Ethically navigate law firm downsizing

In California, while many law firms continue to expand as the economy strengthens, lay-offs continue to be a market reality.

Faced with attractive opportunities for merger or growth, many law firms are closely examining their productivity. This self-examination often leads to firm housekeeping to improve profitability. In many cases, improved profitability makes a firm a more attractive merger target.

One technique firms use to improve profitability is to shut down unprofitable sectors of their firm. Law firms downsize in different ways. Sometimes, entire practice groups are asked to leave to accommodate inconsistent growth initiatives. Other times, law firms downsize by focusing on individual attorneys or nonattorney staff.

These staffing decisions require ethics compliance and involve claims avoidance challenges. To avoid unnecessary conflict, every termination - whether of an attorney or a member of the support staff - should be treated with the same level of formality to protect the law firm from any issues arising out of its professional, legal and ethical obligations.

For partners, the transition is typically, as it always should be, defined in detail in the partnership agreement. For non-partner attorneys, the transition is often detailed in the correspondence or agreement relating to employment. At a minimum, this involves three important issues.

First, determine a specific date on which the departure is effective. This date determines for the firm's clients when the departing attorney moves from current to former counsel. There may be other issues, such as the accrual of receivables, the determination of distributions and the end of financial obligations. Regardless, the departure date is best defined early, not when issues arise later. The departure date should allow an appropriate amount of time for all necessary steps in the transition process to be completed in a smooth manner.

Second, document the law firm's and the departing attorney's understandings regarding the transition. If there is a disagreement, resolve it. If it cannot be resolved, then determine the firm's position and confirm it in writing.

Generally, this communication should address everything from what is communicated to clients and others to the moving of the partner's furniture. Also, confirm the financial arrangements regarding capital accounts, guarantees, distributions and future payments. Nothing creates trouble faster than a dispute over money.

Use a checklist to avoid issues, from moving the attorney off the firm's health care plan to terminating their email account. The most important step is to avoid any misunderstanding about what is happening and when it is happening. Clarity and transparency pay huge dividends when it comes to avoiding disputes down the road.

Third, confirm the departing attorney continues to comply with ethical and professional obligations. The law firm and its partners have a duty to take reasonable steps to assure the bar rules are followed. Associates often have the same duty, so remind departing attorneys of their responsibilities to maintain confidences and secrets, avoid impermissible conflicts of interest with former clients and act consistently with the candor requirements of the bar rules.

There should also be a procedure in place for addressing the transfer of files. Under California Rules of Professional Conduct, Rule 3-700, the firm has an obligation to ensure that a client who chooses to transfer their matter to the departing attorney's new firm is provided with a copy of their file. To the extent that matters stay with the old firm, the firm must maintain the confidentiality of those matters under California Rules of Professional Conduct, Rule 3-100. Moreover, the departing attorney has an ethical obligation to keep all communications with clients confidential under California Business and Professions Code Section 6068(e)(1) and California Rules of Professional Conduct, Rule 3-100.

The involuntary termination of the law firm's nonattorney employees involves similar issues. For example, when terminating a nonattorney employee, first determine a termination date and document it in writing. Significantly, the termination date is not always the same date as the last day in the office.

Under some circumstances, a law firm may decide to inform an employee of the termination and make that day the employee's last in the office. Certainly, there are circumstances where employees are entitled to notice or have other benefits permitting them to remain on the payroll beyond the date they are informed of their termination. On the other hand, there is no corresponding obligation the employee be permitted to come into the office after being informed of the termination.

Deciding these issues prior to notification is critical. Once decided, absent some extraordinary circumstance, stick to the plan.

Next, confirm in writing what is happening and when. Involuntary terminations involve heightened emotions. A confirming document is the most effective way to assure the plan is followed. A comprehensive checklist addressing everything from facilities access to health care is particularly helpful. The more questions answered, the fewer possibilities exist for disputes.

Then, review the obligations attached to a paralegal, secretary or other nonattorney staff. While nonattorney staffers are not subject to regulation by the bar, the law firm is subject to bar regulations. As a result, the law firm and its attorneys have an obligation to take reasonable steps to assure compliance with the ethical and professional obligations that apply and to make sure all firm clients continue to be served during the transition.

Nonattorney staff may not fully appreciate the existence or significance of any ethical or professional obligations. Therefore, written communication addressing these issues is helpful.

Always explain the ongoing obligation to maintain client confidences and secrets, particularly, the obligation to not address anything they may have learned or discussed while at the law firm. This issue is typically addressed at the time of hiring and included in any employee handbook. It is certainly an issue to be addressed again at the time of departure.

Explain the general concept of working for attorneys with cases that are adverse to the clients of the law firm. While ultimately the obligation to avoid conflicts falls on attorneys, both those hiring and firing, highlighting the issue helps ensure the situation never materializes.

Exit interviews are one of the most effective loss prevention tools available to law firms. Specifically, inquire about any issues about which the person leaving the firm might be concerned. The responses can, and sometimes do, identify potential legal malpractice, attorney impairment or ethics lapses. Departing personnel often have axes to grind. An exit interview creates an opportunity to learn about complaints against the law firm, individual attorneys and nonattorney staff.

Finally, make sure all ongoing tasks previously handled by the departing staff are assigned to new personnel. The risks associated with downsizing are similar to those associated with an unexpected departure: lost leadership or documents, missed deadlines and the failure to communicate properly with clients.

It is easy for things to fall through the cracks when personnel leave. To prevent this, the practice group or law firm should immediately transfer the duty to manage the case or perform a specific function to new staff. This may mean assigning a new partner, associate or paralegal - or all three - to the case.