We don’t write about legal doctrine very much—make that hardly ever—but every once in awhile a ruling, precedent, or line of cases strikes such a discordant note that it’s irresistible to question the rationale behind it.
We come to praise Jewel or to bury it. “Jewel” is Jewel v. Boxer, 156 Cal App. 3rd 171 [203 Cal. Rptr. 13] (1984), (Cliff Notes here) which has been learnedly discussed in many fora recently, including by Jerry Kowalski and by Wiley Rein partners. Recently it received new notoriety in a ruling in late May (Southern District of New York) coming out of the Coudert Brothers bankruptcy, nicely described here on the WSJ Law Blog, which extended Jewel’s “unfinished business” claim to New York state law:
In this case, the trustee for former New York firm Coudert Brothers LLP had sued 10 firms that hired former Coudert partners in an effort to recover those profits. No dollar amount was specified, as the firms did not provide documents outlining how much money they made.
The defendants, which included Dechert LLP, Jones Day and Arent Fox LLP, argued that Coudert Brothers had no property interest in the unfinished matters.
On Thursday a federal judge in Manhattan ruled that that the proceeds from those cases did indeed belong to Coudert Brothers, whose estate is being administered by the restructuring and financial advisory firm Development Specialists Inc.
“Because the Client Matters belonged to Coudert on the Dissolution Date, and because the Coudert Partnership calls for the application of the Partnership Law to determine the post-dissolution rights of the partners, the Former Coudert Partners have a duty to account for profits they earned completing the Client Matters at the Firms,” according to the decision by District Judge Colleen McMahon.
Generally, the only way to avoid such claims would be if a law firm had inserted a specific waiver into its partnership agreement before it became insolvent, said Peter Gilhuly, a bankruptcy partner with Latham & Watkins LLP.
“This is a very significant opinion,” Mr. Gilhuly said of the Coudert Brothers case. He said the decision is a major affirmation of a ruling from a 1984 California case known as Jewel v. Boxer, which has since been adopted by a number of other states. “Now every case that would file in New York would cite this decision extensively.”
And, to state the pluperfectly obvious, “If Dewey were to file for bankruptcy [published before just that occurred], the firms joined by former Dewey partners could well face these types of claims.”
OK, so Jewel is the law. The question is whether it should be.
When I was taking Torts as a 1L, the professor—who I choose to think was idealistic rather than just half-wrong—drilled into us that common law tort rules almost invariably had their roots in what made most economic sense. Readers schooled in this “law and economics” tradition may recall the hypothesis that common law tort doctrine tried to assign responsibility to the “cheapest cost avoider,” that is to say the party which could have avoided the mishap most economically. (So, for example, cinder-spewing locomotives had to suppress their tendency to shoot incendiary pellets everywhere along their path rather than requiring farmers to continually hose down their haystacks adjacent to the train tracks to keep them from going up in flames.)
How’s Jewel stack up as an exercise in economic logic?
Here’s my thought experiment comparing the interests of clients, lawyers, and creditors in a “Jewel” and a “Not-Jewel” world, with a Bottom Line bonus round.
As you can see, I think Jewel is a preposterous rule at odds with economic reality, and to see the jurisprudence of it extended rather than reversed is depressing to behold. It elevates antique notions of partnership law over the preferences of clients and, indeed, of the lawyers who wish to continue loyally serving them.
So what are the odds Jewel could ever be overturned?
Not great. Here’s a dose of what used to be called “legal realism” coming from Jerry Kowalski (again), in a comment to the WSJ Law Blog piece noted above:
[I]n the three decades of the application of the doctrine, not a single case brought under this doctrine has ever gone to trial. Each case has resulted in a cash payment to the liquidators of the firm in dissolution in negotiated settlements. Thus, there has yet to be a cogent analysis by any appellate court of the rule. I also do not know of a single viable large law firm that has embedded a waiver of this entitlement into its partnership agreement.
The doctrine and its application has provoked a fair amount of debate, but, to date, that debate has largely been academic, as bankruptcy trustees and liquidators of law firms relentlessly pursue these claims, which they are obligated to do as a fiduciary matter. As defendant law firms routinely settle these cases largely because of the risk of loss, the likelihood of judicially unwinding Jewel v Boxer does not appear likely. The increased free agent status of many partners with substantial client followings disincentivizes law firms from including Jewel v Boxer waivers, since it is one of the few available mechanisms in the United States to keep laterals in the fold.
Jewel v Boxer is simply a cost of doing business.
We may, in short, have to live with it. We don’t have to like it.