Given recent changes in the stock market and concerns over economic growth and stability, law firms, like any business or partnership, can face interruptions in cash flow or other hardship. As a result, some law practices may consider what protections they want in place—for the partnership and for the partners—to help avoid or address potential dissolution due to financial pressures.

A key consideration for law firms facing the worst-case scenario is how to handle “unfinished business” with pending client matters and fees. Some certainty can be obtained by making changes to the firm’s partnership agreement, keeping in mind that law firms have unique obligations that other businesses do not during the winding-up process.

Key Cases on Unfinished Business

Generally, the unfinished business doctrine is based on state partnership law. One landmark California case, Jewel v. Boxer, determined that profits recovered by a new firm on a contingent fee matter that originated at a now dissolved firm may have to be disgorged. For legal representations that were in progress at the time of firm dissolution, and for which the lawyers at the dissolving firm had agreed to a contingency arrangement, the court found that the Uniform Partnership Act requires sharing of contingency fees with the dissolved firm, regardless of who provides legal services after the dissolution (referred to as the “unfinished business doctrine”). That decision led many firms to add “Jewel waivers” to their partnership agreements. The result is increased partner mobility—if a partner were to leave a dissolving firm, the Jewel waiver would protect the new partner and that partner’s new firm from having to disgorge its profits back to the dissolving entity.

Nearly 35 years after the Jewel decision, however, the Supreme Court of California examined a related question of a dissolved firm’s right to recover hourly fees from client matters in Heller Ehrman LLP v. Davis Wright Tremaine LLP. In Heller, a dissolved firm’s bankruptcy plan administrator sought to recover profits earned on hourly-fee matters that had moved to new firms (when the former partners of the dissolved firm joined subsequent firms). The administrator reasoned that, had the firm not dissolved, those profits would have been earned at the dissolved firm. The Court concluded, however, that the dissolving firm did not have a property interest in the hourly fees generated by its former partners after their departures, characterizing the dissolving firm’s position as “unilateral” in expecting to continue to recover profits on work that it could no longer perform. The Court also found that there is no reasonable expectation for future income on hourly work because clients can change the scope of a matter or hire new counsel at any time. Using hourly fees to compensate the dissolved firm would also disincentivize the lawyers actually performing the work.

Although Jewel and Heller were decided under California law, dissolved law firms in other jurisdictions have seen similar results. In In re Thelen LLP (2014), the New York Court of Appeals emphasized that “New York courts have never suggested that a law firm owns anything with respect to a client matter other than yet-unpaid compensation for legal services already provided. Appellate Division decisions dealing with unfinished business claims in the context of contingency fee arrangements uniformly conclude that the dissolved partnership is entitled only to the ‘value’ of its services.” The court also saw recovery of fees for work not performed by the old law firm as an “unjust windfall,” in conflict with the New York Rules of Professional Conduct. Thus, the court rejected the attempt of the dissolved firm to recover profits on hourly fee matters.

In Diamond v. Hogan Lovells US LLP (2020), the District of Columbia Court of Appeals also addressed a trustee of a former law firm’s argument that the unfinished business doctrine should allow the dissolved firm to recover profits from hourly fee matters. The court there found that the former law firm was not entitled to hourly-billed client matters, reasoning that it was clients who own their matters and not law firms.

In states that do not have case law on point, the parameters of the “unfinished business doctrine” are shaped by partnership law. For example, in Georgia, O.C.G.A. § 14-8-21(a) provides: “Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.” Absent an agreement to the contrary, this statute would be expected to govern in a dissolution or bankruptcy of a law firm partnership in that state.

Considerations for Law Firms and Lawyers

While these cases and law provide helpful information on how some client work and receivables might be handled in the event of a firm dissolution, it is unclear how the unfinished business doctrine would be applied in other jurisdictions.

One option to obtaining more certainty is a “Jewel waiver.” As described above, this waiver may give rainmakers the ability to move more freely with their clients , making them more attractive to new firms. In that way, a Jewel waiver is good for individual partners. But some firms don’t like them because they could encourage profitable partners to leave at the first sign of trouble, adding to the firm’s instability.

Another option is to add other provisions to the partnership agreement that would address how firm assets are to be handled in the event of a dissolution. As noted above, the Jewel court noted that the dissolved firm’s partnership agreement was silent on this issue.

Of course, for any partnership—and each partner—considering a Jewel waiver or other agreements, it is critical to ensure that those are consistent with the applicable state rules of professional conduct.

Moreover, making changes to the partnership agreement just prior to a dissolution that changes the distribution of assets likely would be subject to increased scrutiny.

Finally, it is critical to remember that under the applicable rules of professional conduct, client choice matters most. The Heller decision was motivated in part by the conclusion that the client’s right to choose its own counsel is superior to any dissolved law firm’s future interest in clawing back profits for hourly fee matters. A firm cannot make an agreement or enact a policy that is inconsistent with the concept of client choice—however, a dissolving law firm can always seek payment for or recovery of reasonable fees for work already performed.