Top Defense Results: Heller Ehrman LLP et al. v. Orrick, Herrington & Sutcliffe LLP

Law firms that hired partners from defunct competitors earned a major victory last June when U.S. District Judge Charles R. Breyer of San Francisco ruled that they don't have to share profits with the estates of the insolvent firms.

The ruling, concerning litigation that arose from the Heller Ehrman LLP bankruptcy case, was the first in California to overturn U.S. Bankruptcy Judge Dennis J. Montali's theory that any active client matters are considered property of a bankruptcy estate at the moment a firm becomes insolvent.

Breyer disagreed, ruling that active matters belong to the clients, not the firms that represent them.

"Under the facts presented here, neither law, equity, nor policy recognizes a law firm's property interest in hourly fee matters," he wrote, overturning Montali's summary judgment. Heller Ehrman LLP et al. v. Orrick, Herrington & Sutcliffe LLP, 14-CV1239 (N.D. Cal., filed March 18, 2014).

Breyer issued the same ruling simultaneously in cases the Heller Ehrman estate brought against Jones Day, Foley & Lardner LLP and Davis Wright Tremaine LLP.

Jonathan W. Hughes, an Arnold & Porter LLP partner who defended Orrick, Herrington & Sutcliffe LLP against "unfinished business" claims, said Breyer's ruling was particularly important because it reaffirmed other changes in the law that have emphasized client choice and control over their own cases.

He said it was also the first time a court reviewed Montali's theory, adding that the decision represents a sea change in how law firm bankruptcies are viewed.

"A couple of weeks later, the highest court in New York came to the same conclusion in a case that was very similar," he said.

Hughes represented the American Bar Association in that case, which addressed unfinished business cases in the Thelen LLP and Coudert Brothers LLP bankruptcies, filing an amicus brief that successfully argued clients should control their own matters.

The defendant firms also argued, in both cases, that making partners pay back profits if they are at a firm when it becomes insolvent creates a perverse incentive, which could actually cause more law firm bankruptcies.

"It has led some people to conclude that 'if I leave early enough, I don't have a problem,'" he said. "That can lead some partners to race for the door."

The estate, represented by Christopher D. Sullivan of Diamond McCarthy LLP, said the ruling is unfair to employees and creditors of defunct firms and has appealed it to the 9th U.S. Circuit Court of Appeals.

- JOSHUA SEBOLD