The Opinion delved into many individual ethical rules from conflicts, fees, communication and competence to diligence, confidentiality, and duties to former clients. But since it mainly had to do with notice obligations to clients and other shared employer-employee ethical obligations to clients, it mentioned only in passing, ER 5.6, Restrictions on Right to Practice.
Is ER 5.6 relevant today? Some commentators are seeing fissures in the dam.
Ethical Rule 5.6 prohibits lawyers from entering into restrictive covenants such as non-compete agreements and states:
“A lawyer shall not participate in offering or making:
(a) a partnership, shareholders, operating, employment, or other similar type of 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.”
When “it’s not about the money,”. . . it’s about the money.
Notwithstanding the ethical obligations of the employer law firm and the departing employee concerning timely notice and avoiding prejudice to the client, like virtually all things in business, it always comes down to the coin
, the moolah
, the pretty little green ones
, in other words, the Money
Put another way, how will the economic value of the departing lawyer’s client files be apportioned if the clients follow their lawyer out the door? Or put yet another way, how much does the firm get when the departing lawyer takes the client and her active file with her? And having trained, nurtured, and invested time and money in the departing lawyer, are there economic incentives or disincentives to keep the exiting lawyer from competing with her former firm?
Restrictive covenants in other professions, such as medicine, dentistry, and accountancy, have generally been deemed enforceable as long as they’re reasonable in scope and duration. Not so lawyers. Traditionally, attorney non-competes are verboten because they restrict the lawyer’s professional autonomy and a client’s freedom to hire the attorney of their choice.
But are attorney non-competes passé?
The answer is still “No.” But non-competes should be reconsidered given the vastly transformed economic landscape today. While the Arizona Ethics Opinion provides guidance on both sides of the departing lawyer scenario, it does not address the imposition of economic disincentives on lawyers leaving a law firm. It is this penumbra within ER 5.6 that is ultimately the practical consideration standing foursquare amidst the ethical requirements to clients.
Helpfully, the Supreme Court of Arizona
has ruled on the subject and provided more daylight than previously allowed in the vast majority of jurisdictions. In Fearnow v. Ridenour, Swenson, Cleere,
138 P.3d 723 (Ariz., 2006), CV-05-0217-PR,
the state’s supreme court examined whether under ER 5.6(a) it was a restriction on a lawyer’s right to practice to impose a financial penalty on a departing lawyer under a shareholder agreement requiring him to tender his stock for no compensation if he thereafter competes with the corporation in the practice of law.
The court ruled that a lawyer’s right to practice under ER 5.6(a) was not precluded by such financial penalties. In analogizing to the medical profession, the court said,
“We are unable to conclude that a lawyer’s clients are so superior to those of a doctor’s patients (whose choice of a physician may literally be a life-or-death decision) as to require a unique rule applicable only to attorneys. The language of ER 5.6 does not support such a sweeping special treatment of lawyers, nor does protection of clients mandate such a result.
We therefore decline to read ER 5.6(a) in the expansive fashion suggested by Fearnow. Although the rule prohibits — and we will hold unenforceable — agreements that forbid a lawyer to represent certain clients or engage in practice in certain areas or at certain times, its language should not be stretched to condemn categorically all agreements imposing any disincentive upon lawyers from leaving law firm employment. Such agreements, as is the case with restrictive covenants between other professionals, should be examined under the reasonableness standard.”
The Arizona Court followed the lead of California in Howard v. Babcock, 6 Cal.4th 409, 25 Cal.Rptr.2d 80, 863 P.2d 150, 151 (1994). In Howard, the court found in favor of the enforceability of an agreement among law partners imposing a reasonable restriction, including a reasonable financial penalty on departing partners who competed with the firm. The court also spoke of a “revolution” in the practice of law “requiring economic interests of the law firm to be protected as they are in other business enterprises.”
Relying on the California Court, the Arizona Supreme Court stated,
“We find the reasoning of Howard compelling. ER 5.6 prohibits only an agreement “that restricts the right of a lawyer to practice” law after termination of employment with a firm. (Emphasis added.) It is one thing for this Court, in its supervisory capacity over the legal profession, to adopt a limited exception to the general rule construing restrictive covenants for reasonableness when confronting a contract the terms of which forbid a lawyer from engaging in practice or representing certain clients. It is quite another, as Howard notes, to completely “distinguish lawyers from other professionals such as doctors or accountants, who also owe a high degree of skill and loyalty to their patients and clients.”
Still a minority view.
The so-called Howard
view is a minority one but it may be a growing one. For a comprehensive, thought-provoking analysis, see Robert Hillman’s January 2008 Hofstra Law Review
article, Client Choice, Contractual Restraints, and the Market for Legal Services
In his article, Hillman notes another instance of this emerging divergent view. It is the Massachusetts case of Pettingell v. Morrison, Mahoney & Miller, 687 N.E.2d 1237, 1240 (Mass. 1997), which suggests that a “law firm’s legitimate interest in its survival and well-being might justify a limitation on payments to a withdrawing partner in particular circumstances.”
Hillman concludes his analysis by deconstructing long outdated public policy arguments since we now live in a world with too many lawyers and a dwindling client pool that can afford them. And yet, the per capita number of lawyers in the U.S. approaches 300 lawyers per 100,000. I still remember the joke about the lawyer at the cocktail party where almost everyone there was a lawyer except for the family dog.
As of the last census, in California, for example, there were 11 lawyers for every 10,000 persons. In Arizona, it was 8 lawyers per 10,000. See Highest Per Capita Lawyers.
Consequently, Hillman posits that “the legal profession’s current stance on client choice rests on the slim foundation of a handful of rather tentative and obscure ethics opinions rendered when the market for legal services was far less competitive than it is today.”
Sardonically, Hillman observes, “The profession’s commitment to the norm of choice would be truly impressive if legal services were widely available and those in need of the services were provided with options from which to choose.”
The ABA’s Formal Opinion 300 on the subject of restrictive covenants dates back 39 years. Today’s legal marketplace is far different from the one in 1961. (For an informative compilation of cases involving restrictive covenants among law partners, see Minkoff.pdf.) Athough the per se ban on any direct or indirect attorney restrictive covenant was adopted by an overwhelming majority of jurisdictions, thanks to decisions like Howard, things may be changing.
Indeed, in his article, Noncompete Agreements for Attorneys: Are We Now Fair Game?, Daniel Quick opined in the December 2008 Michigan Bar Journal that it “remains an open question for some as to whether attorneys actually deserve special treatment. Those who oppose restrictions on attorneys often invoke our status as “professionals” and bemoan the commercialization of the practice.”
Quick goes on to suggest that decisions like Fearnow may be “way stations on the path toward doing away altogether with per se impediments to attorney noncompetes.”
So what’s the ‘take-away’ from all this? In a world where ER 5.6 retains its vitality, law firms not wanting to run afoul of traditional non-compete prohibitions should hedge their bets by invoking rationales sounding in economic disincentive or liquidated damages in their agreements. This approach might better protect their economic interests when partners or associates depart.
And unlike non-compete clauses, so long as they are reasonable, these so-called forfeiture clauses in attorney employment contracts have a likely better chance of being enforced since they don’t restrict an attorney’s professional autonomy or her ability to practice.