Pierce v. Morrison Mahoney Llp

• Decision Date: 09 December 2008
• Docket Number: SJC-10172
• Citation: 452 Mass. 718,897 N.E.2d 562
• Parties: Joel F. PIERCE & others<SMALL><SUP>1</SUP></SMALL> v. MORRISON MAHONEY LLP (and two companion cases<SMALL><SUP>2</SUP></SMALL>).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

897 N.E.2d 562

452 Mass. 718

Joel F. PIERCE & others¹ v. MORRISON MAHONEY LLP (and two companion cases²).

SJC-10172

Supreme Judicial Court of Massachusetts, Suffolk.

Argued October 8, 2008.

Decided December 9, 2008.

Timothy J. Dacey, Boston (Derek B. Domian & Robert A. Curley, Jr., with him) for Morrison Mahoney LLP.

Anthony M. Doniger, Boston (Andrew R. Levin with him) for Joel F. Pierce & others.

William A. Worth, Boston, for Mitchell S. King, was present but did not argue.

Alice Olsen Mann, Boston, pro se, submitted a brief.

Present: MARSHALL, C.J., GREANEY, IRELAND, SPINA, COWIN,

CORDY, & BOTSFORD, JJ.³

CORDY, J.

In Pettingell v. Morrison, Mahoney & Miller, 426 Mass. 253, 256, 687 N.E.2d 1237 (1997) (Pettingell), we precluded the enforcement of a provision in the Morrison, Mahoney & Miller partnership agreement that "impose[d] adverse consequences on a withdrawing partner" who competed with the law firm. We precluded enforcement because the provision did not impose such adverse consequences on a withdrawing partner who did not compete with the firm. We concluded that the provision violated the public policy of protecting the rights of clients and potential clients to their choice of counsel, as embodied in S.J.C. Rule 3:07, Canon 2, DR 2-108(A), 382 Mass. 773 (1981), now Mass. R. Prof. C. 5.6, 426 Mass. 1411 (1998) (rule 5.6).⁴ In this case, we must decide whether that firm's amended partnership agreement, which imposes identical financial consequences on all partners who voluntarily withdraw from the firm, regardless of whether they compete with the firm after withdrawing, also violates rule 5.6. We conclude that it does not. We also conclude that the plaintiffs' claim that Morrison Mahoney was collaterally estopped from contesting liability in this case was properly rejected.

Background. The following facts are taken from the parties' stipulations,⁵ which we have supplemented with additional undisputed facts from the record.

The defendant Morrison Mahoney LLP (Morrison Mahoney or the firm)⁶ is a limited liability partnership engaged in the practice of law. The plaintiffs Joel F. Pierce, John J. Davis, Elizabeth M. Fahey, Mitchell S. King, and Alice Olsen Mann are lawyers admitted to the practice of law in Massachusetts who became partners of Morrison Mahoney (or its predecessor) in 1981, 1987, 1987, 1987, and 1985 respectively. On January 17, 1989, Morrison Mahoney adopted a new partnership agreement, which each plaintiff signed. The partnership agreement provided that any provision of the agreement could be amended by vote of the partners.

Under the 1989 partnership agreement Morrison Mahoney maintained its financial accounts and reported its income to the Internal Revenue Service on a cash basis. Morrison Mahoney also maintained its financial accounts on an accrual basis. Income reported on an accrual basis included some components that were not included in Morrison Mahoney's cash basis income for the same year, such as work that had not yet been billed and the estimated potential amount collectible on subrogation cases and contingent fee cases. Income reported on a cash basis included some components that were not included in Morrison Mahoney's accrual basis income for the same year, such as fees that were received for billings in a prior year and fees collected on subrogation and contingent fee cases.

Under the 1989 partnership agreement, Morrison Mahoney partners received annual drawing accounts, paid out in equal instalments during the year. From time to time, partners received additional distributions from the firm. The 1989 partnership agreement also allocated the increase or decrease in the net worth of the partnership resulting from each year's operation (i.e., net income or loss), determined on an accrual basis, among the partners. The increase or decrease in the firm's net worth was divided into portions and allocated to each partner as annual partnership interest credits (APICs). The amount of APICs allocated to each partner was noted on the accrual reports prepared by Morrison Mahoney's accountants and on yearly records kept for each partner.

The 1989 partnership agreement described several ways in which partners could receive payments on account of their APICs. With respect to active partners, the agreement provided that "[a]t the end of each fiscal year, an amount equal to 50 percent of the cash surplus, if any, shall be paid as extra compensation to the partners who have positive [APICs] standing in their name from previous years." This practice was known in the firm as the "50/50 Rule." Payments to active partners on account of APICs from the firm's cash surplus were made on a "First In, First Out" basis. That is, the oldest APICs allocations were paid first, such that partners with more seniority were paid before partners with less seniority. The amount distributed to such partners on account of their APICs was attributable to them as earned income for income tax purposes for that year and was reflected in Morrison Mahoney's financial statements. Partners departing from Morrison Mahoney could also receive APICs payments after their departure in certain circumstances. For example, departing partners who retired under the terms of the agreement after having been a Morrison Mahoney partner for twenty years or attaining the age of sixty could receive payment on account of their APICs after departing the firm.⁷ However, if such a partner subsequently resumed the practice of law "other than [at] the ... firm," the agreement treated that partner as a voluntarily withdrawn partner.⁸ Departing partners who voluntarily withdrew from the firm would receive APICs payments only if they did not compete with the firm.⁹

This forfeiture-for-competition provision for voluntarily withdrawing partners became the subject of litigation. In 1993, two Morrison Mahoney partners, Richard Pettingell and Joseph Regan, voluntarily withdrew from the firm and established a competing law practice. Morrison Mahoney refused to make APICs payments to them on the grounds that the voluntarily withdrawn partners had forfeited their right to receive APICs payments under the 1989 partnership agreement. A lawsuit followed. In May, 1996, a Superior Court judge granted summary judgment to Pettingell and Regan, and on December 10, 1997, this court also ruled in their favor, concluding that the forfeiture-for-competition provision violated the polices underlying DR 2-208(A). Pettingell, supra at 255, 687 N.E.2d 1237.

While the Pettingell litigation was pending, the partners of Morrison Mahoney voted to amend the 1989 partnership agreement (1995 amendments). The 1995 amendments froze the APICs accounts, so that there was no further accrual for any year after 1994.¹⁰ They also deleted the "50/50 Rule." Most importantly to this case, the 1995 amendments deleted the forfeiture-for-competition provision for voluntarily withdrawing partners and replaced it with a provision that provided that all partners voluntarily withdrawing from the firm would forfeit their APICs, regardless of whether the partners competed with Morrison Mahoney after withdrawal.¹¹ Pierce, Davis, King, and Mann attended the meeting at which the 1995 amendments were adopted and all of them voted for the amendments. Fahey did not attend the meeting or vote for the amendments by proxy.

The plaintiffs Pierce, Davis, and Fahey voluntarily withdrew from Morrison Mahoney effective September 18, 1998, to form a new law firm. Mann voluntarily withdrew from Morrison Mahoney effective October 5, 1998, to form her own law office. King voluntarily withdrew from Morrison Mahoney effective February 18, 2000, to join another law firm. None of the plaintiffs had reached age sixty or served as a Morrison Mahoney partner for twenty years, and each planned to continue practicing law.¹² Relying on the 1995 amendments, Morrison Mahoney made no payments on account of APICs to any of the plaintiffs.

In August, 2004, Pierce, Fahey, and Davis sued Morrison Mahoney in the Superior Court. Mann and King brought separate actions in the Superior Court against Morrison Mahoney in October, 2004, and February, 2006, respectively. All five plaintiffs sought APICs payments from Morrison Mahoney. On cross motions for summary judgment, a judge ruled that Morrison Mahoney was not collaterally estopped from contesting liability by reason of an adverse ruling against it in a prior arbitration. All three cases were consolidated at the request of the parties for a trial on stipulated facts and exhibits. The judge concluded that to the extent the 1995 amendments did not permit voluntarily withdrawn partners who continued to practice law to receive APICs payments, the amendments violated rule 5.6, and ordered Morrison Mahoney to make APICs payments to the plaintiffs. Morrison Mahoney appealed from the judgment and the plaintiffs cross-appealed. We granted Morrison Mahoney's application for direct appellate review.

Discussion. Rule 5.6. "Because the case was submitted on the basis of a fully stipulated record, we consider the legal issues presented on appeal de novo." Hochberg v. Proctor, 441 Mass. 403, 409, 805 N.E.2d 979 (2004), and cases cited.

Rule 5.6 provides in pertinent part: "A lawyer shall not participate in offering or making ... a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement...." Our cases make clear that rule 5.6 exists primarily to protect the interests of clients, not lawyers. See Pettingell, supra at 255-256, 687 N.E.2d 1237. See also Eisenstein v. David G. Conlin, P.C., 444 Mass. 258, 262-263, 827 N.E.2d 686 (2005) (Eisenstein); Meehan v. Shaughnessy, 404 Mass. 419, 431, 535 N.E.2d 1255 (1989); comment 1 to rule 5.6, 426 Mass. 1411 (1998) ("An agreement restricting the right of partners or associates to practice after leaving a firm...