Non-compete Agreements in Colorado
| Publication year | 2011 |
| Pages | 63 |
2011, June, Pg. 63. Non-Compete Agreements in Colorado
June 2011
Vol. 40, No. 6 [Page 63]
Professional Conduct and Legal Ethics
Professional Conduct and Legal Ethics articles are sponsoredby the CBA Ethics Committee. Articles published here do not necessarily reflect the legal interpretation of the Committee.
Coordinating Editor
Stephen G. Masciocchi, Denver, of Holland and Hart LLP-(303) 295-8000, smasciocchi@hollandhart.com
About the Author
Eli Wald is the Charles W. Delaney Jr. Associate Professor of Law at the University of Denver Sturm College of Law. He is a member of the CBA Ethics Committee and the Colorado Supreme Court Standing Committee on the Colorado Rules of Professional Conduct. He thanks Ed Barad, Richard Hennessey, Stephen Masciocchi, and Cecil Morris for their insightful comments.
This article explores the legality and enforceability of non-compete agreements between lawyers and law firms in Colorado. It focuses on indirect reasonable financial disincentives to compete with the former firm imposed on a departing lawyer.
Consider the following questions: (1) Can Colorado lawyers execute non-compete agreements? (2) Can a law firm, for example, include a provision in its partnership agreement stating that a departing partner may not compete with the firm and may not represent any of the firm's current clients for a period of twelve months?
Colorado Rule of Professional Conduct (Colo. RPC or Rule) 5.6 appears to provide a clear answer, prohibiting non-compete agreements. It states:
A lawyer shall not participate in offering or making ... a partnership ... employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship... .(fn1)
Comment [1] to Rule 5.6 explains that:
In other words, non-compete agreements for lawyers are prohibited in Colorado for two reasons: they interfere with the right of clients to select the lawyer of their choosing and they interfere with lawyer mobility, in a day and age when increased mobility is a common practiceAn agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer.(fn2)
Although it is clear that a law firm may not impose a direct restriction on the right of a departing lawyer to represent certain clients or practice in a specified area, it is not clear whether a law firm may impose an indirect financial restriction or a penalty on a departing attorney's ability to practice. Colorado lawyers may wish to include such non-compete provisions in their partnership agreements, but Colorado law is unclear on this issue. This article explores applicable Colorado law, as well as the law in other jurisdictions, and offers specific guidance to Colorado lawyers contemplating the adoption of a non-compete provision and advice regarding its likely enforceability.
General Rule: Direct Restrictions on Right to Practice Prohibited
Colo. RPC 5.6, titled "Restrictions on Right to Practice," generally states that a lawyer shall not participate in offering or making a partnership agreement that restricts the right of a lawyer to practice after termination of the relationship, with the exception of an agreement concerning benefits on retirement.(fn3) This rule is identical to American Bar Association (ABA) Model Rule 5.6. Rule 5.6 is uniformly construed to prohibit a direct restriction on the practice of law. Examples of such a prohibited constraint on the right to compete include a geographical restriction-for example, "on leaving the firm, a departing lawyer shall not practice law within 100 miles of law firm's office," and a restriction on the representation of the former law firm's clients-for example, "on leaving the firm, a departing lawyer shall not solicit or represent any clients of the firm."
The comment explains that Rule 5.6 forbids direct restrictions on competition to protect the autonomy interest of departing attorneys, as well as clients' interests, specifically the right of clients to be representedby a lawyer of their choosing.(fn4) This rationale is illustratedby the following example. Client C has long been representedby Lawyer L. L decides to leave Law Firm and practice within 100 miles of Law Firm. C wishes to have L continue to represent him. Were non-compete agreements allowed, a 100-mile geographical restriction would deprive C of L's representation.
Although a direct constraint on the right to practice law is disallowedby Colo. RPC 5.6, the rule is silent on whether a law firm may indirectly restrict a departing attorney's practice of lawby incorporating restrictive covenants into its partnership agreement providing financial disincentives, triggering liquated damages clauses, or imposing financial penalties on a departing lawyer. Colorado law does not address such indirect restrictions on lawyers' practice, but other jurisdictions have addressed the issue, exploring the relevant considerations raisedby non-compete covenants.
Majority View: Indirect Restrictions on Right to Practice Prohibited
In a majority of jurisdictions, a law firm cannot condition the payment of money otherwise due a departing lawyer on the lawyer's refraining from competing with the firm. To be sure, contractual provisions in partnership agreements that impose on departing lawyers financial consequences for choosing to compete with the former firm do not explicitly prohibit competition with the former firm. Such financial disincentives, however, indirectly have the same practical restrictive effect, because the financial consequences they impose on competition may cause a departing lawyer to decline representation of the former firm's clients.
Accordingly, first generation case law broadly construed former DR 2-108(A) (the Model Code counterpart to Rule 5.6), refusing to permit even indirect restrictions on the practice of law. In particular, courts refused to allow the imposition of financial penalties on departing lawyers who competed with their former law firm. In Gray v. Martin(fn5) the Oregon Court of Appeals disallowed a contractual provision that attempted tobypass the prohibition on geographical restrictionsby stating that a departing partner would forfeit certain financial benefits were he to compete with his old firm in specified geographical boundaries. The court held that such an indirect provision, which imposed a financial penalty but not a direct prohibition on the departing lawyer's practice of law, was clearly a violation of DR 2-108(A) because it had the practical consequence of restricting the lawyer's right to practice law.(fn6)
Similarly, in the leading case of Cohen v. Lord, Day and Lord,(fn7) New York's highest court invalidated a provision stating that a departing partner forfeits fees for services provided but not yet billed as of his departure if he engaged in competition with the firm. Explicitly addressing the issue of indirect practice restrictions, the Court held that a
significant monetary penalty ... constitutes an impermissible restriction on the practice of law. The forfeiture-for-competition provision would functionally and realistically discourage and foreclose a withdrawing partner from serving clients who might wish to continue to be...
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