New York, California, and now Washington, D.C., have rejected the so-called Jewel doctrine. The three jurisdictions have all concluded that profits earned on unfinished hourly business after a law firm dissolves are not property of the “old” firm and can be retained by the new firm that completes the work.
In the three jurisdictions, the issues arose in the bankruptcies of the law firms Howrey LLP, Heller Ehrman LLP, Coudert Brothers LP and Thelen LLP. In those cases, the trustees had sued former partners to recover profits on matters they completed after leaving their “old” firms.
The suits in those bankruptcies were based on Jewel v. Boxer, a 1984 decision by an intermediate California appellate court. Jewel held that profits earned on unfinished business belong to the “old” firm. Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. Ct. App. 1984).
The Jewel court allowed the new firm to recover only its overhead and rejected arguments based on clients’ rights to select attorneys of their choice. Jewel had been followed in one other California appellate decision, but the issue had not reached the California Supreme Court.
At the highest level among the states, the New York Court of Appeals hit the books first. On a certified question from the Second Circuit, New York’s highest court held in July 2014 that Jewel is not the law in New York. The New York court ruled that there is no property interest in hourly unfinished business because it is “too contingent in nature and speculative to create a present or future property interest.” Thelen LLP, 24 N.Y.3d 16 (2014).
In March 2018, the California Supreme Court answered a certified question from the Ninth Circuit. The California high court held that “a dissolved law firm’s property interest in hourly fee matters is limited to the right to be paid for the work it performs before dissolution.” A “narrow” exception allows the old firm to collect on work performed before dissolution for preserving and transferring hourly fee matters to new counsel of the client’s choice. Heller Ehrman LLP v. Davis Wright Tremaine LLP, 411 P.3d 548 (Cal. 2018). To read ABI’s report on Heller, click here.
In the newest decision on the subject, the District of Columbia Court of Appeals responded on February 13 to a certified question from the Ninth Circuit arising in the bankruptcy of Howrey LLP.
The Howrey firm voted to dissolve in early 2011. In 2013 the chapter 7 trustee sued eight major law firms that had hired former Howrey partners who had taken hourly, non-contingency matters with them to their new firms. The trustee wanted the former partners to account for and turn over the profits from matters they took.
The bankruptcy court denied the law firms’ motion to dismiss, but the district court reversed. The trustee appealed to the Ninth Circuit, where the court of appeals certified questions to the D.C. Court of Appeals.
The D.C. court answered the certified questions in a 33-page opinion resolving an issue of first impression in D.C. The Washington court had no hesitation in ruling for the law firms.
In reaching its conclusions, the D.C. court in significant part trod the same ground as the New York and California courts. Indeed, the D.C. court found the New York and California decisions to be “persuasive.”
Because three top courts have now reached the same result, we won’t belabor the D.C. court’s reasoning. Instead, we drop to the bottom line with the court’s holdings:
- Client matters billed by the hour are not “property” of the “old” law firm, largely because a client has an “unfettered” right to switch firms. The “old” firm has nothing more than a “unilateral expectation” of future fees earned by continuing to work on hourly matters.
- Once a partner leaves the “old” firm, he or she has no duty to account to the “old” firm for “new” profits earned on hourly work begun at the “old” firm. The departed partner only has a limited duty to turn over profits earned on work before departing.
- The “unfinished business rule” does not apply to matters billed hourly. The rule applies only to contingency matters. In those matters, profits earned after dissolution must be remitted to the dissolved firm for distribution among the partners as part of the winding up.
New York, California, and now Washington, D.C., have rejected the so-called Jewel doctrine. The three jurisdictions have all concluded that profits earned on unfinished hourly business after a law firm dissolves are not property of the “old” firm and can be retained by the new firm that completes the work.
In the three jurisdictions, the issues arose in the bankruptcies of the law firms Howrey LLP, Heller Ehrman LLP, Coudert Brothers LP and Thelen LLP. In those cases, the trustees had sued former partners to recover profits on matters they completed after leaving their “old” firms.
The suits in those bankruptcies were based on Jewel v. Boxer, a 1984 decision by an intermediate California appellate court. Jewel held that profits earned on unfinished business belong to the “old” firm. Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. Ct. App. 1984).
The Jewel court allowed the new firm to recover only its overhead and rejected arguments based on clients’ rights to select attorneys of their choice. Jewel had been followed in one other California appellate decision, but the issue had not reached the California Supreme Court.