Enforceability of non-competition clauses affecting lawyers.

• Author: Sinclair, J. Walter

AS MORE law firms break up and lawyers change firms more frequently, there is an emerging interest in the enforceability of noncompete clauses as used by lawyers in the law firm setting.

To begin, Rule 5.6 of the American Bar Association Model Rules of Professional Conduct, as well as Disciplinary Rule 2-108 of the former ABA Model Code of Professional Responsibility, prohibit lawyers from entering into partnership or employment agreements that restrict their right to practice law after withdrawing from the law firm with which they have been associated. All the states have their own disciplinary rules, which typically are identical to, or modeled after, the ABA rules.

Rule 5.6 of the ABA Model Rules states:

RULE 5.6 RESTRICTIONS ON RIGHT TO PRACTICE

A lawyer shall not participate in offering or making:

(a) 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; or

(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a controversy between private parties.

The comment to Rule 5.6 provides additional insight into its underlying policy:

An agreement restricting the right of partners

or associates to practice after leaving a firm not

only limits their professional autonomy but also

limits the freedom of clients to choose a lawyer.

Paragraph (a) prohibits such agreements except

for restrictions incident to provisions concerning

retirement benefits for service with the firm.

Paragraph (b) prohibits a lawyer from agreeing

not to represent other persons in connection with

settling a claim on behalf of a client.

This rule does not apply to prohibit restrictions

that may be included in the terms of the sale of a law practice pursuant to Rule 1.17.

In general, the focus in determining whether such an agreement is enforceable is to look at the effect of the agreement on the right to practice law and the ability of clients to have free access to lawyers of their choice. The intent of the parties entering the agreement is not the primary focus. Indirect restrictions on the practice of law, such as financial disincentives to withdrawing lawyers, as well as the more obvious direct prohibitions, generally are prohibited by this rule.

There are two major exceptions to the general rule. First, a lawyer can be restricted from practice pursuant to an agreement providing for the payment of retirement benefits. This exception is expressly stated in Rule 5.6. Second, in a small number of states an ongoing law practice can be sold pursuant to the provisions of ABA Model Rule 1.17, and the sale may include restricting the selling lawyer's right to practice in a particular jurisdiction or geographic area. The ABA added this rule, entitled "Sale of Law Practice," to its Model Rules in 1990, but it has been adopted so far by only a few states.

Other issues that arise in this context include the lawyer's fiduciary duties to the client on the lawyer's withdrawal from the law firm, protection of client confidences and secrets, fee splitting between the withdrawing lawyer and the law firm, and whether the unenforceable non-compete portion of an employment agreement can be severed, thus leaving an otherwise enforceable employment contract.

NON-COMPETE CLAUSES GENERALLY Not ENFORCEABLE

Restrictive covenants in the practice of law typically fall within one of two categories. Either they directly prohibit the practice of law in a particular jurisdiction or geographic area and for a set period of time, or they indirectly restrict the practice of law by way of financial disincentives that result from competitive activities following withdrawal from the law firm. Regardless of classification, employment agreements that restrict a lawyer's right to practice law and limit clients' access to the lawyer of their choice are not enforceable.

A. Law Practice Distinguished

As a preliminary matter, non-compete agreements within the legal employment context are treated separately and are to be distinguished from similar agreements found in the commercial world, which are common incidents to the sale of a business. One of the leading cases addressing this distinction, as well as non-compete agreements generally, is Dwyer v. Jung,(1) in which the New Jersey Superior Court, Chancery Division, provided an informative history:

Initially, it must be recognized that lawyer restrictive

covenants are to be distinguished from

non-competitive covenants incident to the sale of

a business where the covenants are designed to

protect the goodwill of the business for the benefit

of the buyer. . . . A lawyer's clients are

neither chattels nor merchandise, and his practice

and good will may not be offered for sale.

...In this regard Abraham Lincoln's sage observation

(slightly paraphrased) is particularly

appropriate: A lawyer's time and advice are his

stock in trade.

Nor may lawyer restrictive covenants, whether

contained in a partnership agreement or an

agreement of employment, be classified within

the general category of agreements restricting

post-employment competition. The usual employee

restrictive covenant is a legitimate business

device to protect the business and good will

of an employer against various forms of unfair

competition. Although not freely as enforceable

as a seller's noncompetitive agreement, such restrictive

covenant will, nevertheless, be given effect

if it is reasonable under all of the circumstances.

"It will generally be found to be reasonable

where it simply protects legitimate interests

of the employer, imposes no undue hardship on

the employee and is not injurious to the public."(2)

The Dwyer court continued its analysis of the non-compete clause in the law, as compared to that in the commercial context generally:

Commercial standards may not be used to

evaluate the reasonableness of lawyer restrictive

covenants. Strong public policy considerations

preclude their applicability. In that sense lawyer

restrictions are injurious to the public interest. A

client is always entitled to be represented by

counsel of his own choosing.... The attorney-client

relationship is consensual, highly fiduciary

on the part of counsel, and he may do nothing

which restricts the right of the client to repose

confidence in any counsel of his choice....

No concept of the law is more deeply rooted.

The lawyer's function is to serve, but serve he

must with fidelity, devotion and erudition in the

highest traditions of his noble profession.(3)

The court determined that the particular restrictive covenant in that case, which was contained in a partnership agreement and which assigned named clients to specific partners on dissolution, was void as against public policy.

B. Direct Restrictions

Direct restrictions, which expressly prohibit lawyers from representing certain clients following their withdrawal from the firm, typically arise in one or more of three common scenarios. First, the restrictive covenant may prohibit the lawyer from continuing to represent clients with whom the lawyer may have had contact while with the firm. Second, it may prohibit the lawyer from soliciting those clients following the lawyer's withdrawal from the firm. Third, it may prohibit the lawyer from accepting business from prior clients of the law firm from which the lawyer withdrew. As a general rule, each one of these outright prohibitions would be unenforceable pursuant to Rule 5.6 or firmly established case law, or both.

On direct restrictions generally, the Supreme Court of New Jersey stated in Jacob v. Norris, McLaughlin & Marcus:

Other states have almost uniformly shared

New Jersey's dim view of restrictive covenants

in employment agreements among lawyers. Laurel

S. Terry, Ethical Pitfalls and Malpractice

Consequences of Law Firm Breakups, 61

Temp. L. Rev. 1055, 1072-74 (1988). For example,

in refusing to enforce a covenant allowing

withdrawing partners to take only particular

clients and not others, one court stated that:

"We believe that each person must have the

untrammeled right to the counsel of his choice.

A contrary decision would allow clients to be

unknowingly treated like objects of commerce,

to be bargained for and traded by merchant-attorneys

like beans and potatoes."(4)

C. Indirect Restrictions

While it is clear that direct prohibitions are unenforceable as against public policy, more controversial is the issue of indirect restrictions, which commonly take the form of financial disincentive provisions and which are typically not intended to restrict the practice of law. In fact, they are intended to protect the law firm from which the lawyer withdraws from serious financial detriment resulting from the loss of clients and established goodwill.

Case law on this issue, however, has held that financial disincentives that arise on the termination or withdrawal of a lawyer from the firm and that have the effect of restricting the practice of law and of limiting clients' choice of counsel are unenforceable. In determining the validity of the financial disincentive provisions, the focus has been on the effect of the restriction, as opposed to the intent of the parties who drafted and agreed to its terms.

There are some distinctions as to whether a different result should be reached when termination agreements limit...