Nice discussion of what does a law partnership “own”?

Diamond v. Hogan Lovells US LLP (In re Howrey), 950 F.3d 1200 (9th Cir. Feb 2020)  

Issue:   Does a “dissolved [law]firm have a property interest in the profits earned from ongoing client matters billed on an hourly basis,” under District of Columbia law? 

Holding:   No. 

Appeal from the district court. 

Gould, Murguia, Freudenthal

The law firm Howrey LLP, organized under District of Columbia law, decided to dissolve in 2011.  The partners then amended the partnership agreement “to include a ‘Jewell waiver’ which would free any departing partner from any obligation to account for profits related to the winding up of unfinished business.”  This meant that partners that left the firm could take their existing cases and not have to account for the profits of those cases to the partnership.  A month later, creditors filed an involuntary petition.  The trustee sued several firms for “work done on client matters that had been started at Howrey, attempting to recover portions of payments made by former Howrey clients for work done on those ongoing matters.”

“[T]he Trustee argues that partners who dissociated pre-dissolution had a duty to account for profits earned on ongoing client matters, and that Howrey can recover those profits from the defendant firms under an unjust enrichment theory.  The Trustee argues that partners who left after the March 15, 2011 dissolution had a duty to account to Howrey for any profits earned on ongoing client matters, that the Jewel waiver constituted a fraudulent transfer of that interest from Howrey to the partners under 11 U.S.C. § 548, and that the Trustee can recover from the defendant firms as subsequent transferees under 11 U.S.C. § 550.”    

The bankruptcy court ruled for the trustee.  The district court reversed. 

The 9th Circuit asked the District of Columbia advise it on the issue.  That court issued its ruling on February 13, 2020.  As to contingency fee matters, if a firm is half way through a contingency fee matter and the partner leaves and takes the case with him, does the firm he left have a right to some of the ultimate profit?  Yes.  Although the Jewell waiver says that the partners can agree when dissolving, that the old firm has no further interest in matters each takes with him.

But these are hourly cases.  The billing done before leaving is property of the firm that he left.  Does the firm he left own a property interest in the case he took with him?  That, at least here, depends on District of Columbia law.  It is an important issue because, “On the one hand, if a firm goes into bankruptcy all of its suppliers become creditors and will be impacted by the scope of a partner’s duty to account for profits.”  On the other hand, “If, when a firm is failing, a lawyer cannot complete any pending client work for the benefit of his or her new firm, that will make it harder for lawyers to find a new home if their firm fails.”

The District of Columbia court ruled succinctly (all ruling are according to DC law):

We answer the above questions as follows:

(1) We hold that hourly-billed client matters are not “property” of the law firm.  A client has an almost “unfettered right” to choose or to discharge counsel. … Therefore, a law firm has no more than a “unilateral expectation,” rather than a “legitimate claim or entitlement,” to future fees earned from continued work on hourly-billed client matters. Bd. of Regents of State Colleges v. Roth, 408 U.S. 564, 577 (1972).

(2) After a partner leaves the law firm (disassociates), the partner owes no continued duty to the former law firm to account for new profits earned on hourly-billed client matters that started at the former firm.  A dissociated partner has a limited duty of loyalty to the former firm only “with regard to matters arising and events occurring before the partner’s dissociation.” …. This limited duty requires a dissociated partner to remit profits earned on work performed prior to the partner’s dissociation, but does not include profits earned from work performed subsequent to the partner’s dissociation.

(3) Since a dissociated partner has no duty to account for profits earned after the partner leaves the firm, we need not address this question.

(4) A dissolved law firm has no interest in profits earned on hourly-billed client matters following dissolution.  A dissolved law firm is only entitled to proceeds earned as part of the firm’s “winding up” process, which include acts that preserve partnership rights and property, prosecute and defend actions, settle or transfer partnership business, or distribute assets. “Winding up” does not encompass new business or work done on former client matters after dissolution by former partners. The dissolved partnership can no longer undertake work on these matters after dissolution. …

Interesting new case in California

Hooked Media Group, Inc. v Apple, Inc. (May 2020) 55 Cal.App.5th 323

2.  Who is the plaintiff or movant?  Who is the defendant or respondent?

            Plaintiff is Hooked Media “a startup company.”

            Defendant is Apple, Inc.   

3.  Exactly what relief has the plaintiff requested?


4.  What is the legal basis for the request?

            “fraud; misappropriation of trade secrets; interference with contract and prospective economic advantage; aiding and abetting breach of fiduciary duty; unfair business practices; and unjust enrichment.”

5.   What facts does the plaintiff provide that support the request?

            Hooked Media approached Apple to see if Apple would acquire it.  Apple expressed interest.  After a few meetings in which Hooked Media disclosed trade secrets, Apple said it wasn’t interested in acquisition but was interested in certain employees.  Shortly thereafter Apple hired the company’s Chief Technical Officer and two other key engineers.  Apparently that was the guts of the company.                     

6.   How did the case end at the trial court level?

            The trial court granted summary judgment for Apple.  Court of Appeals affirmed. 

7.  What standard did the court use to resolve the issue?

            No material facts at issue.  Apple has a right to judgment as a matter of law.          

8.   What is the defendant’s opposition? 

            Apple said it refused to sign a non-disclosure agreement at the outset.  It did not lie about anything especially about its intent to buy Hooked.  The employees it hired were “at will” so it did not interfere with anything.   The people it hired did not owe fiduciary duties to Hooked.  Hooked voluntarily disclosed what it disclosed.  Apple did not actually use the “secrets” and the employees did not actually take anything from Hooked.                   

9.   Who won and Why?  What is the court’s reasoning for giving the plaintiff what she requested or denying the request. 

            The trial court said that the statements made alleged to be false were about things to happen in the future so Hooked must show evidence that Apple did not intend to perform from the outset.  The court commented that California has many laws about employees being able to freely move from one employer to another.  Covenants not to compete are generally unenforceable.  It said much of Hooked’s arguments were really trying to create a covenant not to compete.   As to aiding and abetting and unfair business practices, there were no “bad acts,” therefore those causes of action failed.  Unjust enrichment is not a cause of action; it’s a remedy.    

            Note, there may still be claims against the individuals who left.

            Note 2, the California Supreme Court has agreed to review this (I think).

            Note 3, the parties apparently did a ton of discovery before the summary judgment motion.  Apple alleged it spent $360,000 just in costs during discovery, i.e., not including attys fees.    

Another question re mid-term and my videos on D2L

Hi Professor, The videos were informational.

I have two questions: 1. To whom do make your disclosures when you are selling a security? 2. If a corporation with stockholders and one of them want to sell his/her stock, isn’t that stock already registered since it was previously sold?

  1. For securities laws purposes, the security has to be “registered.” It’s not about you disclosing anything. If it’s a duty to disclose under Rule 10b-5, you disclose to the other party (if there is a duty to disclose). If you cannot disclose (because you don’t know who the other party is), you must abstain from trading.
  2. Stock doesn’t just stay registered, the basic rule of “register unless exempt” applies to every transaction.

Question from student re second mid-term

As I was going over Judson’s Tax Service essay, I realized that in the past, you have expected students to discuss securities law as a cause of action for Donald. However, I have the following questions / comments:

1) This corporation is not a public traded company,

2) the corporation is not selling stocks (securities), and 

3) the loan by Donald is not a security, repayment of a loan is not contingent on the company’s expected gains or losses. There are no facts indicating that Judson has offered any percentage of ownership of the corp. to Donald, nor that Donald expected any profits from the efforts of others. 

Could you please explain how a securities issue is present?


The short answer is no.

As I have stated many times, answer the question asked.

(1) Tina now believes that her audit was mishandled by Judson. Who can she sue, on what basis, and what is the likelihood of success?
(2) Donald has not been paid. Who can he sue, on what basis, and what is the likelihood of success?
(3) Robert wants to sue to collect the 50% he was promised. Who can he sue, on what basis, and what is the likelihood of success?

If securities law is part of the answer to one of those questions, then it should be included.

Good question from a student re corporations which enter into partnership agreements.

Hi Professor Hayes,

If someone opens a corporation, then enters into a partnership to carry out the business, does that mean that the corporation becomes part of the partnership or the corporation will be a separate entity?


First a corporation, once formed, will continue to exist and be a corporation until the end of eternity unless dissolved by the state. A partnership is the same except that it ends when the agreement ends (or eternity, whichever occurs first).

If a corporation enters into a partnership with someone else, a person, a corp or another partnership, then the corp is a partner in the partnership. The corp has its assets and business, the partnership has its assets and business. Assume that Apple and Microsoft decide to build a new computer, they could form a new corporation to do that (which issue stock to each) or just agree to do it together which would create a partnership (sometimes called a joint venture). The partnership is created by the agreement to create the thing. IT has two partners.

You and I could agree to start a sports bar. We each form corps, mine is ProfHayes, Inc. Yours is “Student, Inc. The two corps then agree to buy or build a sports bar. That agreement creates a partnership which would then own and operate the sports bar. If the partnership agreement says the partners get x dollars per month, that would go to the two corps. The BOD of each corp would then decide to declare dividends or invest the money or whatever. The partners are liable for the debts of the partnership but that means the two corps, not you and I personally.