In re: Coudert Brothers LLP, Debtor. -------------------------------- Development Specialists, Inc., Respondent-Appellant, -------------------------------- K&L Gates LLP et al., Appellants-Respondents, -------------------------------- Akin Gump Strauss Hauer & Feld LLP, et al., Appellants-Respondents.BriefN.Y.June 4, 2014To be Argued by: SHAY DVORETZKY (Time Requested: 15 Minutes) CTQ-2013-00010 Court of Appeals of the State of New York IN THE MATTER OF: COUDERT BROTHERS LLP, Debtor. –––––––––––––––––––––––––––––– DEVELOPMENT SPECIALISTS, INC., Plaintiff-Respondent-Appellant. –––––––––––––––––––––––––––––– GEOFFROY DE FOESTRAETS, JINGZHOU TAO, Defendants. – and – K&L GATES LLP, MORRISON & FOERSTER LLP, Defendants-Appellants-Respondents. –––––––––––––––––––––––––––––– (For Continuation of Caption See Inside Cover) –––––––––––––––––––––––––––––– ON APPEAL FROM THE QUESTION CERTIFIED BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT IN DOCKET NO. 12-4916-BK (L) CORRECTED REPLY BRIEF FOR DEFENDANT-APPELLANT-RESPONDENT JONES DAY SHAY DVORETZKY JONES DAY 51 Louisiana Avenue, NW Washington, DC 20001 Tel.: (202) 879-3939 Fax: (202) 626-1700 GEOFFREY S. STEWART JONES DAY 222 East 41st Street New York, New York 10017 Tel.: (212) 326-3939 Fax: (212) 755-7306 JEFFREY B. ELLMAN JONES DAY 1420 Peachtree Street, NE Atlanta, Georgia 30309 Tel.: (404) 521-3939 Fax: (404) 581-8330 Attorneys for Defendant-Appellant-Respondent Jones Day Dated: May 8, 2014 JONES DAY, ARENT FOX LLP, DLA PIPER LLP, DORSEY & WHITNEY LLP, DECHERT LLP, SHEPPARD MULLIN RICHTER & HAMPTON, LLP, SCOTT JONES, DUANE MORRIS LLP, AKIN GUMP STRAUSS HAUER & FELD, LLP, Defendants-Appellants-Respondents. TABLE OF CONTENTS Page -i- INTRODUCTION .................................................................................................... 1 ARGUMENT ............................................................................................................ 4 I. CLIENT MATTERS ARE NOT THE “PROPERTY” OF A LAW FIRM .......................................................................................... 4 A. A Law Firm’s Only Property Interest in a Client Matter Is a Conditional Right to the Legal Fees for Work that the Firm Performs While a Client Allows a Firm to Continue Handling that Matter .................................................. 5 B. Allowing Law Firms To Own Client Matters Is Antithetical to New York Law and Professional Ethics Rules ........................................................................................... 6 C. New York Law Regarding a Dissolved Law Firm’s Right to Contingency Fees Demonstrates that Law Firms Have No Interest in Fees Paid for Work They Did Not Perform or Risk They Did Not Bear ........................................................ 9 II. DSI CANNOT RELY ON PARTNERSHIP LAW TO CREATE A PROPERTY INTEREST THAT IS OTHERWISE NOT COGNIZABLE ......................................................................... 13 A. The “Unfinished Business Doctrine” Does Not Create Property Interests In Future Fees For Work On a Matter that a Client Has Transferred to a New Firm ........................... 14 B. Stem Does Not Support DSI’s Contention that a Dissolving Firm Is Entitled to All Future Fees on a Client Matter Irrespective of Who Performs the Work ...................... 17 C. No Other Case that DSI Cites Supports Its Contention that Partnership Law Entitles a Dissolving Firm to All Future Fees on a Client Matter Irrespective of Who Performs the Work ................................................................... 22 III. TREATING A CLIENT MATTER AS LAW FIRM PROPERTY WOULD LEAD TO INEQUITABLE RESULTS ....... 26 CONCLUSION ....................................................................................................... 28 -ii- TABLE OF AUTHORITIES Page CASES Beckman v. Farmer, 579 A.2d 618 (D.C. 1990) .................................................................................. 15 Castle v. Marks, 50 A.D. 320 (N.Y. App. Div. 1900) ............................................................. 25, 26 City of Burlington v. Dague, 505 U.S. 557 (1992) ............................................................................................ 11 Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989) ............................................................................................. 6 Denburg v. Parker Chapin Flattau & Kimpl, 82 N.Y.2d 375 (1993) ..................................................................................... 6, 27 Denver v. Roane, 99 U.S. 355 (1979) .............................................................................................. 15 Dwyer v. Nicholson, 89 A.D.2d 597 (N.Y. App. Div. 1982) ............................................................... 24 Elghanian v. Elghanian, 277 A.D.2d 162 (N.Y. App. Div. 2000) ............................................................. 20 Geist v. Burnstine, 19 N.Y.S.2d 76 (1940) ........................................................................................ 24 Geron v. Robinson & Cole LLP, 476 B.R. 732 (S.D.N.Y. 2012) ........................................................................... 13 Greenspan v. Orrick, Harrington & Sutcliffe (In re Broeck, Phleger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009) ..................................... 24 Holyoke v. Adams, 59 N.Y. 233 (1874) ............................................................................................. 21 In re Cooperman, 83 N.Y.2d 465 (1994) ................................................................................. 6, 7, 12 -iii- In re Heller Ehrman, No. 10-3203DM, 2011 WL 1539796 (Bankr. N.D. Cal. Apr. 22, 2011) ........... 24 Int’l News Serv. v. Assoc. Press, 248 U.S. 215 (1918) .............................................................................................. 4 Jewel v. Boxer, 156 Cal. App. 3d 171 (1984) ........................................................................ 23, 24 King v. Leighton, 100 N.Y. 386 (1885) ........................................................................................... 25 Kirsch v. Leventhal, 181 A.D.2d 222 (N.Y. App. Div. 1992) ....................................................... 12, 13 La Mantia v. Durst, 234 N.J. Super. 534, 561 A.2d 275 (App. Div. 1989) .................................. 11, 12 Labrum & Doak v. Ashdale (In re Labrum & Doak), 227 B.R. 391 (Bankr. E.D. Pa. 1998) ................................................................. 24 Lai Ling Cheng v. Modansky Leasing Co., Inc., 73 N.Y.2d 454 (1989) ......................................................................................... 11 Nishman v. De Marco, 62 N.Y.2d 926 (1984) ........................................................................................... 9 Rhein v. Peeso, 194 A.D. 274 (N.Y. App. Div. 1920) ................................................................. 22 Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997) .......................................................................... 23 Rothman v. Dolin, 20 Cal. App. 4th 755, 24 Cal. Rptr. 2d 571 (1993) ............................................ 23 Santalucia v. Sebright Transp., Inc., 232 F.3d 293 (2d Cir. 2000) ........................................................................passim Seawall Assocs. v. New York, 74 N.Y.2d 92 (1989) ....................................................................................... 4, 16 -iv- Shandell v. Katz, 217 A.D.2d 472 (N.Y. App. Div. 1995) ....................................................... 10, 13 Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, 950 N.Y.S.2d 611, 35 Misc. 3d 1201(A) (2011) ................................................ 11 Stem v. Warren, 227 N.Y. 538 (1920) ....................................................................................passim United States v. Cherokee Nation of Okla., 480 U.S. 700 (1987) ............................................................................................ 13 Verizon New England, Inc. v. Transcom Enhanced Servs., Inc., 21 N.Y.3d 66 (2013) ............................................................................................. 5 Young v. Delaney, 647 A.2d 784 (D.C. 1994) .................................................................................. 23 STATUTES New York Partnership Law § 24 ............................................................................. 20 New York Partnership Law § 43 ............................................................................. 19 New York Partnership Law § 61 ................................................................. 14, 15, 16 New York Partnership Law § 66 ............................................................................. 16 OTHER AUTHORITIES Epstein, In Defense of the Contract at Will, 51 U. CHI. L. REV. 947 (1984) ............................................................................ 28 C.C. Langdell, A Brief Survey of Equity Jurisdiction, 2 HARV. L. REV. 241 (1888-89) .......................................................................... 20 INTRODUCTION The central premise of DSI’s argument is that a dissolved law firm owns a client matter just as it owns a “Jackson Pollack painting.” (A 94.)1 According to DSI, “client matters are partnership property,” a refrain it repeats constantly. (DSI Resp. at 27; see also id. at 1, 6, 10, 14, 22, 27, 36, 39.) This premise is wrong. I. New York law, as set forth in this Court’s precedents and New York’s Rules of Professional Conduct, precludes law firms from owning client matters, and from demanding all future fees on a matter regardless of who does the work. Clients may terminate their engagement with a law firm at any time. And New York law stringently protects a client’s right to retain new counsel of its choosing, and to pay lawyers only for work that they actually perform on the client’s behalf. Thus, Coudert’s retainer agreements did not, and could not, give Coudert any right to own a client or any given matter. Coudert had only a right to the legal fees that it earned for as long as clients allowed Coudert to continue handling their matters. 1 Citations beginning with “A” refer to the Appendix submitted jointly by Appellants- Respondents Akin Gump Strauss Hauer & Feld, LLP, Arent Fox, LLP, Dechert LLP, DLA Piper (US) LLP, Dorsey & Whitney LLP, Duane Morris LLP, K&L Gates LLP, Morrison & Foerster LLP, and Sheppard Mullin Richter & Hampton, LLP. Citations beginning with “DSI App’x” refer to the Appendix submitted by Respondent-Appellant DSI. Citations beginning with “DSI Resp.” refer to the Brief for Respondent-Appellant (filed April 21, 2014), and those beginning with “JD Br.” refer to the Brief for Defendant-Appellant-Respondent Jones Day (filed March 7, 2014). -2- Under DSI’s logic, if a former Coudert client transferred a matter to a third- party firm without any former Coudert partners, the liquidated Coudert would still own the matter and reap the financial benefits, without doing any of the work or taking on any of the risk of handling the matter. Moreover, if law firms owned client matters, then any firm that a client terminated in the middle of a matter, even a firm that did not dissolve, would have a claim to the replacement firm’s profits on that matter in perpetuity. That is plainly not the law. A law firm cannot own a client matter. II. Nor does partnership law allow a dissolved firm to reach out from the grave to demand profits earned by the third-party law firms that took on the clients that the dissolved firm could no longer serve. The Uniform Partnership Act (“UPA”), adopted by New York, does not create new property interests that are not otherwise cognizable. Instead, it provides default rules as to how a law firm’s property must be divided among partners, and defines the duties among parties with respect to that property. For this reason, DSI’s mantra and citations that partners must “wind up” pending engagements and “account to the dissolved firm for unfinished business” and “partnership property” are beside the point. (DSI Resp. at 16-20.) The antecedent question remains: What is the firm’s property that must be wound up and accounted for? The Second Circuit understood this concept in framing the -3- certified question: It did not ask how fees should be allocated among former law partners, but instead whether a client matter can even be considered “property of a law firm” in the first place. Critically, no New York cases hold that a dissolving firm owns all future revenues from matters handled by a third-party firm even after the dissolved firm became incapable of representing its clients. In Stem v. Warren, 227 N.Y. 538 (1920), on which DSI relies heavily, a firm dissolved due to the death of one partner. Two partners of the dissolved firm induced a client to enter a new agreement with them alone to handle a matter, in direct violation of their express agreement with their former partners. In that circumstance—where two partners breached their other partners’ trust and performed work themselves that could have been performed by the former partnership—this Court disregarded the form of a new retainer agreement and imposed a duty to account. But this case is a far cry from Stem. Coudert liquidated and could no longer serve its clients; Coudert’s dissolution plan encouraged its partners to find new homes for its former clients; those clients retained Jones Day through new engagement agreements signed with Jones Day directly, not with individual partners; and Jones Day, far from being a subset of Coudert, brought its own resources, personnel, expertise, and capital to bear on the matters. -4- III. Lastly, DSI provides no sound justification for the inequitable consequences that would result from adopting its arguments. Under DSI’s rule, a law firm that takes on matters that a dissolving firm is unable to handle must work for free—without any compensation save overhead expenses. DSI’s rule would impede client choice by deterring new firms from taking on such matters. It would also lead to additional law firm failures because partners—seeking to avoid a duty to account that is triggered upon dissolution—would flee at the first sign of financial trouble. Numerous amici who speak for the legal profession have underscored these concerns—The American Bar Association; Attorneys’ Liability Assurance Society, Inc.; and the New York State Bar Association, the Association of the Bar of the City of New York, and the New York County Lawyers’ Association. DSI trivializes these consequences; this Court should not. ARGUMENT I. CLIENT MATTERS ARE NOT THE “PROPERTY” OF A LAW FIRM. Contrary to DSI’s contention, no law firm owns client matters. “An essential element of individual property is the legal right to exclude others from enjoying it.” Int’l News Serv. v. Assoc. Press, 248 U.S. 215, 250 (1918) (Brandeis, J., dissenting); see also Seawall Assocs. v. New York, 74 N.Y.2d 92, 103-04 (1989) (same). Here, by virtue of Coudert’s retainer agreements and by operation of New York law, which places paramount importance on client choice, Coudert had no -5- ability to prevent clients from replacing Coudert with new firms on pending matters. Nor does New York law regarding contingency fees support the notion that a firm owns the matters that clients entrust to it. A. A Law Firm’s Only Property Interest in a Client Matter Is a Conditional Right to the Legal Fees for Work that the Firm Performs While a Client Allows a Firm to Continue Handling that Matter. Coudert’s client contracts, which clients could terminate at will, did not give Coudert any property interest in the client matters themselves. As this Court recently explained, a client’s “ability to terminate the relationship at any time without penalty” negates the existence of a property right, because “the expectation of continued or future business is too contingent in nature and speculative to create a present or future property interest.” Verizon New England, Inc. v. Transcom Enhanced Servs., Inc., 21 N.Y.3d 66, 72 (2013). Therefore, if a client decides to retain a new firm—even midway through a matter—the old firm has no claim to the future fees that the new firm will earn. Indeed, not even DSI claims that it would have any interest in fees earned by a firm that a client hired to replace Coudert and that never took on any former Coudert partners. Instead of giving Coudert ownership over an entire client matter, its retainer agreements gave it only a conditional right to fees to the extent that clients allowed Coudert to continue handling matters and to earn those fees. (See also JD Br. 5-8.) -6- B. Allowing Law Firms To Own Client Matters Is Antithetical to New York Law and Professional Ethics Rules. Giving Coudert a right to future fees for work that it did not perform would conflict with New York law governing the attorney-client relationship and would violate New York’s Rules of Professional Conduct. Under New York law, “[c]lients are not merchandise.” Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 98 (1989). Based on this fundamental principle, New York law protects clients in two key ways. First, New York “assiduously” protects clients’ right to retain counsel of their choice. See In re Cooperman, 83 N.Y.2d 465, 473 (1994). Clients have the right to fire counsel midstream, without penalty. Id. And in selecting new counsel, New York public policy supports maximizing client choice. This Court has even invalidated partnership agreements that financially discourage an attorney from representing a firm’s former client or otherwise restrict competing with the firm. See Denburg v. Parker Chapin Flattau & Kimpl, 82 N.Y.2d 375, 382 (1993); Cohen, 75 N.Y.2d at 96. Second, New York law allows lawyers to be compensated only for work that they actually perform. Clients may not promise to pay for legal fees irrespective of whether the lawyer actually does the work. See In re Cooperman, 83 N.Y.2d at 473-74. Likewise, the Rules of Professional Conduct forbid fee splitting unless the -7- lawyers jointly assume responsibility for the case or are paid in proportion to the work they each perform. See N.Y. R. Prof. Conduct 1.5(g). These principles underscore that client matters are not law firm property. If a law firm owned a client matter, it would severely impinge upon a client’s right to terminate its engagement at will and to choose new counsel. Although a client “technically” would still have the ability to fire its counsel, there would be a strong disincentive for other firms to take on the matter given the “economic coercion” of having to pay all the profits to the former firm. In re Cooperman, 83 N.Y.2d at 473-74. Similarly, requiring that all fees on a matter be remitted to the firm that originated the matter is the functional equivalent of impermissible fee splitting, akin to a promise to pay a lawyer for work even if the lawyer does not complete it. Id. Therefore, DSI’s contention that it owns an entire matter is inconsistent with fundamental tenets of New York law. DSI’s attempts to sidestep this authority are unavailing. First, DSI argues that these cases and attendant ethics rules do not address the so-called “unfinished business rule” and cannot trump New York partnership law. (DSI Resp. at 50-53.) But New York jurisprudence, ethical rules, and public policy inform what constitutes a law firm’s property in the first place. Partnership law, by contrast, does not define property; it delineates how property is to be distributed among partners. See infra Part II. There is no conflict between partnership law and these -8- fundamental tenets of the attorney-client relationship. DSI’s objection that adhering to these precepts would clash with partnership law only reflects its confusion about the distinction between property interests and partnership duties. Second, DSI claims that, even if client matters are not “presumptively partnership property,” partners can—and did here—agree “that such matters be treated as partnership property.” (DSI Resp. at 39.) Not so. Coudert’s partnership agreement states that: “The property of the Partnership belongs to the Partnership, and not to the Partners, and a Partner has no individual property rights in any specific assets of the Partnership.” (A43.) This provision reflects the unremarkable proposition that no individual partner can claim a personal interest in partnership property—but it says nothing about what constitutes partnership property in the first place. Moreover, Coudert partners have no authority to agree upon how to distribute property that they do not own, like client matters. Partners cannot unilaterally deem something “partnership property,” subject to agreed terms of dissolution, if it is not their property to begin with. Indeed, for this reason, DSI’s artificial distinction between “property” and “partnership property” is made of whole cloth. (DSI Resp. at 36.) In arguing that law firms own client matters, DSI has stretched the concept of property beyond its breaking point, and thus has had to -9- invent an entirely new concept of “partnership property” distinct from the independent property interests that partners may allocate among themselves. Nor does Nishman v. De Marco, 62 N.Y.2d 926 (1984), suggest that an agreement treating client matters as partnership property would be permissible. (DSI Resp. at 38, 54.) There, this Court stated, in a single sentence without any citation or further elaboration: “[T]here is no merit to the assertion that provisions of the Code of Professional Responsibility preclude giving effect to what the courts below have found was the agreement of the parties with respect to the division of fees received on matters pending at the time of dissolution of the partnership.” 62 N.Y.2d at 929-30 (emphasis added). This one sentence stands only for the uncontroverted principle that partners may agree on how to divide fees actually “received” on client matters. Id. This Court’s opinion does not address how or when such fees were received in Nishman, or when a partnership is entitled to receive fees. Thus, DSI’s reliance on it is misplaced. C. New York Law Regarding a Dissolved Law Firm’s Right to Contingency Fees Demonstrates that Law Firms Have No Interest in Fees Paid for Work They Did Not Perform or Risk They Did Not Bear. Contrary to DSI’s suggestion, New York law regarding a law firm’s interest in a contingency fee does not establish that Coudert has an interest in all fees collected on a given matter, regardless of who actually performs the work. (DSI Resp. at 27-32.) DSI relies on language in some New York cases stating that a -10- dissolved firm is not limited to quantum meruit recovery for the value of the time that its lawyers spent working on contingency matters prior to dissolution. See, e.g., Shandell v. Katz, 217 A.D.2d 472, 472 (N.Y. App. Div. 1995); Santalucia v. Sebright Transp., Inc., 232 F.3d 293, 297 (2d Cir. 2000). From that language, DSI erroneously concludes that dissolved firms have an interest in contingency fees that extends beyond the contributions of those firms, such that law firms can own entire client matters. (DSI Resp. at 28.) As an initial matter, the New York cases on which DSI relies reject quantum meruit as a measure of recovery. To the extent that DSI suggests that those cases reject quantum meruit as a theory of recovery, and that by extension a dissolved firm must derive its interest in a contingent fee from a property interest in the matter itself, DSI is mistaken. In Shandell, for example, the court declined to use quantum meruit “as a measure of [the] work [an attorney] performed prior to dissolution.” 217 A.D.2d at 473 (emphasis added). Similarly, in Santalucia, the Second Circuit rejected the district court’s method of calculating a dissolved law firm’s recovery, holding that quantum meruit was an insufficient measure of the firm’s interest. 232 F.3d at 296-97. The better measure, these courts have held, is “the value of the case at the date of dissolution.” Id. at 298; see Shandell, 217 A.D.2d at 473. But the firm’s interest still arises from principles of quantum meruit—i.e., the fact that it should be compensated for its efforts. See Santalucia, -11- 232 F.3d at 298. Cf. Lai Ling Cheng v. Modansky Leasing Co., Inc., 73 N.Y.2d 454, 459 (1989) (a discharged attorney’s entitlement to a contingency fee, however calculated, is based on quantum meruit). When courts have rejected quantum meruit as the measure of a dissolved firm’s interest in contingency fee awards, they have simply meant that the firm’s recovery is not limited to the lodestar–i.e., “a reasonable hourly fee multiplied by the number of hours [the firm] had devoted to the [relevant] matter.” See Santalucia, 232 F.3d at 294. Cf. La Mantia v. Durst, 234 N.J. Super. 534, 541, 561 A.2d 275, 278 (App. Div. 1989) (noting that trial judges have sometimes improperly “equated quantum meruit to simply factoring the hours spent multiplied by the hourly rate”). A dissolved firm is entitled to compensation not only for the time and expenses it actually invested, but also for the risk it took on. This rule makes good sense: When law firms take a case on contingency, they do so with the hope of prevailing for a client and sharing in the client’s award, but they also accept the risk that they will not recover anything at all. See Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, 950 N.Y.S.2d 611, 35 Misc. 3d 1201(A) (2011) (“A fee collected in a contingency fee case initiated by the former law firm may well result in a fee much greater than the amount of work expended by the lawyer or lawyers handling the case.”). Cf. City of Burlington v. Dague, 505 U.S. 557, 565 (1992) (“An attorney operating on a contingency-fee basis pools -12- the risks presented by his various cases: cases that turn out to be successful pay for the time he gambled on those that did not.”). In this context, the lodestar—which compensates the initial firm “solely for time spent”—is an inadequate measure because it “fails to recognize the value of the initial firm’s willingness to risk the time and money to develop the claim,” and “does not permit that firm to benefit from the risk taken.” La Mantia, 561 A.2d at 279. The inadequacy of the lodestar as a measure of a dissolved firm’s right to contingency fees does not mean, however, that a dissolved firm owns the matter and is entitled to the entire contingency fee. See Kirsch v. Leventhal, 181 A.D.2d 222, 226 (N.Y. App. Div. 1992); see also Santalucia, 232 F.3d at 298. Indeed, New York courts have stated repeatedly that a dissolved partnership is entitled only to the value of a contingency case at the date of dissolution—not the value of the case at the date of the matter’s completion. See Kirsch, 181 A.D.2d at 226 (a former partner “is only entitled to the value of his interest at the date of dissolution”); Santalucia, 232 F.3d at 298 (“[T]he dissolved firm is entitled only to the value of the case at the date of dissolution, with interest.”). This rule reflects the fundamental principle that law firms do not have any interest in fees paid for work that they do not perform or for risk that they do not bear. See In re Cooperman, 83 N.Y.2d at 496; Demov, 53 N.Y.2d at 557-58. Moreover, preventing the dissolved firm from claiming the entire contingency fee ensures that -13- new firms are not discouraged from taking on a contingency case midstream; they can be confident that they, too, may collect, if successful, for the risk they bear on the contingency matter. See Kirsch, 181 A.D.2d at 226. Thus, although some New York courts have loosely characterized contingency cases as “assets” subject to post-dissolution distribution, see, e.g., Shandell, 217 A.D.2d at 473; Kirsch, 181 A.D.2d at 225, they were referring to the dissolved firm’s interest in a contingency fee at the date of dissolution, rather than in the entire client matter. II. DSI CANNOT RELY ON PARTNERSHIP LAW TO CREATE A PROPERTY INTEREST THAT IS OTHERWISE NOT COGNIZABLE. Having failed to demonstrate that Coudert’s retainer agreements or attorney- client relationships could give rise to a property interest in client matters, DSI retreats to the fiduciary duty of partners of a dissolving firm to “account” to one another as the firm “winds up.” (See, e.g., DSI Resp. at 16-20, 22-27, 33-38, 40- 48.) Partnership law, however, does not create new partnership property interests; it provides default rules for how otherwise-cognizable property should be allocated. See United States v. Cherokee Nation of Okla., 480 U.S. 700, 707 (1987) (explaining that fiduciary duties “do not create property rights where none would otherwise exist”); Geron v. Robinson & Cole LLP, 476 B.R. 732, 742 (S.D.N.Y. 2012) (“The purpose of the UPA is to harmonize partners’ duties regarding -14- partnership property, not to delineate the scope of such property.”). DSI repeatedly misses this point. To be sure, partners may have a post-dissolution duty to account where they earn post-dissolution profits on “partnership business” of the dissolving firm. Thus, at most, a duty to account applies (1) where a partner earns post-dissolution profits under an existing retainer agreement with the dissolving firm, or (2) if the partner earns profits that, while ostensibly earned under a new retainer agreement, are deemed in equity to have been earned on behalf of the dissolving partnership. But no case gives Coudert a right to an accounting from Jones Day for profits from matters that Coudert was unable to handle, and that were handled instead by Jones Day using its own personnel, capital, resources, and expertise. A. The “Unfinished Business Doctrine” Does Not Create Property Interests In Future Fees For Work On a Matter that a Client Has Transferred to a New Firm. DSI bases much of its argument that “client matters are partnership property” on the so-called “unfinished business doctrine.” (DSI Resp. at 2, 16, 22-25, 41-45, 57.) That doctrine stems from the principle that, “[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.” New York Partnership Law § 61 (McKinney 2013). But the “unfinished business doctrine” does not create property rights; it merely provides that the partners’ fiduciary duties to account for partnership property continue as -15- they take “act[s] appropriate for winding up partnership affairs or completing transactions unfinished at dissolution.” Id. § 66(1)(a). Law firm partners, however, can only “complete[]” client matters “on dissolution” if a client allows them to do so. Id. § 61. Therefore, if a client continues to allow the dissolving partnership to handle the matter under the original retainer, any fees earned would be properly attributable to the partnership. As described in Jones Day’s opening brief, the so-called “unfinished business rule” indeed originated at common law in cases where the surviving partner completed work under the original retainer agreement. (JD Br. at 10-12.) See Denver v. Roane, 99 U.S. 355, 356 (1979). That was the case in Beckman v. Farmer, 579 A.2d 618 (D.C. 1990), upon which DSI heavily relies (DSI Resp. at 15, 41, 42, 45, 66); there, the post-dissolution work was performed under the same retainer agreement between the client and the dissolved firm. 579 A.2d at 636 & n.24. Conversely, if a client decides to terminate its relationship with the dissolved partnership, there is no more work for the dissolved partnership to do: The matter is automatically wound up. Certainly, “wind up is not complete when the partner joins a new law firm,” as DSI mischaracterizes Jones Day’s argument. (DSI Resp. at 37 (capitalization altered).) But if a client retains a third-party firm with no former Coudert partners—e.g., “Smith & Smith,” as in Jones Day’s hypothetical from its opening brief (JD Br. at 7)—no one would contend that the former -16- Coudert partners still, somehow, need to “wind up” the matter or that a “transaction[] unfinished at dissolution” remained for the former firm to “complete[].” New York Partnership Law §§ 61, 66(1)(a). So, too, if a client retains a third-party firm that a former Coudert partner has joined, that does not make the third-party firm’s work attributable to Coudert. When a former client decides to enter a new contract, with a new firm that has new partners, new associates, new resources, and new expertise, there is likewise no basis to believe that the old firm still retains the so-called “unfinished business.” This is all the more true where, as here, Coudert was completely incapable of performing under the contract. Although a dissolving firm might, in some situations, be able to continue to perform the work, Coudert could not; it closed its premises, liquidated its assets, fired its staff, and dispersed its lawyers. There was no identifiable successor firm. Indeed, the sheer number of law firms that DSI has sued shows how widely Coudert’s partners were spread. Because Coudert could not handle its engagements, its clients had to take their work elsewhere. This was not a circumstance where the dissolving firm could wind up its “unfinished business.” DSI counters that a “winding-up partner” should not be able to “terminate his fiduciary duties to the dissolved firm simply by joining forces with a third party and then having the client enter a new contract.” (DSI Resp. at 37.) Where a -17- plaintiff proves a true subterfuge, a court might disregard a sham retainer agreement and impose a duty to account on the individual partner. But that is nothing like this case, in which Coudert was unable to continue representing clients; Coudert’s dissolution agreement expressly encouraged partners to help their clients find new firms (DSI App’x at A76); Coudert’s former clients retained Jones Day, a bona fide, separate entity from Coudert; and the retainer agreement was between the client and Jones Day, rather than any former Coudert partner. B. Stem Does Not Support DSI’s Contention that a Dissolving Firm Is Entitled to All Future Fees on a Client Matter Irrespective of Who Performs the Work. DSI contends that Stem v. Warren, 227 N.Y. 538 (1920), stands for the proposition that a dissolved firm is entitled to all future fees irrespective of whether a client enters into a new agreement with a different firm. But such an overbroad reading is divorced from Stem’s facts and reasoning. Stem involved a partnership consisting of two underlying partnerships. The death of a partner, Mr. Reed, dissolved one of the underlying partnerships, thus automatically dissolving the larger partnership as well. Id. at 546. However, neither of the underlying partnerships was liquidated in the sense that Coudert was liquidated here. In fact, except for the recently deceased partner, all of the individuals and both of the underlying partnerships were ready, willing, and able to complete the larger partnership’s contract with its client. See id. at 546-47. -18- Against this backdrop, some former partners improperly induced the client to terminate its contract with the partnership in direct contravention of the express terms of the partnership agreement. Id. at 545. Specifically, the partnership agreement and the partnership’s contract with its client expressly contemplated that the partnership would continue the client’s business even in the event of the death of a partner, Mr. Reed. Id. at 542-43. Yet, upon Mr. Reed’s death and the dissolution of the partnership, two of the partners—without “any suggestion by the client”—persuaded the client to terminate its agreement with the dissolved partnership and enter a new agreement with them alone. Id. at 545. Accordingly, the Court held that the former partners, who had “breach[ed] . . . the trust incident to the partnership,” had a duty to account to the dissolved partnership. Id. Stem differs materially from this case. First, the former Coudert partners did not induce clients to leave the dissolved partnership in contravention of their partnership agreement. To the contrary, in their dissolution plan, the Coudert partners encouraged one another to assist in “the orderly transition of client matters to other firms or service providers.” (DSI App’x at A76.) Moreover, unlike in Stem, Coudert’s retainer agreements did not anticipate that client representations would survive the firm’s dissolution. Second, in Stem, the client entered into a new retainer agreement with a subset of the former partnership (i.e., two of the four former partners), rather than -19- with an entirely new entity with new partners, resources, and expertise. Those two partners sought to arrogate to themselves an opportunity that an ongoing successor to the former firm stood ready to handle with them. By contrast, when Coudert’s former clients retained Jones Day, they entered into substantively new representations with a third-party firm—one that included former Coudert partners, to be sure, but that also provided vast resources and services beyond those of the liquidated Coudert. Moreover, once Coudert dissolved, and its personnel and assets dispersed, it was unable to handle any client matters. DSI deems that undisputed fact “irrelevant.” (DSI Resp. at 37 n.19.) That Coudert was unable to represent its clients, however, confirms that former Coudert partners did not siphon off work for themselves that should have otherwise been wound up by the partnership (had the clients permitted it). Unlike in Stem, Coudert had no ongoing successor that could have handled the matters at issue. Third, in Stem, the Court held that the former partners had a fiduciary duty to account to the dissolved partnership—but it imposed no such duties upon a third party like Jones Day. Indeed, partnership law governs the duties of partners to one another. See New York Partnership Law § 43 (McKinney 2013) (providing that “[e]very partner must account to the partnership” for partnership property (emphasis added)). Likewise, at common law, subject to limited, obscure exceptions not applicable here, courts would not order an accounting absent a -20- fiduciary relationship between the parties. See C.C. Langdell, A Brief Survey of Equity Jurisdiction, 2 HARV. L. REV. 241, 248 (1888-89) (“[T]here must be a fiduciary relation between the plaintiff and the defendant, or, as the books of the common law express it, there must be privity between them.”); see also Elghanian v. Elghanian, 277 A.D.2d 162, 162 (N.Y. App. Div. 2000) (“Plaintiff’s demand for an accounting sounding in equity was properly rejected since there is no evidence supporting a conclusion that defendants owed plaintiff a duty based on a special relationship.”). Jones Day, of course, was never a partner of Coudert, and never had any fiduciary duties to it.2 Ignoring these key differences, DSI relies on Stem for three propositions, each of which is unavailing. First, DSI suggests that “an unperformed contract between a client and a professional service partnership that is terminable at will is not terminated by dissolution of the partnership.” (DSI Resp. at 24.) True, but it is the decision by Coudert’s former clients to terminate their contracts that is dispositive here—and all the more so because Coudert both dissolved and 2 New York Partnership Law § 24, cited in passing on page 69 of DSI’s brief, does not give DSI the right to an accounting for Jones Day’s profits. Section 24 explains that for “any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership . . . the partnership is liable therefor to the same extent as the partner so acting.” New York Partnership Law § 24 (McKinney 2013). But a former partner’s duty to account to Coudert, a separate partnership, is not part of “the ordinary course of [Jones Day’s] partnership.” Id. Thus, there is no basis for DSI to reach beyond the bounds of fiduciaries to hold Jones Day accountable. -21- liquidated, so that its clients had to look elsewhere for law firms that could represent them. Second, according to DSI, Stem holds that an “unfinished contract remains a firm asset” upon dissolution. (DSI Resp. at 24.) While Stem referred to the contract at issue as an “asset” of the partnership, 227 N.Y. at 546-57, that contract gave the partnership the right to work only as long as the client allowed. The partnership in Stem could not prevent the client from taking its matter to a different firm. The same is true of Coudert’s client contracts, as described in Part I.A, supra. Therefore, this Court’s reference to an unfinished contract as an “asset” must be understood in the particular context in which it was used. See Holyoke v. Adams, 59 N.Y. 233, 237 (1874) (rejecting interpretation of precedent even though “[t]here may be expressions there which, if separated from the context and from the facts of the case, are susceptible of such interpretation.”). This Court described a limited asset (i.e., a conditional expectation of future fees for as long as the client permitted them to be earned)—not an absolute property interest in the client matter. Third, DSI contends that, per Stem, “if the client terminates the contract post-dissolution and separately enters into a new contract with one of the former partners, that former partner is obligated, consistent with his fiduciary duties, to account to the dissolved firm and turn over any profit realized on completion of the services that the dissolved partnership had originally contracted to perform.” (DSI -22- Resp. at 24 (emphasis added).) This articulation of Stem validates Jones Day’s reading of the case. When “one of the former partners” enters separately into a new but substantially similar contract with the client post-dissolution to perform the client matter, thereby directing all the profits to himself (or a subset of former partners) instead of an ongoing successor of the dissolved firm, he may have a duty to account. But that is wholly different from this case, in which Coudert could no longer handle its client matters and the clients entered into new engagements with Jones Day, a new and distinct third-party firm. C. No Other Case that DSI Cites Supports Its Contention that Partnership Law Entitles a Dissolving Firm to All Future Fees on a Client Matter Irrespective of Who Performs the Work. While DSI relies most heavily on Stem, the other authorities that it cites are equally unavailing, and do not establish Coudert’s right to profits earned by Jones Day. Like Stem, the other New York cases cited by DSI in which courts have disregarded a new contract have all involved new agreements solely between a client and a former partner or subset of partners from the dissolving firm. See, e.g., Rhein v. Peeso, 194 A.D. 274, 276 (N.Y. App. Div. 1920) (two-person dentistry partnership dissolved and one partner made an agreement with client to complete ongoing dental work); Santalucia, 232 F.3d at 295-96 (law firm with four named -23- partners dissolved; one of those partners individually retained former client to finish wrongful death suit). The same is true for DSI’s state cases from other jurisdictions. In Frates v. Nichols, for example, two partners of a dissolved firm formed their own practice and entered retainer agreements with the dissolved firm’s former clients to continue working on a series of negligence cases. 167 So. 2d 77, 79 (1964). The Florida court recognized that, in hiring the new firm, all the client did was “manifest [its] intention of retaining [the former partners] to fulfill the continuing obligation of the [dissolved] firm.” Id. at 80. That intention was manifest by the fact that the client did not retain an entirely new firm, but instead retained a law firm that was merely a subset of the dissolved firm. Those partners performed the work not in the context of a third-party firm—with new partners, resources, and expertise—but instead, just as they could have had they been winding up on behalf of the dissolved partnership. See also Jewel v. Boxer, 156 Cal. App. 3d 171, 178 (1984). 3 3 None of the cases that DSI cites (from New York or elsewhere) applying the so-called “unfinished business” doctrine grant a discharged firm a right to profits from the work completed post-dissolution by a third party firm, as opposed to by a subset of the original partners. See e.g., Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997) (six-person partnership dissolved and several partners established new firm and represented clients on matters handled by the original partnership; only persons sharing in profits on those matters were partners of original firm); Young v. Delaney, 647 A.2d 784 (D.C. 1994) (four-person partnership dissolved and two partners took responsibility for pending cases; only persons who shared in profits from those cases were the two former partners); Rothman v. Dolin, 20 Cal. App. 4th 755, 24 Cal. Rptr. 2d -24- Indeed, in the only state case that DSI cites in which post-dissolution work was performed by a third-party firm (composed of one of the former partners and several other partners that had no affiliation with the dissolved firm), the court held that no accounting was required. In Welman v. Parker, a law partner (Parker) joined a new firm upon her firm’s dissolution; that new firm contained multiple partners that had never been associated with the dissolved firm. 328 S.W.3d 451, 454 (Mo. Ct. App. 2010). Some clients of the dissolved firm signed new retainer agreements with Parker’s new firm, and her former partners sought an accounting for profits made on the dissolved firm’s former matters. Id. Explaining that “[c]lients are not the possession of anyone,” the court rejected the notion that either Parker or her new firm had to account for profits made for completing a dissolved firm’s uncompleted matters. Id. at 456-57. (continued…) 571 (1993) (two shareholders in a two-shareholder professional corporation agreed to split up and divide the firm’s cases; the only persons who shared in profits from the new substituted engagements with the clients were the former shareholders); Rosenfeld, 146 Cal. App. 3d 200 (two partners in a 17-partner law partnership left with the firm’s biggest contingency case; the only persons who shared in profits from the substituted engagement with the client were the two former partners); Dwyer v. Nicholson, 89 A.D.2d 597 (N.Y. App. Div. 1982) (multiple partners failed to share post-dissolution profits with estate of deceased partner); Geist v. Burnstine, 19 N.Y.S.2d 76 (1940) (two-person partnership dissolved, each partner was entitled to share in post- dissolution profits made by the other). But see In re Heller Ehrman, No. 10-3203DM, 2011 WL 1539796 (Bankr. N.D. Cal. Apr. 22, 2011) (in a fraudulent transfer case, incorporating the same bankruptcy judge’s analysis in Greenspan v. Orrick, Harrington & Sutcliffe (In re Broeck, Phleger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009)); Labrum & Doak v. Ashdale (In re Labrum & Doak), 227 B.R. 391 (Bankr. E.D. Pa. 1998) (imposing a duty to account only on individual partners and only for the profits that they personally earned, not on the firm that they joined for its profits). -25- Finally, contrary to DSI’s contention, King v. Leighton, 100 N.Y. 386 (1885), and Castle v. Marks, 50 A.D. 320 (N.Y. App. Div. 1900), do not support its claim either. DSI cites King for the proposition that, “‘[i]f at [dissolution] there are adventures, contracts, or enterprises outstanding unperformed,’” they must be “‘concluded and adjusted’” and then the partners can collect their “‘share or interest . . . as shown by the result.’” (DSI Resp. at 19 (quoting King, 100 N.Y. at 393); see also DSI Resp. at 2, 15, 17-19, 25, 32, 36, 42, 64.) But King does not hold that profits on pending contracts are partnership property no matter who completes the contract. In King, “nothing more” happened than one of the partners wound up the affairs of the partnership. 100 N.Y. at 394. Following dissolution, one partner continued the work he was doing on the firm’s business under pending contracts, using “the same premises[,] power, tools and machinery” as before. Id. King does not address what happens when a client retains a different entity than the original partnership to perform a contract. And in Castle, a former partnership entered a contract to be the “sole and exclusive” agent for providing fire department supplies “for a term of three years.” 50 A.D. at 321. When the partnership dissolved one year later, one of the partners secretly arranged for the client to rescind the contract with the partnership and sign a contract that was “substantially the same” but with him alone. Id. The court held that, because of the partnership’s exclusive interest in the three-year contract, the -26- partners maintained a post-dissolution obligation to act for the benefit of the partnership “until such contracts had been fully completed.” Id. But there is no exclusive term-of-years contract here that Coudert could claim as property until it is “complete.” And Castle did not contemplate a new entity, rather than one of the former partners individually, taking over the matter—the precise situation at issue here. III. TREATING A CLIENT MATTER AS LAW FIRM PROPERTY WOULD LEAD TO INEQUITABLE RESULTS. As Jones Day explained in its opening brief, deeming a client matter “property” of a law firm would also result in numerous inequities and anomalies. (JD Br. at 24-27.) Several amici who speak for the legal profession have expanded on these consequences of DSI’s position. (Brief for The American Bar Ass’n as Amicus Curiae, at 14-19; Brief for Attorneys’ Liability Assurance Society, Inc., as Amicus Curiae, at 5-11; Brief for The New York State Bar Ass’n, et al. as Amicus Curiae, at 12-20.) DSI makes light of these concerns. First, it contends that there is “no evidence” that forcing a law firm to remit all profits to a prior firm would disincentivize it from taking on matters in the first place. (DSI Resp. at 54.) It suggests that law firms would have the same incentive to take work “even if profits must be remitted to the dissolved firm in order to obtain new matters from those clients” in the future. (Id.) And it asserts that Jones Day must have made such a calculation because it “was certainly aware” that it had -27- to remit profits on former Coudert matters when it “extended offers to the Coudert Partners” and agreed to represent former Coudert clients. (Id. at 63). The only reason that the consequences of DSI’s approach are not borne out by “evidence” is that no appellate court has ever adopted a rule requiring third- party firms like Jones Day to disgorge profits to dissolved firms like Coudert. Should such a rule be adopted, the economic incentives that it would create are self-evident. Even the District Court agreed with this basic proposition. (A112-14.) See also Denburg, 82 N.Y. at 380 (explaining that it is “clear” that “financial disincentives against competition . . . are objectively unreasonable primarily because they interfere with a client’s choice of counsel”). Jones Day’s actions provide no counterpoint. Jones Day was not “aware” that it had to remit fees to Coudert; indeed, that is the question of law certified here. Absent a clear indication to the contrary, Jones Day had no reason to believe that it would owe Coudert the profits for work that Jones Day, rather than Coudert, performed. Second, DSI argues that, even if its proposed rule did diminish client choice, this Court should not be concerned because “[c]onflicts of interest or a client’s inability to pay the fees may preclude a client from retaining her preferred counsel” anyway. (DSI Resp. at 55.) But the fact that a “client’s right to choose counsel is not . . . unlimited” does not mean that the Court should disregard New York’s strong public policy favoring client choice to the maximum extent possible. (Id.) -28- Third, DSI argues that, “because the Partnership Law provides only default rules, law partnerships can opt out of the application of the provisions at issue by amending their agreements to provide that their partners are not subject to the Fiduciary Duties post-dissolution.” (DSI Resp. at 61.) Default rules, however, are fashioned to provide an equitable or efficient arrangement for the vast majority of cases, in the absence of an express agreement. Epstein, In Defense of the Contract at Will, 51 U. CHI. L. REV. 947, 951 (1984) (“The rule of construction is normally chosen because it reflects the dominant practice in a given class of cases and because that practice is itself regarded as making good sense for the standard transactions it governs.”). A default rule that parties must routinely modify to comport with public policy and preserve client choice contravenes the very purpose of default rules in the first place. CONCLUSION For the reasons stated above, this Court should hold that a law firm does not have a property interest in client matters. Thus, where a law partnership dissolves and its clients hire another law firm that has taken on former partners of the dissolved firm, the new firm has no duty to account for profits that it earns on matters that former clients of the dissolved firm retained it to handle. Dated: May 8,2014 Respectfully Submitted, ~~2~"" JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C. 20001 Tel: (202) 879-3939 Fax: (202) 626-1700 GEOFFREY STEW ART JONES DAY 222 E. 41 st Street New York, New York 10017 Tel: (212) 326-3939 Fax: (212) 755-7306 JEFFREY B. ELLMAN JONES DAY 1420 Peachtree Street, N.E., Suite 800 Atlanta, Georgia 30309 Tel: (404) 521-8939 Fax: (404) 581-8300 Attorneys for Defendant-Appellant- Respondent Jones Day -29-
