My Colleague’s Keeper – Benefits & Pitfalls of Law Firm Structures
There are many benefits to working in a professional firm including the ability to collaborate and seek support from colleagues. Teamwork amongst colleagues may improve efficiency, innovation, flexibility and branding. But, through the doctrine of vicarious liability, a professional may be liable for her colleague’s conduct in certain situations. There are various corporate models intended in part at protecting an individual for corporate (mis)conduct. But these models are not bulletproof. A recent New Jersey decision emphasizes the double-edged nature of practice in a professional corporation in the context of a multi-attorney law firm. In light of this case, we took a closer look at the benefits and risks of attorney partnerships.
Insurance and Insulation
The defendants in the NJ dispute are an intellectual property law firm formed as an LLP (“Firm”) and its two, individual partners. The Firm maintained a professional liability insurance policy, as required by New Jersey law. In 2009, plaintiff retained Firm to pursue a patent infringement matter. In mid-2011, Firm’s two partners stopped actively practicing law and began winding up the practice. But, in the midst of the wind-up, Firm’s PL policy expired. Subsequently, when one partner’s legal advice allegedly harmed plaintiff’s patent rights, plaintiff filed a legal malpractice claim against Firm and the two partners individually.
The trial court held that Firm became a general partnership once its liability policy expired, and thus one partner could be held individually liable for the malpractice of the other. The appellate court reversed, holding the state’s Uniform Partnership Act (“UPA”) clearly expressed the legislature’s intent that partners of an LLP be shielded from liability for a fellow partner’s acts. Pursuant to the UPA, the LLP remains valid until the LLP itself cancels its status. The court held that all partners can only be jointly and severally liable for all partnership obligations in the absence of such LLP status.
The court also analyzed Firm’s failure to maintain liability insurance. Though New Jersey court rules require an LLP to maintain malpractice insurance for attorneys to practice law as an LLP, the rules delineate specific sanctions against LLPs for failure to do so. Converting an LLP into a general partnership is NOT one of these enumerated sanctions. Instead, other forms of discipline are available to the trial court, such as censure or disbarment, but this kind of corporate conversion was and is not an available remedy in New Jersey.
Despite this holding, this case is not carte blanche to permit your malpractice insurance to lapse, and also highlights the importance of choosing the right structure for your firm. Instead:
- Keep current on coverage. Maintain valid malpractice insurance, at ALL times: from the inception of a practice until, if ever, winding up. Though these attorneys escaped with a comparatively light penalty, this is not the norm. Indeed, as the court recognized, failure to maintain such insurance may result in numerous penalties, including termination of your right to practice law, and even personal liability. In addition, failure to maintain such insurance may hurt business – the ABA has recommended that the Model Rules require attorneys to disclose their lack of malpractice insurance.
- Firm framework is foremost. Comply with any specific requirements set forth in statutory or court rules for the type of corporate structure your firm has in place (e.g., LLC, LLP, LP, PC, etc.). In states like New Jersey, who offer and uphold LLP protection, adoption of an LLP model may be prudent, but not all states and not all judges may be as lenient as the W&O court. Assess the various structures available, and the laws applicable to each, before deciding what format is best for your firm.