Non-compete Clauses for Lawyers

• Jurisdiction: California,United States,Federal
• Author: By Megan Zavieh
• Publication year: 2016
• Citation: Vol. 22 No. 2

Non-Compete Clauses for Lawyers

By Megan Zavieh

Megan Zavieh focuses her practice on attorney ethics, representing attorneys facing state bar disciplinary action and providing guidance to practicing attorneys on questions of legal ethics. She has been representing attorneys facing disciplinary action before the California State Bar since 2009 and is admitted to practice in California, Georgia, New York and New Jersey, as well as in Federal District Court and the U.S. Supreme Court. She blogs at CaliforniaStateBarDefense.com and is a contributor at Lawyerist.com and AttorneyatWork.com.

Non-compete clauses are largely unenforceable in California except as to business owners, and the general rules contained in statutes and public policy apply equally to lawyers. However, the Rules of Professional Conduct go further to protect lawyers' right to practice in their profession. In the end, the interplay of the Rules of Professional Conduct, the Business and Professions Code, and public policy yields a rule under which associates are free to move from one firm to the next or go solo as they choose, and partners cannot be precluded from competing with their old firms but can be required to compensate their old partners for doing so.

GENERAL RULE AGAINST NON-COMPETE AGREEMENTS IN CALIFORNIA

The basic rule in California is that non-compete clauses are not enforceable. Business & Professions Code § 16600 is simple and clear: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."¹

EXCEPTION ALLOWING NON-COMPETE AGREEMENTS FOR NON-LAWYER BUSINESS OWNERS

The main exception to the general rule appears in Business & Professions Code § 16601, which provides a lengthy and detailed explanation of how a business owner who sells the business (or its goodwill) may lawfully agree not to compete with the buyer.² The statute applies whether the business operates as a sole proprietorship, a partnership, a limited liability company, or a corporation. In addition, members of partnerships and limited liability companies may enter into enforceable non-compete agreements with their partners or fellow members in anticipation of their withdrawal from, or the total dissolution, of the entity.³

To be enforceable under Business & Professions Code § 16601, a non-compete agreement must contain limiting parameters, such as the geographic region in which the restricted party may not engage in competitive activity and the term of the restriction (which may be as long as the buyer operates the business).⁴ An enforceable non-compete agreement from non-law businesses and professions may prevent the business seller or withdrawing partner or member from engaging in that business at all in the specified geographic area.⁵

MORE RESTRICTIVE NON-COMPETE RULES FOR LAWYERS

It may seem logical to expect the business-owner exception to the general rule against non-compete agreements to apply to law firm partners who leave their firms. After all, a when a law firm partner (a part owner of the firm) withdraws from (or is asked to leave) the firm, the departing partner usually leaves with a practice developed at the firm that would compete with the firm's business. Why would the provisions of the Business and Professions Code not permit enforcement of an agreement prohibiting such competition? Why would the law partner not be prevented from practicing the same type of law in the same town, just as any other departing business owner can be restricted under § 16601?

[Page 18]

The answers lie in Business & Professions Code § 16602 and the Rules of Professional Conduct.

BUSINESS & PROFESSIONS CODE § 16602: PARTNERSHIPS AND NON-COMPETES

Professionals engaged in the practice of their professions in the structure of partnerships with other professionals are not treated the same in the Business & Professions Code as other business owners. To enforce a non-compete agreements amongst partners, § 16602 provides that when a partner is withdrawing from a partnership or the partnership is dissolving, a partner may agree not to "carry on a similar business within a specified geographic area where the partnership business has been transacted" so long as another partner continues to conduct a like business in that area.

As with the business owner exception, the time that a non-compete under § 16602 may be enforced is theoretically years. Nevertheless, this section has explicitly been held to apply to doctors,⁶ accountants⁷ and lawyers.⁸

RULE OF PROFESSIONAL CONDUCT 1-500

Where the Rules of Professional Conduct weigh in on the non-compete issue is Rule 1-500. It limits non-compete agreements for lawyers to the term of the lawyer's employment. Thus, it...