Subscriber Benefit
As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe Now
A recent opinion issued by the Kentucky Supreme Court could have implications for a case moving through federal court that accuses a Louisville law firm with Indiana ties of making it difficult for attorneys to serve clients at their new firms.
Last month, an attorney who previously worked for Isaacs & Isaacs Personal Injury Lawyers, which serves clients throughout Indiana, filed a lawsuit in the U.S. District Court in the Western District of Kentucky against the firm for enforcing “take-it-or-leave-it” employment agreements he said were meant to “trap attorneys inside the firm and to punish, financially and reputationally, any who leave,” according to the complaint.
The complaint argues that these stipulations include enforcing an $8,000-per-client liquidated-damages penalty, a $6,000 case acquisition cost and a claim of 70% of every fee any departing lawyer earns on any client who follows them to their new firm.
The lawsuit, Alex R. White, PLLC and Nicholas Alexiou vs. Isaacs & Isaacs P.S.C., states that the terms violate the ethics rules of every state in which Isaacs practices.
The plaintiff further alleges that the firm’s employment agreements are part of a larger anticompetitive scheme, forbidding attorneys from discussing their compensation with one another and locking departing attorneys out of the firm’s systems before they can tell their clients where they’re going.
But on June 25, the Kentucky Supreme Court issued a 4-3 opinion that a fee allocation provision contained in an attorney employment agreement does not violate legal public policy that prohibits the restriction of attorneys’ ability to practice law.
In Emery Law Office Inc. v. Joel Franklin, filed in Jefferson Circuit Court, Emery Law Office sued its former employee, Joel Franklin, for breach of contract after Franklin stated he would not divide attorney contingency fees with the firm as required under a separation/employment agreement Franklin and Emery entered into when Franklin started at the firm. That agreement stated that if Franklin’s employment with Emery ended and clients chose to follow Franklin to his new firm, Emery would receive 75% of any contingency fee Franklin earned in those clients’ cases.
Both parties filed motions for summary judgment in the case, with Franklin arguing that enforcement of the law firm’s separation agreement violates the public policy of Kentucky Rules of the Supreme Court 3.130(5.6), which states that lawyers cannot enter into an agreement that restricts their ability to practice law and clients’ ability to choose who represents them in the case.
The trial court ruled in the law firm’s favor, entering a judgment to enforce the fee allocation, according to court documents.
Franklin appealed the decision, and the Kentucky Court of Appeals reversed the lower court’s judgment, determining that the fee allocation violated public policy by imposing a financial disincentive that could impair Franklin’s ability to practice.
The Kentucky Supreme Court, however, reversed that decision. In its opinion, written by Justice Kelly Thompson, the high court reasoned that the separation agreement between Emery and Franklin does not explicitly restrict Franklin’s ability to practice.
Citing its opinion in Kentucky Bar Ass’n (KBA) v. Truman, 457 S.W.3d 325, 326–27 (Ky. 2015), in which the court publicly reprimanded law firm owner Karl Truman for entering into a restrictive agreement that prevented an associate from even contacting clients if they left the firm, the court determined that Emery’s agreement is not so restrictive, since Franklin still had the ability to contact his clients concerning his departure, therefore giving clients the choice of who would represent them upon Franklin leaving the firm.
Further, the supreme court stated that Franklin failed to establish in his argument that enforcement of the 75% fee allocation provision would restrict his ability to practice.
The court reversed and remanded the case for enforcement of the separation agreement.
The dissenting opinion, written by Justice Robert Conley, stated that while the dissenting justices do not disagree that Franklin failed to demonstrate how the fee allocation restricts his ability to practice, the fee allocation opposes “the interests of the public generally.”
According to Justice Conley, the fee allocation provision should be examined not as whether it simply restricts Franklin’s individual ability to practice law, but whether provisions like this could have implications on other instances like it. The high court viewed the argument in too narrow a lens, Conley wrote, making its decision based on how the agreement impacts Franklin specifically, “rather than whether it would injure the public interest generally.”
“The unsurprising result is that in some other instance the fee allocation could ‘end up being an amount so high as to discourage the attorney from taking the case, thereby denying the client the attorney of his or her choice – particularly in a case that might require a lengthy and complicated trial to obtain recovery.’ That violates public policy,” Conley wrote.
While the court stated its ruling to be narrow, based on the facts of this case only, that is not how public policy doctrine works, the dissenting opinion said.
“That the Court has even acknowledged, albeit impliedly, that the fee allocation provision could be violate of SCR 3.130(5.6) in another case under different facts demonstrates there is an evil tendency in the fee allocation provision,” according to the opinion. “A correct application of the public policy doctrine necessitates declaring it void now, rather than waiting for some other case where an individual attorney could demonstrate actual harm.”
In Alex R. White, PLLC and Nicholas Alexiou vs. Isaacs & Isaacs P.S.C., plaintiff Alexiou argues that, upon leaving the firm, Issacs & Isaacs restricted his ability to contact approximately 40 of his 90 clients at the firm.
He also cited SCR 3.130(5.6) in his argument, stating that employment agreements that attempt to assign a uniform fee allocation percentage to all client cases upon an attorney’s departure runs runs afoul of public policy against restricting a lawyer’s ability to practice law.
According to SCR 3.130(1.5e), fee allocations should happen on a case by case basis, “in proportion to the services performed by each lawyer,” Alexiou wrote.
Please enable JavaScript to view this content.