Ethics 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The partnership agreement provides that a withdrawn partner is entitled to payments from his capital financial account over a five year period without interest beginning on the last day of the first fiscal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If a Withdrawn Partner who is otherwise entitled to receive payments prior to age 65 pursuant to the section of this Agreement captioned “Payments for Withdrawn Partners” engages in the private practice of law in the metropolitan District of Columbia area, such payments shall be delayed until the earlier of (i) the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such payments were otherwise scheduled to commence pursuant to the section of this Agreement captioned “Payments for Withdrawn Partners.”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

1. 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.