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Opinion 241
Financial Penalty Imposed on Departing Lawyer Who Engages in Legal
Practice in D.C. Area
A partnership agreement imposes a delay of up to five years in paying
out funds from a partner’s capital financial account where the partner
leaves the partnership and engages in the practice of law in the Washington
area. Such an agreement violates Rule 5.6(a) in imposing a penalty for
opening a potentially competing practice.
Applicable Rule
- Rule 5.6(a) (Restrictions on Right to Practice Law)
Inquiry
Inquirer seeks an opinion concerning the propriety of delay in paying
funds from a partner’s capital financial account where the partner leaves
the partnership and engages in the practice of law in the District of
Columbia metropolitan area.
The partnership agreement provides that a withdrawn
partner is entitled to payments from his capital financial account over
a five year period without interest beginning on the last day of the first
fiscal quarter of the year following the date of withdrawal. It limits
payments, however, in the following circumstances:
If a Withdrawn Partner who is otherwise entitled to receive
payments prior to age 65 pursuant to the section of this Agreement captioned
“Payments for Withdrawn Partners” engages in the private practice
of law in the metropolitan District of Columbia area, such payments shall
be delayed until the earlier of (i) the date such Terminated Partner attains
age 65, (ii) the date such Terminated Partner ceases to engage in the
private practice of law as aforesaid or (iii) five years after the date
such payments were otherwise scheduled to commence pursuant to the section
of this Agreement captioned “Payments for Withdrawn Partners.”
Inquirer seeks an opinion whether this provision
violates Rule 5.6(a).
Discussion
Rule 5.6 provides:
A lawyer shall not participate in offering or making
(a) A partnership or employment agreement that restricts the rights
of a lawyer to practice after termination of the relationship, except
an agreement concerning benefits upon retirement; . . .
The operative language of Rule 5.6—“restricts
the right of a lawyer to practice”—is identical to the language
of the predecessor Code provision, DR 2-108(A).
The Committee has frequently been asked to define
the scope of firms’ authority to limit, through partnership or employment
agreements, competition by lawyers who depart the firm. In Opinion 181,
the Committee engaged in a thorough review of the purposes of the former
Code provision, analyzing the case law, ABA opinions and prior Committee
decisions. It concluded that these decisions “demonstrate a general
hostility toward restrictive [employment] agreements and persuade this
Committee that it should carefully examine any such agreements that come
before it.” The reasons are twofold: to protect the ability of clients
to obtain lawyers of their own choosing and to enable lawyers to advance
their careers. The changing nature of the bar and the practice of law
in the District of Columbia, which is characterized by significant growth
in the size of the bar, the opening of branches of out-of-town firms and
relaxation of rules concerning solicitation and advertising, all reinforce
the need for limiting restrictions on lawyer mobility.
The Committee has twice before held that employment
and partnership agreements imposing direct financial penalties for practicing
in a competing or potentially competing firm amount to forbidden restrictions
on the right to practice. In Opinion 65, the Committee held that former
DR 2-108(A) prohibited an employment agreement requiring that, for two
years after departure, the departed lawyer pay to the former firm 40%
of net billings deriving from clients previously represented by the firm.
And in Opinion 194, the Committee found impermissible a provision that
reduced by half the payment of unrealized accounts receivable if the departing
partner opened any competitive practice within twelve months. These decisions
are consistent with Gray v. Martin, 663 P.2d 1285 (Or. 1983), twice cited
by the Committee (Opinions 181 and 194), where the court refused to enforce
a clause in the partnership agreement eliminating the payments a partner
was otherwise entitled to receive if the lawyer practiced in any of three
designated counties.
By contrast, financial arrangements that do not
penalize a lawyer for competing do not run afoul of Rule 5.6. In Opinion
221, the Committee considered an agreement used by a firm engaged in plaintiff
personal injury litigation that specified the division of potential contingent
fees in cases unresolved at the time of an attorney’s departure from the
firm.1 The
Committee held that to the extent the arrangement was simply an effort
to establish a fair split based on work performed, the agreement was permissible;
an excessive share to the firm would, however, amount to a restriction
on the right to practice.
The Committee has upheld only one sort of restriction
on the right to practice. These are reasonable—not absolute—limitations
on the departing lawyer’s solicitation of clients of the departing firm.
In Opinions 77 and 97, the Committee upheld employment agreements prohibiting
an associate leaving a firm from seeking to solicit business from clients
of the firm, where the associate was free to mail announcements short
of direct solicitation. The Committee recognized that the rule in each
instance did constitute a restriction on the former associate’s ability
to obtain clients, but believed that solicitation of current clients raises
special concerns that warranted at least regulation of the manner of such
solicitations. As the Committee has often determined, however (see, e.g.,
Opinions 181 and 221), even in the case of direct solicitation of a firm’s
clients, where problems of interference in ongoing relationships are most
sensitive, a firm may impose only the most narrow of restrictions.
The agreement here violates Rule 5.6. The financial
penalties imposed on a departing lawyer serve no other purpose than restricting
practice and insulating the firm from potential competition. The agreement
plainly discourages a partner from competing against the former firm,
or even representing clients at all, by forcing the partner to forego
the payments otherwise payable for up to five years if the partner practices
law in the Washington area.
One might argue that here the agreement provides
for delay in payment rather than its elimination or diminution, so is
not nearly so onerous as in other cases. Even putting aside the possibly
significant sums at stake and the cost to the lawyer of the delay, the
provision’s broad application undoubtedly serves as a deterrent to opening
a competing practice. It thus represents a restriction on the right to
practice to limit competition even as to potential future clients of the
firm. The fact that the restriction ends automatically if the terminated
partner ceases the private practice of law reinforces this conclusion.
The Committee concludes that a partnership agreement
that delays for five years payments otherwise due a departing partner
from the partner’s capital financial account if the partner engages in
the practice of law in the Washington area is prohibited by Rule 5.6.
Inquiry No. 92-7-20
Adopted: September 21, 1993
- For example, the agreement provided that
if the client had retained the firm two years before the lawyer’s
departure and resolved within a year of departure, the firm would
receive 75% of the fee. If the firm had been retained only a year before
the lawyer’s departure and the case was not resolved for two to
three years thereafter, the firm would receive 55% of the fee.
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