The biggest mistakes in law firm mergers

There is no end in sight to the law firm mergers that continue to dominate the news of the legal industry. Most experts agree mergers this year will exceed 2014 numbers and, according to the American Lawyer, may indeed be the most ever reported.

For many firms, the question is not whether to merge - but how. The goals and hurdles for every merger are unique to those law firms combining. However, several common mistakes can lead to real problems. Here are the five most common mistakes to avoid when law practices or law firms merge.

1. Failing to minimize risks associated with the effective date

Under California Rule of Professional Conduct 3-310, the clients of one partner become the clients of every other partner after a merger. All at once, multiple representations can spring into existence. In addition, former clients of the combined partnership must be evaluated for successive representation purposes under Rule 3-310(B).

In addition to professional and ethical obligations, the merger effective date dictates many other issues - from tax obligations and insurance coverage to pension or retirement requirements and legal obligations arising from any predecessor firm.

To avoid complications, most firms use a checklist. The key is for all issues to be addressed, and resolved, before the effective date.

2. Failing to consider how to combine the firms' systems

Attorneys can be the worst at adjusting to new systems, especially when it impacts the way they practice. For many attorneys, the way things have been done for years evolves into the way things will always be done.

With mergers, change is inevitable. When firms combine, a decision needs to be made about which system will control, whether it be adopting the system of one of the predecessor firms or assuming a new system. There may be risks of continuing with multiple legacy firm systems or using different systems by geographic location. Inevitably, the gaps between competing or parallel systems create high risks for ethical and legal malpractice exposures.

Eventually, all attorneys should be acting within a single set of systems with accompanying practices, procedures and protocols. However, careful consideration of the issues is required before any single set of practices is adopted. This is especially true for things like file opening procedures, docket control, conflict of interest resolution, and document processing and storing systems. As difficult as it may be, a merger requires abandoning old systems that are no longer part of the newly combined firm.

3. Failing to adequately address gaps in insurance coverage

Other than the legal structure of the practice, nothing is more important to protecting partners' assets than insurance. The greatest potential risk to a newly merged firm is a gap in insurance coverage.

The specific steps necessary to avoid this depend on the combination of firms or practices. For example, if a completely new law firm will replace the existing law firms, the legal malpractice policy for the new firm will need to provide coverage for acts by the attorneys that pre-date the new firm - preferably going back to the earliest retroactive date of either firm. To avoid any risk, the predecessor law firms can purchase an extended reporting period for any claims arising out of acts that occurred prior to the end of the old law firms. If the merger involves the continuing firm's acquisition of the assets of the other firm, which will no longer exist, steps can be taken to reduce the risk of an uncovered claim.

Regardless of the structure of the merger, it is important to work with an experienced insurance broker to confirm continuity of coverage for all attorneys for acts occurring both before and after the merger.

One crucial part of this process is completing the insurance application. Most legal malpractice insurer applications ask whether any attorney is aware of a circumstance that might give rise to a claim. It is essential that every attorney is surveyed for this. An incorrect response, whether intentional or not, can jeopardize coverage. See, e.g., New Hampshire Ins. Co. v. C'Est Moi Inc., 519 F.3d 937, 940 (9th Cir. 2008) (applying California law); LA Sound USA Inc. v. St. Paul Fire & Marine Ins. Co., 67 Cal. Rptr. 3d 917 (Cal. Ct. App. 2007).

If any attorney is aware of a circumstance that could give rise to a claim, it's best to disclose those circumstances on the new insurance application and also to report it as a potential claim under any expiring policy. Any subsequent claim can be reported under both the expiring policy, based on the notice of circumstance provision, and the new policy, if the alleged wrongful act occurred after the retroactive date.

4. Overlooking conflicts of interest, both real and potential

As stated above, California Rule of Professional Conduct 3-310 imputes the conflict of interest of any one attorney to every other attorney in a law firm. While some conflicts can be waived, others cannot as a matter of law.

Once a merger is in effect, these nonwaivable conflicts are more difficult to address, and the options are more limited. The best practice is to consider how best to address these conflict issues pre-merger. This requires more than just an understanding of how the conflicts will be resolved. Instead, the firm should take steps to avoid the risks of post-merger conflicts and the resultant financial, ethical and legal consequences. This could be client consent supported by full disclosure in writing, or it could be a termination of representation or file closing letter. Either way, the predecessor and merged firms need to document how they handled these conflicts.

5. Ignoring issues that are not going to resolve themselves

Inevitably, there are bumps in the road when merging. Often these work themselves out. However, one of the worst things a law firm can do is ignore these bumps. It is best to address any problems before a mountain morphs out of a molehill.

One of the most effective risk management tools is to task a single partner or group of partners to address problems. No matter who is given this role, it is important that someone is actually tasked with the responsibility for addressing those issues that do not resolve themselves.

If one attorney has a problem post-merger, others will likely face the same problem. Rather than have multiple partners working to resolve the same problem repeatedly, systems modifications are often the best solution. The firm can share the solution across legacy firms and across office locations, so attorneys with the same problem can easily identify the solution.

By all accounts, law firm mergers are here to stay. Taking note of and avoiding these mistakes makes mergers more likely to succeed and provides firms with the platform for even bigger plans ahead.

J. Randolph Evans is a partner in the Georgia office of Dentons US LLP.

Shari Klevens is a partner in the Washington, D.C. office of Dentons US LLP.