Clifford Chance faces New York test over $5.8m partner clawback dispute

Former Clifford Chance partners Clifford Cone and Michael Sabin have sued the Magic Circle firm in New York over its attempt to recover nearly $5.8 million in profit distributions following their departures to Sidley Austin in January.

The complaint, filed in a New York federal court earlier this week, centres on whether Clifford Chance can enforce clawback provisions contained in its English partnership agreement against former US-based partners.

Cone and Sabin previously co-led Clifford Chance's US funds and investment management practice. Cone focuses on investment management and crypto-focused funds, while Sabin advises asset managers on the formation and operation of private investment funds across private equity, credit and other alternative asset classes.

The clawback

According to letters sent by Clifford Chance global managing partner Charles Adams in March and attached to the complaint, the firm's executive leadership determined that clawback provisions in the partnership agreement applied following the partners' resignations.

The firm calculated that Cone should repay £3.4 million ($4.4 million), while Sabin should repay £1.1 million ($1.4 million).

The sums were calculated using a provision in Clifford Chance's partnership agreement that allows the firm to reclaim the value of profit units awarded above a specified threshold during the previous three financial years, with the amounts offset against unpaid distributions and tax reserves.

The complaint says the clawbacks relate to profits that had already been earned and distributed before the partners left the firm.

The filing also includes correspondence from the partners' lawyers at Duane Morris seeking to resolve the dispute with Clifford Chance before litigation commenced.

Wider implications

The lawsuit seeks a declaration that New York law should govern the dispute, with the former partners arguing the clawback provisions are unenforceable as a financial penalty on lawyers who join competing firms.

It relies in part on a recent New York Bar ethics opinion, which concluded that partnership provisions that discourage lawyers from competing after leaving a firm can breach the state's professional conduct rules.

The case could become an important test of the extent to which UK law firms can rely on English partnership agreements when seeking to recover compensation from partners who move to rival firms in the US.

The crux of the complaint is that allowing English law to govern disputes involving US partners would let international firms effectively sidestep New York's professional conduct rules.

“Given the evolution of large, global law firms, allowing English law to control would allow any firm with a UK-based office to interpose English law on its US-based counterparts, effectively undermining the public policy underlying New York’s prohibition of these exact anti-competitive clauses,” it said.

A Clifford Chance spokesperson told Non-Billable: "Clifford Chance does not comment on pending litigation and will address any issues through the appropriate legal process."