Tuesday, March 15, 2016

It’s (Risky) Business Time: Global Firms, Terms, Laterals & Business Matters

This week we're featuring several stories on the theme of risk and business. First up, an excellent overview via Hong Kong Lawyer: "Conflicts of Interest: A Challenge for Global Law Firms" --
  • “International conflicts challenges will usually first become an issue when law firms operating in different jurisdictions/countries decide to combine/merge in order to become one global firm and service the needs of international clients. The combined firm will need to decide on the application of different conflicts of interest rules by not only taking into account the different practice areas of the firm, but also local professional conduct rules.”
  • “One approach is to apply the more stringent ABA Model Rules of Professional Conduct (the “US Conflicts Rules”) to every client/matter in every jurisdiction where the global firm operates. However, standards under these rules can be in breach of local conflicts rules, which might not permit consents to a conflict of interest.”
  • “Another approach is to apply the local conflicts rules to local clients/matters. However, cross-border transactions might be problematic if it is unclear at the outset which conflict rules prevail. If a law firm adopts a combination/layering approach of the various conflicts rules, it should be done under careful consideration. While this approach may be more difficult at the outset, it may be the only viable way to avoid breaching local conflicts rules.”
  • “On top of considering the conflicts rules for each client/matter, firms also need to navigate commercial conflicts of interest either imposed by a contractual obligation or, generally, by the client relationship.”
  • Clients want to manage and control the efficiency and cost effectiveness in the delivery of legal services provided by law firms and the way they achieve this is by trying to impose outside counsel guidelines onto the law firms (ie, their terms of business). If law firms agree to outside counsel guidelines with clients then they need to contractually comply with the terms and conditions stipulated by the clients. Most of the time, the client’s terms of business do contradict the terms of business of law firms. The following issues are the ones where the interests between clients and law firms differs the most:
    • “Everyone is the client: representation of the whole corporate family. Clients want to define the client in the matter as everyone in the corporate family, including both subsidiaries and affiliates. However, this broadens the application of the fiduciary duties owed by a solicitor to a client. Including all affiliates is much too broad and might be difficult to comply with. Hence, law firms should try to define the client as narrow as possible.”
    • “No adversity: cannot be adverse to a client without consent. Clients want to impose the duty of loyalty under the US Conflicts Rules to jurisdictions where local conflicts rules do not require it. This could put a law firm at a competitive disadvantage as waivers would need to be sought which would not be required under the local conflicts rules, slowing down matter acceptance or even rejecting matters if a waiver cannot be obtained.”
    • “Best rates: most favoured nation clause. Clients want to obtain the same low rate that a law firm offers to its long-term clients, who deserve this rate due to its relationship and volume of work it gives to the law firm. This arrangement can be unfair to the law firm and other clients. Furthermore, it might even be impossible to measure due to the different types of services law firms provide to different client.”
  • “Hence, law firms need to be careful not to contractually incorporate the US Conflicts Rules into engagement terms which would need to be considered additionally when resolving conflicts of interest issues for local matters.”
Next, via the Partner Departure Blog (see the full story for California-specific analysis) comes: “Law Firm Can’t Require Departing Partner to Forfeit Equity If Partner Takes Clients” --
  • “In an important order that impacts the field of partner departures nationwide, a district court judge in the Eastern District of Virginia held that a provision in a law firm’s operating agreement that provides that a withdrawing partner who ‘takes clients’ forfeits up to fifty percent of his equity in the firm is void and unenforceable because it places an impermissible restriction on the partner’s right to practice law. (Moskowitz v. Jacobson Holman, PLLC, (E.D. Va. Jan. 28, 2016.)”
  • “In analyzing whether or not the forfeiture provision in the Jacobson partnership agreement was valid, the Court interpreted Rule 5.6 to prohibit, ‘not only outright restrictions on practice, but also indirect restraints, such as financial disincentives.’ (Order, Page 5.)”
  • “And while this provision on its face does not impose a direct restriction on the member’s right the practice law, the Court noted that it certainly ‘attaches a financial cost to a withdrawing member’s decision to continue to represent any of his or her clients.’”

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