When Selling A Law Firm Was Unethical

For years, selling a law firm was prohibited because ethics regulators believed clients, files, and a firm’s goodwill were not something that could be sold. Regulators feared that clients would be treated like merchandise. Other ethics worries included the possibility of sharing fees with a non-lawyer (spouse of a deceased lawyer) and the ban on payments to anyone for recommending the lawyer’s services.

These ethics concerns did not affect larger law firms, which would just buy out partners, i.e. the partnership would return the percentage of the equity owned by the retiring partner through various retirement plans. Similarly, practices were “sold” via mergers and acquisitions.

Solo practitioners had to be more creative. Selling a law firm’s physical fixtures and furnishings for more than their reasonable market value was a common way to get around the prohibition. Another way was to create a sham partnership, in which the departing lawyer received “retirement benefits” from the new partner. Solos who were unwilling or unable to take advantage of one of those options, would simply give away their clients—or just close up shop.

All of this began to change about 30 years ago. In 1989, California became the first state to adopt a rule permitting the sale of a practice. The following year, the ABA adopted Model Rule 1.17 allowing the sale of an entire practice. In 2002, the Model Rule was amended to permit the partial sale of a practice. Most states, though not all, have adopted Model Rule 1.17 or a modified version.

This policy change was largely based on a desire for transparency and to level the playing field between solos and small firms and firms of larger sizes. In addition, regulators decided it would be better to have client matters placed in the hands of a (presumably) pre-screened lawyer than to force clients to find a new one.

In sum, the history of Rule 1.17 is a perfect example of how outdated notions of practicing law have succumbed to the realities of the marketplace.