Opinion
January 8, 1998.
ORDER
Pursuant to Article V, § 4, of the South Carolina Constitution, the Rules of Professional Conduct contained in Rule 407, SCACR, are amended by adding the following Rule and Comment:
RULE 1.17 SALE OF LAW PRACTICE
(a) A lawyer or a law firm may sell or purchase a law practice, including good will, if the following conditions are satisfied:
(1) The seller ceases to engage in the private practice of law in the geographical area in which the seller's practice has been conducted;
(2) The practice is sold as an entirety to another lawyer or law firm;
(3) Written notice is given to each of the seller's active clients regarding:
(i) the proposed sale;
(ii) the terms of any proposed change in the fee arrangement authorized by paragraph (b);
(iii) the client's right to retain other counsel or to take possession of the client's file;
(iv) the fact that the client's consent to the sale will be presumed if the client does not take any action or does not otherwise object within forty-five (45) days of the date of the mailing of the notice; and
(4) A notice is published in a newspaper of general circulation in the geographical area in which the practice has been conducted regarding:
(i) the proposed sale;
(ii) the client's right to retain other counsel or to take possession of the client's file;
(iii) the fact that active clients will be or have been given written notice regarding the proposed sale and that their consent to the sale will be presumed if they do not take any action or object within forty-five (45) days of the date of mailing of the written notice;
(iv) the fact that the selling lawyer will retain the files of inactive clients unless those clients give permission for the transfer of their files or, if the parties to the sale elect to give written notice to an inactive client in the manner provided by paragraph (a)(3) above, the inactive client's consent to the sale will be presumed if the client does not take any action or does not otherwise object within forty-five (45) days of the date of the mailing of the notice.
(b) The fees charged clients shall not be increased by reason of the sale. The purchaser may, however, refuse to undertake the representation unless the client consents to pay the purchaser fees at a rate not exceeding the fees charged by the purchaser for rendering substantially similar services prior to the initiation of the purchase negotiations.
(c) The agreement for the sale of a law practice may include reasonable restrictions on the seller's right to practice without violating Rule 5.6.
COMMENT:
The practice of law is a profession, not merely a business. Clients are not commodities that can be purchased and sold at will. Pursuant to this Rule, when a lawyer or an entire firm ceases to practice and another lawyer or firm takes over the representation, the selling lawyer or firm may obtain compensation for the reasonable value of the practice as may withdrawing partners of law firms. See Rules 5.4 and 5.6.
Termination of Practice by the Seller
The requirement that all of the private practice be sold is satisfied if the seller in good faith makes the entire practice available for sale to the purchaser. The fact that a number of the seller's clients decide not to be represented by the purchaser but take their matters elsewhere, therefore, does not result in a violation. Neither does a return to private practice as a result of an unanticipated change in circumstances result in a violation. For example, a lawyer who has sold the practice to accept a judicial office does not violate the requirement that the sale be attendant to cessation of practice if the lawyer later resumes private practice in the same geographic area after ceasing to hold judicial office due to retirement, resignation or the failure to be reelected or reappointed.
The requirement that the seller cease to engage in the private practice of law in the geographic area does not prohibit employment as a lawyer on the staff of a public agency or a legal services entity which provides legal services to the poor, or as in-house counsel to a business even in the geographic area in which the private practice was located.
The Rule permits a sale attendant upon retirement from the private practice of law within the jurisdiction. Further, its provisions accommodate the lawyer who sells the practice upon the occasion of moving to another state or geographic area within this state.
Single Purchaser
The Rule requires a single purchaser. The prohibition against piecemeal sale of a practice protects those clients whose matters are less lucrative and who might find it difficult to secure other counsel if a sale could be limited to substantial fee-generating matters. The purchaser is required to undertake all client matters in the practice, subject to client consent. If, however, the purchaser is unable to undertake all client matters because of a conflict of interest in a specific matter respecting which the purchaser is not permitted by Rule 1.7 or another rule to represent the client, the requirement that there be a single purchaser is nevertheless satisfied.
Client Confidences, Consent and Notice
Negotiations between seller and prospective purchaser prior to disclosure of information relating to a specific representation of an identifiable client no more violate the confidentiality provisions of Rule 1.6 than do preliminary discussions concerning the possible association of another lawyer or mergers between firms with respect to which client consent is not required. Providing the purchaser access to client-specific information relating to the representation and to the file, however, requires client consent. The Rule provides that before such information can be disclosed by the seller to the purchaser regarding an active client, the client must be given written notice of the contemplated sale, including the identity of the purchaser and any proposed change in the terms of future representation, and must be told that the decision to consent or make other arrangements must be made within 45 days. If nothing is heard from the active client within that time, consent to the sale is presumed. The Rule also requires that notice be given to both active and inactive clients in a newspaper of general circulation in the geographical area where the seller's practice has been conducted.
It is not envisioned that files of inactive clients will be transferred to the purchaser as part of the sale of the practice, because of the continuing duties to an inactive client that remain vested in the seller. Should the parties choose to transfer files of inactive clients of the seller as part of the sale of the law practice, notice must be given to each inactive client in the same manner as set forth in paragraph (a)(3). For the purposes of this Rule, an inactive client refers to a client whose file has been closed due to the completion or termination of the representation.
All the elements of client autonomy, including the client's absolute right to discharge a lawyer and transfer the representation to another, survive the sale of the practice.
Fee Arrangements Between Client and Purchaser
The sale may not be financed by increases in fees charged the clients of the practice. Existing agreements between the seller and the client as to fees and the scope of the work must be honored by the purchaser, unless the client consents after consultation. The purchaser may, however, advise the client that the purchaser will not undertake the representation unless the client consents to pay the higher fees the purchaser usually charges. To prevent client financing of the sale, the higher fee the purchaser may charge must not exceed the fees charged by the purchaser for substantially similar service rendered prior to the initiation of the purchase negotiations.
The purchaser may not intentionally fragment the practice which is the subject of the sale by charging significantly different fees in substantially similar matters. Doing so would make it possible for the purchaser to avoid the obligation to take over the entire practice by charging arbitrarily higher fees for less lucrative matters, thereby increasing the likelihood that those clients would not consent to the new representation.
Other Applicable Ethical Standards
Lawyers participating in the sale of a law practice are subject to the ethical standards applicable to involving another lawyer in the representation of a client. These include, for example, the seller's obligation to exercise competence in identifying a purchaser qualified to assume the practice and the purchaser's obligation to undertake the representation competently (see Rule 1.1); the obligation to avoid disqualifying conflicts, and to secure client consent after consultation for those conflicts which can be agreed to (see Rule 1.7); and the obligation to protect information relating to the representation (see Rules 1.6 and 1.9).
If approval of the substitution of the purchasing attorney for the selling attorney is required by the rules of any tribunal in which a matter is pending, such approval must be obtained before the matter can be included in the sale (see Rule 1.16).
Applicability of the Rule
This Rule applies to the sale of a law practice by representatives of a deceased, disabled or disappeared lawyer. Thus, the seller may be represented by a nonlawyer representative not subject to these Rules. Since, however, no lawyer may participate in a sale of a law practice which does not conform to the requirements of this Rule, the representatives of the seller as well as the purchasing lawyer can be expected to see to it that they are met.
Admission to or retirement from a law partnership or professional association, retirement plans and similar arrangements, and a sale of tangible assets of a law practice, do not constitute a sale or purchase governed by this Rule. Nor does this Rule govern the transfer of ownership interests or clients between members of a law firm.
This Rule does not apply to the transfers of legal representation between lawyers when such transfers are unrelated to the sale of a practice.
This amendment shall become effective immediately.
IT IS SO ORDERED.