm'rs on Grievances & Discipline Op. 92-19, 1992 Ohio Griev. Discip. LEXIS 2 (Oct. 16, 1992) (sale of law practice implicated former OH DR 2-103(B), 4-101(B)(1) & (3)). In 2003, Ohio adopted former OH DR 2-111, which authorized the sale of a law practice when effected in accordance with its provisions. See generally Eugene P. Whetzel, Buying or Selling a Law Practice, Ohio Law., May/June 2003, at 24. Because of the recentness of the adoption of OH DR 2-111, Ohio Rule 1.17 has, in substance, retained the language of the former disciplinary rule. For a review of the Rule 1.17 provisions, see Harry D. Cornett, Jr. & Nicole Braden Lewis, The Disposition of a Law Practice, Cleveland Metro. B.J., Oct. 2008, at 10 (the article also touches on obligations under Rule 1.15 in cases of law firm dissolution and under Rule 1.16 in instances of disability or retirement).

1.17:300 Problems in Sale of Practice

What may be sold: Ohio Rule 1.17(a) allows the sale of a law practice, including the good will of the practice. It does not apply to transfer of cases where the sale of a practice is not involved, or to admission to or retirement from a law partnership or professional association. Ohio Rule 1.17 cmts. [14] & [15]. For a brief discussion of how to value good will, see Denise G. Callahan, Solos, Small Firms Can Sell Their 'Practices,' Ohio Law. Wkly., Apr. 14, 2003, at 1. The practice must be sold in its entirety, except where conflict of interest prohibits the transfer of certain clients. See Rule 1.17(a) and cmts. [2] & [6]. Comment [6] further makes clear that the entire-practice requirement is satisfied despite the "fact that a number of the seller's clients decide not to be represented by the purchasers, but take their matters elsewhere," so long as "the seller in good faith makes the entire practice available for sale to the purchasers." Id.

Sale participants: Sales are to take place between a "selling lawyer" and a "purchasing lawyer." The Rule defines "selling lawyer" as "an individual lawyer, or a law firm, the estate of a deceased lawyer, or the representatives of a disabled or disappeared lawyer." Ohio Rule 1.17(b)(2). It defines "purchasing lawyer" as "either an individual lawyer or a law firm." Ohio Rule 1.17(b)(1). The Rule also focuses on the motives of the purchaser and prohibits sales when the purchaser's "sole or primary purpose" for the purchase is to resell the practice to another. Ohio Rule 1.17(a) & cmt. [1]. The seller must "exercise competence" in selecting a qualified buyer, who in turn is obligated to undertake the representation competently. Ohio Rule 1.17 cmt. [11]. Failure to do so may result in an Ohio Rule 1.1 violation.

Client protections - Confidentiality: One potential problem in the sale of a law practice is that the seller will need to share confidential client information with the buyer if the buyer is to make an informed decision about the purchase. Without further restrictions, the prospective purchaser would have no duty to preserve that information. To remedy this, Ohio Rule 1.17(c) provides that the prospective purchaser must enter into a confidentiality agreement before protected information is shared with the prospective purchaser. Under this agreement the purchaser is to treat the seller's clients as his own and "preserve information relating to the representation of the clients of the selling lawyer, consistent with Rule 1.6." This agreement remains in effect even if the sale is not completed. See Rule 1.17 cmt. [7]. Comment [7] further adds that a conflict check should be completed to assure that the purchasing lawyer does not review client-specific information regarding a client as to whom the lawyer is conflicted out.

While the Rule speaks to confidentiality, it does not directly address the question from an evidentiary perspective. Would sharing documents or conversations containing privileged information waive the privilege? One would assume not, since only the client can waive the privilege. Ohio Rule 1.17(c) is designed to ensure against unauthorized disclosure by the purchasing lawyer of protected information of the selling lawyer's clients.

Client protections - Fees: The purchasing lawyer must honor all fee agreements made between the seller and the seller's clients pertaining to "legal representation that is ongoing at the time of the sale." Ohio Rule 1.17(d)(2). The lawyer is free to negotiate fee agreements for representation commenced after the date of the sale. See Rule 1.17(d)(2) & cmt. [10]. Complications could arise in determining whether certain tasks undertaken were subparts of the original representation or are a new representation. A careful lawyer will resolve such ambiguities in the client's favor.

Client protections - Limiting liability: A lawyer may "not make an agreement prospectively limiting the lawyer's liability to a client for malpractice absent the client's independent representation in making the agreement." Ohio Rule 1.8(h)(1); see section 1.8:910. The same basic approach is used with respect to the sale of a law practice, although the language used is more restrictive. Ohio Rule 1.17(i) provides that neither the seller nor the purchaser "shall attempt to exonerate the lawyer or law firm from or limit liability to the former or prospective client for any malpractice or other professional negligence." (Emphasis added.) See Rule 1.17 cmt. [11]. There is no provision for independent representation in making such an agreement, as there is in Rule 1.8(h)(1). (But see further discussion of this issue infra at "Required terms of the agreement," third bullet.)

The prohibition on limiting liability to the client does not limit the seller and purchaser from agreeing to indemnification or other forms of contribution should a claim of professional negligence or malpractice be brought. Rule 1.17(i).

Client protections - Notice to seller's clients: Because each client has the right to choose his or her own attorney, clients cannot be "sold" by one lawyer to another. Ohio Rule 1.17 cmt. [1]. Rather, the client must choose a new attorney when an existing representation is ended. Nevertheless, as a practical matter, clients often will be happy to have the purchasing attorney take on the representation. The notice provisions in Ohio Rule 1.17(e) reflect this.

Notice is to be given to all current clients of the seller and to those who were clients in closed files that the seller and purchaser agree to transfer. Id. The notice must contain the following information:

  • the anticipated effective date of the proposed sale, Ohio Rule 1.17(e)(1);

  • a statement that the purchaser will honor all existing fee agreements for representation ongoing at the time of the sale, but that fee agreements for representation commencing after that date will be negotiated by the purchasing lawyer and the client, Ohio Rule 1.17(e)(2);

  • the right of the client to obtain her files and seek another attorney, Ohio Rule 1.17(e)(3);

  • the fact that if the client does not object within ninety days of receiving notice, the client's consent to representation by the purchasing lawyer will be presumed, Ohio Rule 1.17(e)(4); and

  • biographical information about the purchaser, including information on any disciplinary action taken against the purchaser and any pending disciplinary complaints against the purchaser that have been certified by a probable-cause panel, Ohio Rule 1.17(e)(5).

  • Comment [7A] purports to add an additional requirement. "At a minimum the notice must include information about the proposed sale and the purchasing lawyer that will allow each client to make an informed decision regarding consent to the sale." Ohio Rule 1.17 cmt. [7A].

The technical aspects of who is obligated to do what in providing the necessary notice to clients are somewhat confusing. Rule 1.17(e), the general notice provision, states that both "the selling lawyer and purchasing lawyer shall provide written notice of the sale to the clients of the selling lawyer." When the seller is the estate of a deceased lawyer or the representative of a disabled or disappeared lawyer, Rule 1.17(f) provides that the written notice required by division (e) shall be given by the "purchasing lawyer." These two divisions are confirmed by Rule 1.17 cmt. [7A], which states that "notice must be provided jointly by the selling and purchasing lawyers," except where division (f) applies, "in which case the notice is provided by the purchaser." So far, so good. But Rule 1.17(h) states that the "written notice required by division[s] (e) and (f) of this rule shall be provided by certified mail, return receipt requested. In lieu of providing notice by certified mail, either the selling lawyer or purchasing lawyer, or both, may personally deliver the notice to a client." What this seems to say (for reasons that are not apparent) is that written notice shall be by both under division (e) and by the purchaser under division (f), but that under division (h) there is the option of giving personal notice, which, if selected, can be made by seller, purchaser, or both. These technicalities seem unduly cumbersome to us.

If a client cannot be given the notice required under division (e), a client's matter can be transferred to the purchasing lawyer only after both the selling and purchasing lawyer have caused notice of the sale to be published in a newspaper of general circulation in the relevant county. "Upon completion of the publication, the client's consent to the sale is presumed." Ohio Rule 1.17(g).

To the extent the seller is the estate of a deceased lawyer or the representative of a disabled or disappeared lawyer, the process is altered somewhat. First, as noted above, the duty to provide notice -- and to obtain written consent (not required under division (e)) -- falls solely on the purchasing attorney. Ohio Rule 1.17(f). Second, treating a client's failure to respond as presumed consent if no response is received within ninety days applies only if (a) notice was sent to the client's last known address shown in the seller's records or (b) the client's rights would be harmed if the purchasing lawyer failed to act within the ninety-day period. Id.

Required terms of the agreement: Ohio Rule 1.17 requires that certain terms must be included in any agreement for the sale of a law practice. These include:

  • a statement by both the selling and purchasing lawyer that the purchaser is doing so "in good faith" and with the intention of providing legal services to the seller's clients and future clients, Ohio Rule 1.17(d)(1);

  • a provision that the purchaser will abide by any existing fee agreements relating to ongoing representations taken on before the sale, Ohio Rule 1.17(d)(2); and

  • incorporation of Ohio Rule 1.8(h) (pertaining to limiting liability to a client), Ohio Rule 1.17(i), second sentence. (Perhaps this eliminates the distinction between the first sentence of Rule 1.17(i) and Rule 1.8(h)(1) with respect to independent representation, noted above at "Client protections - Limiting liability.")

Seller's withdrawal duties: Upon completion of the sale, the selling lawyer may withdraw from the representation. Ohio Rule 1.16(b)(8) (recognizing this as a reason for permissive withdrawal). [Query whether this characterization makes much sense. Would not a client's agreement to transfer matters to the purchasing lawyer constitute a constructive discharge of the selling lawyer, thereby implicating mandatory withdrawal under Ohio Rule 1.16(a)(3)?] In certain instances in matters pending before a tribunal, court permission may be necessary before the seller's withdrawal and buyer's substitution will be allowed. Ohio Rule 1.17 cmt. [12].

When withdrawal stems from sale of a law practice, the usual duty to refund advanced fees that have not been earned does not apply. Ohio Rule 1.16(e). To the extent the client decides to stay with the purchasing attorney, this makes sense. Those funds will just be used by the purchasing attorney in carrying out the representation. But as written, relief from the refund obligation applies even if the client selects a different attorney. As this was probably a drafting error, the unearned fees should be returned in those circumstances, regardless of the language of the Rule.

As to client funds held by the seller, those should be transferred to the purchasing attorney at the time the client files are transferred. Ohio Rule 1.15(g).

Distribution of sale proceeds: Ohio Rule 5.4(a) generally prohibits sharing legal fees with a nonlawyer. See section 5.4:200. Apparently, the proceeds of the sale of a practice are "legal fees"; otherwise there would have been no need to provide for a limited sale-of-practice exception (see Rule 5.4(a)(2)) to the general prohibition. The former disciplinary rule (OH DR 3-102(A)(2)) did not address whether the entire sale proceeds were to be treated as legal fees, or whether only a portion of the proceeds (such as actual or anticipated accounts receivable from clients) were to be so treated, with the balance attributed to goodwill or other assets of the seller. (3-102(A)(2) referred generally to "the payment of money" resulting from the sale.) The new rule, however, expressly states that the exception applies to the "agreed-upon purchase price." Ohio Rule 5.4(a)(2).

Restrictions on seller's after-sale practice: As a general matter, restrictions on the right to practice following termination of employment are not permitted. Ohio Rule 5.6. See section 5.6:200. In contrast, when a professional association is terminated by the sale of a law practice, the parties may "reasonably limit the ability of the selling lawyer to reenter the practice of law." Ohio Rule 1.17(d)(3). This could include time restrictions, geographical restrictions, and/or any other reasonable limitation. Id.

This limited approval of restrictions on practice does not apply if the selling lawyer is selling the practice in order to enter academic, government, or public service, or to serve as in-house counsel to a business. In those instances such restrictions are prohibited. Id. See Rule 1.17 cmt. [3].

Restriction on use of name of seller's firm: As stated in Ohio Rule 1.17 cmt. [16], the purchaser cannot use the seller's name "unless the seller is deceased, disabled, or retired pursuant to Rule VI of the Supreme Court Rules for the Government of the Bar of Ohio."