Phil Watson, PC v. Peterson

• Citation: 650 N.W.2d 562
• Decision Date: 05 September 2002
• Docket Number: No. 00-1271.,00-1271.
• Parties: PHIL WATSON, P.C., Appellant, v. Gregory W. PETERSON, Todd A. Elverson, Jon A. Vasey, Thomas J. Jackowski, and Elverson, Vasey & Peterson, L.L.P., Appellees.
• Court: United States State Supreme Court of Iowa

650 N.W.2d 562

PHIL WATSON, P.C., Appellant, v. Gregory W. PETERSON, Todd A. Elverson, Jon A. Vasey, Thomas J. Jackowski, and Elverson, Vasey & Peterson, L.L.P., Appellees.

No. 00-1271.

Supreme Court of Iowa.

September 5, 2002.

Carlton G. Salmons of Gaudineer, Comito & George, L.L.P., West Des Moines, for appellant.

Mark J. Wiedenfeld of Wiedenfeld & McLaughlin, L.L.P., Clive, for appellees.

LARSON, Justice.

Gregory Peterson left the law firm with which he had been associated and joined a new firm. He continued to represent several clients with whom he had been working in his old firm. The firm, Phil Watson, P.C. (Watson), sued Peterson, his new partnership, Elverson, Vasey, and Peterson, L.L.P. (EVP), and the partners individually, on several theories, and the defendants counterclaimed. The district court entered its judgment, and both parties appealed. We modify and affirm on both appeals.

I. Facts and Prior Proceedings.

Peterson was an associate in the Watson firm for twelve years before he resigned on May 1, 1996, to become a partner in EVP. Peterson's employment with Watson was at will, based on an oral agreement that provided Watson would pay Peterson an annual salary, a bonus of a set percentage of his contingency-fee receipts, medical insurance, and other benefits. There was, however, no agreement concerning termination of the employment relationship or how fees would be allocated in the event of termination.

Peterson's practice with Watson was largely a contingent-fee practice in plaintiffs', workers' compensation, and social security cases. Peterson also represented Watson's credit-card-company clients in bankruptcy and collection matters. The clients Peterson represented had signed attorney-client contracts with Peterson and, while Watson did not sign the contracts, the contracts indicated Peterson was associated with the Watson firm. Peterson believed the clients he represented were his, not Watson's, despite his association agreement with Watson providing that the gross fees from contingency-fee cases were Watson's property.

About two months before Peterson resigned, he began contacting some of the clients he had represented, and in some cases obtained on a preprinted form the clients' authority for Peterson to take their cases to EVP. This form stated:

Election

Dear Mr. Peterson: I would like you to continue to represent me. Please take my file(s) with you and continue with the present representation.

_________________________

Client Date

In at least one case, Peterson obtained authorization by telephone.

In the weeks prior to his departure, Peterson obtained several of these consents and quietly removed files for those cases from Watson's premises. He took thirty cases, twenty of which later produced fees. Ten were contingent-fee cases. The EVP partners left it to Peterson to decide how much to set aside for a quantum meruit reimbursement to Watson for each case that produced a fee after Peterson left Watson. Peterson segregated for repayment to Watson $130 for each hour he had worked at Watson on a case producing a fee. All of the cases brought from Watson were resolved between 1996 and 1998. From time to time during that period, Peterson calculated his time spent on the case while at the Watson firm and tendered various checks to Watson at the rate of $130 per hour. Watson refused to endorse the checks without knowing the particulars of the fee recovery and an accounting. He also objected to the accord and satisfaction provisions on the endorsement portion of the checks. Peterson and EVP acknowledged that Watson was entitled to a quantum meruit payment, and they retained $40,766 earmarked for Watson on that basis.

The parties apparently agreed at trial on the number, nature, and specifics of the cases Peterson brought from the Watson firm. Peterson stated he had spent a total of 286.2 hours on all cases, regardless of recovery, while at the Watson firm. He spent 426.8 hours on the cases after he began with EVP. The cases produced a total gross income of $280,805.

Watson filed a petition for an accounting and declaratory relief and later amended it to add claims of breach of fiduciary duty, tortious interference with contracts, and conversion. Peterson answered and filed a counterclaim for failure to pay wages and to make contributions to a profit-sharing plan.

The case was tried to the court, which ruled that, of the $280,805 gross fees in dispute, $114,956 was to be paid to Watson. This was based on a lost-profits theory in which Watson recovered all of the fees minus Peterson's salary, bonus, benefits, and other overhead costs that Watson was able to avoid. The court found Peterson liable for breach of fiduciary duty and interference with a contract, but not for conversion. The court also found that EVP and all of the individual partners were jointly and severally liable for the entire amount on a theory of constructive trust. The court, however, rejected Watson's request for punitive damages and attorney fees. The court awarded Peterson $519.23 for unpaid wages.

On the parties' motions to reconsider, the court confirmed most of its findings against Peterson but reversed its finding of a constructive trust. The court continued to hold EVP and its individual partners jointly and severally liable for damages on a theory of aiding and abetting and partnership liability, although those claims had not been pled by Watson. The court made some adjustments to the judgment concerning interest and Peterson's counterclaim and entered a judgment of $114,436.77 against all defendants jointly and severally. All parties appealed. Our review is de novo.

II. Whose Clients Are They?

When a law firm and an associate have no agreement for posttermination division of fees in cases originally handled by the firm, how shall the fees be determined: should they become the sole property of the firm, the departing lawyer, or both? Further, if the fees are to be divided, on what basis should that be done? The district court ruled that the fees collected by Peterson on cases he obtained while associated with the Watson firm remained the property of Watson, subject to payment of salary and benefits to Peterson as if Peterson had continued to work for Watson. For the reasons that follow, we disagree with this analysis.

Watson also contends the procedure used by Peterson in contacting clients and obtaining their consent to remove files before the termination of Peterson's employment was improper. The proper procedure to follow, according to Watson, is set out in a 1982 opinion by the Iowa State Bar Association Committee on Professional Ethics and Conduct. This opinion was addressed to an associate who had left a law firm and was inquiring about how to handle cases in which he wanted to continue representation. The opinion stated:

The Committee is of the opinion that it is the obligation of the firm to advise clients for whom you were doing work that you have left the firm and that the client can elect to have another lawyer in the firm handle the matter or select other counsel, including you, to complete the work.

The firm should furnish you with an appropriate copy or copies of the notification letter so you will know that the clients have been advised of your departure and their options. If the firm fails to notify the clients within a reasonable time (one week to ten days) the Committee is of the opinion that it would be appropriate for you to advise the clients of the above information. If it is necessary for you to so write, you should furnish an appropriate copy or copies of your letter to the firm.

ISBA Comm. on Prof'l Ethics & Conduct, Formal Op. 82-23 (1982) [hereinafter Formal Op. 82-23].¹

We have no cases directly on point. The principal case relied on by Watson and the district court, West v. Jayne, 484 N.W.2d 186 (Iowa 1992), is distinguishable. West does not stand for the proposition, as Watson urges, that Peterson is entitled to "only that which [he] would have earned under the employment contract." In West Jayne was an associate. The lawyers divided contingency fees one-third to the originating attorney, one-third to the attorney doing the work, and one-third to West for office overhead. West, 484 N.W.2d at 188, 190. In West the issue was whether one attorney, West, who had been suspended, was entitled to his share of the fees in view of the fact that, generally, suspended lawyers may not collect fees for legal work during the period of suspension. We held that, despite the suspension of West's license, his work that justified his referral portion was completed once he referred the case to Jayne, and the other portion West received was for office overhead. Id. at 190. This is not an issue in the present case.

Although no Iowa cases are directly on point, the facts of this case are not uncommon. In fact, it has been observed that "[l]aw firms are under siege." See Robert W. Hillman, Law Firms and Their Partners: The Law and Ethics of Grabbing and Leaving, 67 Tex. L.Rev. 1, 1 (1988) [hereinafter Hillman]. Because of lateral movement by attorneys between firms, there is "the ever-present threat of [a lawyer] leaving and taking what many regard as the firm's assets—its clients." Id. at 4.² This phenomenon is referred to as "grabbing and leaving."

"The idea that a partner `leaves' while others `stay' tips the analysis toward a view that the partner `taking' clients is, in effect, looting the firm." Id. at 5. Solicitation of clients by lawyers has been the subject of several Supreme Court cases. See, e.g., Shapero v. Kentucky Bar Ass'n, 486 U.S. 466, 108 S.Ct. 1916, 100 L.Ed.2d 475 (1988) (states may not categorically prohibit attorneys from soliciting clients with truthful letters); Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 98 S.Ct. 1925, 56 L.Ed.2d 444 (1978) (states may discipline attorneys for in-person solicitation of clients).

Grabbing, [as opposed to solicitation],

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