Ethics Opinion 368
Lawyer Employment Agreements—Restrictions on Departing Lawyer Who Competes with Former Firm
A law firm may not provide for or impose liquidated damages on a lawyer who, after departure, competes with the firm. A firm and a departing lawyer may have liability to one another, though, for work done before the lawyer's departure. Also, a firm may not restrict a departed lawyer's subsequent professional association or affiliation with partners or employees of the firm, except insofar as such activity is subject to legal limitations outside the Rules of Professional Conduct. Whether a choice of law provision in a partnership or employment agreement can avoid application of the D.C. Rule governing lawyer departures usually will depend on the location where the departing lawyer principally practiced.
Applicable Rules
- Rule 5.6(a) (Restrictions on Right to Practice)
- Rule 8.5(b)(2) (Disciplinary Authority; Choice of Law)
- Rule 8.4 (Misconduct)
Inquiry
The committee has received a number of inquiries along the following lines and has concluded that a discussion of these issues will be of interest to the Bar.
- Whether a law firm may provide for or impose liquidated damages on a lawyer who, after departure, competes with the firm.
- Whether a law firm may provide for or impose a financial penalty on a departing lawyer who associates professionally with anyone who was a partner or employee (lawyer or non-lawyer) at the firm.
- Whether, where at least one lawyer at a law firm is admitted to practice in both the District of Columbia and another jurisdiction, the firm may insert a choice of law provision in a partnership, employment, or other agreement in order to avoid applying Rule 5.6(a) of the D.C. Rules of Professional Conduct in favor of a rule of the other jurisdiction that addresses the same subject matter but yields a different result.
Analysis
For the reasons set out below, the committee answers the first two inquiries in the negative. Our answer to the third inquiry is somewhat more complex.
The D.C. Rules of Professional Conduct ("D.C. Rules") provide:
A lawyer shall not participate in offering or making:
(a) A partnership, shareholders, operating, employment, or other similar type of agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.1
D.C. Rule 5.6.2
Because they limit a client's freedom in choosing a lawyer and a lawyer's professional autonomy, provisions in partnership, employment, and other agreements that expressly or impliedly restrict a lawyer's practice are prohibited. Neuman v. Akman, 715 A.2d 127, 130-31 (D.C. 1998) (citing D.C. Rule 5.6, cmt. [1]); accord Cohen v. Lord, Day & Lord, 550 N.E.2d 410, 411 (N.Y. 1989);3 Stevens v. Rooks Pitts and Poust, 682 N.E.2d 1125, 1132 (Ill. App. 1997);4 D.C. Legal Ethics Op. 325 (2004); D.C. Legal Ethics Op. 241 (1993); D.C. Legal Ethics Op. 122 (1983).5 The prohibition extends not only to absolute bars upon competition with the former firm but also, at least in some circumstances, to "[r]estrictions . . . that impose a substantial financial penalty on a lawyer who competes after leaving the firm." D.C. Rule 5.6 cmt. [2];6 accord Cohen, 550 N.E.2d at 411; Stevens, 682 N.E.2d 1125; D.C. Legal Ethics Op. 325 (2004); D.C. Legal Ethics Op. 241 (1993); D.C. Legal Ethics Op. 194 (1988); D.C. Legal Ethics Op. 65 (1979).7
Liquidated damages
The first inquiry addresses whether a law firm may provide for or impose liquidated damages on a lawyer who, after departure, competes with that firm. Liquidated damages, unlike actual damages, are fixed in advance of a breach rather than afterward. They are viewed by the D.C. Court of Appeals "with a gimlet eye" and will be sustained only if "'not . . . disproportionate to the level of [actual] damages reasonably foreseeable at the time of the making of the contract.'"8 District Cablevision Limited Partnership v. Bassin, 828 A.2d 714, 723 (D.C. 2003) (quoting Council v. Hogan, 566 A.2d 1070, 1092 (D.C. 1989)); accord Ashcraft & Gerel v. Coady, 244 F.3d 948, 954-55 (D.C. Cir. 2001).9 Moreover—
when a contract specifies a single sum in damages for any and all breaches even though it is apparent that all are not of the same gravity, the specification is not a reasonable effort to estimate damages; and when in addition the fixed sum greatly exceeds the actual damages likely to be inflicted by a minor breach, its character as [an impermissible] penalty becomes unmistakable.
District Cablevision, 828 A.2d at 723 (quoting Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1290 (7th Cir. 1985)); accord Jacob v. Norris, McLaughlin & Marcus, 607 A.2d 142, 151 (N.J. 1992); cf. Ashcraft & Gerel, 244 F.3d at 955 (upholding liquidated damages clause where amount was not fixed but increased over time to reflect lawyer's increasing value to law firm).
As we read D.C. Rule 5.6(a), Neuman and other case law, and our own previous opinions, a departing lawyer may not be subjected to liquidated damages because she subsequently competes with her former firm. She and the firm may be responsible to one another for the value of work completed before she leaves the firm. See D.C. Legal Ethics Op. 194 (1988) (disapproving agreement that deprived departing lawyer of part of unrealized accounts if lawyer competed within 12 months). This applies notably in the case of contingent fee cases. Compensation for such matters might not be received or even owed until long after her departure, and a portion of that compensation might be attributable to work done at the former firm prior to her departure. D.C. Legal Ethics Op. 221 (1991); accord In re Thelen LLP, 20 N.E.3d 264, 271 (N.Y. 2014) (stating that former firm is entitled to an accounting for value of contingent fee case as of the lawyer's departure date). A 1990 D.C. Court of Appeals decision held that contingent fee matters are part of the partnership property. Beckman v. Farmer, 579 A.2d 618 (D.C. 1990). Farmer was a law firm dissolution matter that did not involve a penalty for post-departure competition, so the opinion did not discuss the penalty-for-competition issue. Id.10
By contrast, we believe that an agreement imposing substantial damages—actual or liquidated—attributable to or because of work done by the departing lawyer (or her new firm) in competition with the former firm after she relocates would violate Rule 5.6(a). D.C. Legal Ethics Op. 65 (1979); see Stevens, 682 N.E.2d at 1131-32. But cf. Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997) (holding that hourly matters are partnership property but not addressing post-departure competition penalties).11
In 1979 this committee considered a liquidated damages provision that a lawyer's post-departure work "for a client of the firm during a two-year period following . . . termination" would render the departing lawyer liable to his former firm for "40% of his net billings to such clients . . . during the said two year period." D.C. Legal Ethics Op. 65 (1979). The committee concluded that the provision violated the predecessor of D.C. Rule 5.6(a). Id. A later opinion disapproved a clause that imposed liquidated damages of $150,000 for any breach of an agreement's suite of post-employment restrictions. D.C. Legal Ethics Op. 181 (1987).12
In Thelen, the New York Court of Appeals decided that hourly fee matters are not law firm property. In re Thelen LLP, 20 N.E.3d 264. This opinion does not address that particular issue but the Thelen court pointed out several policy considerations that are relevant here. First and most important, many a departing lawyer would be compelled to inform clients who wish to follow her that she can't afford to continue representing them. That would constitute—
a major inconvenience for the clients and a practical restriction on a client's right to choose counsel. Or, more likely, these attorneys would simply find it difficult to secure a position in a new law firm because any profits from their work for existing clients would be due their old law firm, not their new employers.
* * *
Additionally, clients might worry that their hourly fee matters are not getting as much attention as they deserve if the [new] law firm is prevented from profiting from its work on them.
Id. at 273. Second, such a rule would allow the departed lawyer's former partners "to profit from work they do not perform, all at the expense of a [the departed lawyer and her] new firm," thus creating a windfall for the former firm. Id.
Similar considerations underlie Rule 5.6(a). Thus, regardless of whether a liquidated damages provision passes muster under contract principles, it is grounds for professional discipline if it runs afoul of the limitations set out above.13
Restrictions upon post-departure association with personnel of former firm
The second inquiry is whether a law firm may penalize a lawyer financially for entering into an agreement or association with an individual who was a partner or employee (lawyer or non-lawyer) with the former firm.
In 1987 this committee reviewed an agreement we described as "perpetually prohibiting any interference" by a departed lawyer "with the firm's relationships with its lawyer/employees." D.C. Legal Ethics Op. 181 (1987). The committee opined that by interfering with the right of association among attorneys, the provision indirectly restricted the departing attorney's right to practice law and hence violated the predecessor of Rule 5.6(a). Id. (citing ABA Informal Op. 1417 (1978)); accord Jacob, 607 A.2d at 152-54. We see no reason to alter this conclusion and accordingly reaffirm Opinion 181.14 As is the case in respect of damages for post-departure competition, any penalty must be substantial to trigger the prohibition of Rule 5.6(a). D.C. Rule 5.6, cmt. [2].
This is not to say that a departing lawyer has an unlimited right to solicit firm partners or employees, particularly before she departs. We have noted that although this issue is "primarily, if not entirely," a function of "law other than ethics law, such as the common law of interference with business relations and fiduciary obligations," there could be extreme instances where deception and dishonesty by the departing lawyer might constitute "dishonesty, fraud, deceit, or misrepresentation" in violation of Rule 8.4(c). D.C. Legal Ethics Op. 273 (1997).
Choice of law
The final inquiry is whether, where the departing lawyer also is admitted to practice in another jurisdiction,15 a choice of law provision in a partnership or other agreement may avoid the application of D.C. Rule 5.6(a) in favor of a rule of the other jurisdiction that yields a different result. By way of example, a minority of jurisdictions permit the imposition of a financial penalty on a competing former lawyer, so long as the penalty reasonably reflects the loss in the value of the law firm occasioned by the departure. See supra n. 7 and authorities cited therein.
A lawyer admitted to practice here is subject to the District's disciplinary authority regardless of where the questioned conduct occurs. D.C. Rule 8.5(a). Moreover, "[a] lawyer may be subject to the disciplinary authority of both this jurisdiction and another jurisdiction where the lawyer is admitted for the same conduct." Id.16 Where multiple jurisdictions are involved, however, and the conduct is not in connection with a matter pending before a tribunal—
the rules to be applied [by the D.C. disciplinary authorities] shall be the rules of the admitting jurisdiction in which the lawyer principally practices; provided, however, that if particular conduct clearly has its predominant effect in another jurisdiction in which the lawyer is licensed to practice, the rules of that jurisdiction shall be applied to that conduct.
D.C. Rule 8.5(b)(2) (emphasis added). The intent of this rule is that "any particular conduct of an attorney shall be subject to only one set of rules of professional conduct" and that the process of determining which set applies be "as straightforward as possible." D.C. Rule 8.5 cmt. [3].
Although they antedate choice-of-law provisions in the Model Rules17 and state ethics codes, several rulings from outside the District of Columbia are instructive. A 1991 ABA opinion, for example, addressed the fact that the District permits ownership and management of law firms by non-lawyers, while every other American jurisdiction prohibits such arrangements. ABA Formal Op. 91-360 (1991) ("ABA Opinion"). "[W]hat ethical rule should govern," the ABA committee asked, "when lawyers are partners in a law firm that, as permitted by the D.C. rule, includes nonlawyer partners, but are also members of the bar of another jurisdiction [State X] whose rules forbid such partnerships"? Id. The ABA committee concluded that if the lawyer admitted in D.C. and in State X is practicing in a D.C.-located firm with non-lawyer partners, State X should not discipline her for such conduct. Id. On the other hand, State X should be able to discipline the lawyer if she were to practice in State X as a partner of the D.C.-located firm. Id.;18 accord Mich. Op. RI-225 (1995); see In re Overboe, 745 N.W.2d 852, 861-62 (Minn. 2008) (applying South Dakota rules to conduct of lawyer admitted there and in Minnesota where lawyer's office and trust account were in South Dakota and funds involved were those of South Dakota clients).
The ABA Opinion cited several state ethics opinions in support of its conclusions. ABA Opinion n. 13. A 1984 Michigan opinion had responded to a Michigan Bar member, also admitted in California, who practiced in the latter jurisdiction but not the former. Mich. Ethics Op. CI-929 (1984). The inquirer asked whether he could employ a foreign lawyer in his California law office. Id. The opinion stated that "[t]o the extent that California would permit the contemplated conduct, the attorney would not be in violation of the Michigan Code of Professional Responsibility." Id.
The ABA Opinion also cited a 1986 Maryland opinion that addressed a situation where a lawyer licensed in Maryland and specially admitted to appear in a District of Columbia litigation learned that he had introduced the client's forged documents into evidence in connection with the litigation. Md. State Bar Ass'n, Comm. on Ethics, Op. 86-28 (1986). Maryland's rules required disclosure; D.C.'s prohibited it. Id. The Maryland opinion stated that—
[w]here a Maryland attorney is acting in a foreign jurisdiction in accordance with that jurisdiction's Code of Professional Responsibility, it is the opinion of this committee that his conduct is ethical per se. While the Maryland Code of Professional Responsibility may impose different or more stringent requirements on its attorneys, it does not require its attorneys to behave in a manner that is inconsistent or at variance with the code of conduct prescribed by another jurisdiction when practicing there.
Id. Although the Maryland opinion addressed conduct in connection with a proceeding before a tribunal, see Model Rule 8.5(b)(1), the ABA Opinion nonetheless found Maryland's rationale instructive in a Rule 8.5(b)(2) setting like that presented in this opinion.
More recently, a New York State Bar Association opinion has set out useful criteria for determining where a lawyer "principally practices" and where the "predominant effect" of a lawyer's conduct is felt. N.Y.S. Bar Ass'n Ethics Op. 1027 (2014) ("New York Opinion").19 On the former point, the factors cited in the New York Opinion are—
(a) the number of calendar days the lawyer spends working in each jurisdiction, (b) the number of hours the lawyer bills in each jurisdiction, (c) the location of the clients the lawyer serves, (d) the activities the lawyer performs in each jurisdiction (e.g., legal work for clients vs. administrative work for the law firm), and (e) special circumstances (such as a recent move, an extended illness, or a natural disaster).
Id. (citing Roy D. Simon, Simon's New York Rules of Professional Conduct Annotated 1915-17 (2014)). The New York Opinion adds that "[g]iven the increase in law practice over the Internet, and the corresponding decrease in the importance of a lawyer's physical location, the jurisdiction in which a lawyer 'principally practices' . . . is becoming less certain." Id.
"[N]o simple formula is available to determine where the 'predominant effect' will occur," either. Id. "Factors to consider include such things as (a) where the clients reside, and where they work; (b) where any payments will be deposited; (c) where any contract will be performed; and (d) where any new or expanded business will operate." Id.
We conclude that D.C. Rule 8.5(b)(2) supplies the answer to this inquiry and does so consistently with the ABA Opinion. For the departing lawyer and lawyers in her former firm who are located in the District of Columbia, it makes no difference whether the "principally practices" or the "predominant effect" prong of the rule applies. As to the first prong, they principally practice here. As for the second prong—predominant effect—recall that Rule 5.6(a) seeks to protect lawyers' autonomy and clients' right to choose a lawyer . D.C. Rule 5.6 cmt. [1]. The predominant effect of a provision penalizing such a lawyer for post-departure competition falls upon a lawyer who is located in D.C. For that reason, the predominant effect prong renders members of the D.C. Bar in the firm subject to the D.C. version of Rule 5.6(a) regardless of where they principally practice.20
Where the departing lawyer is admitted in D.C. but located in a jurisdiction that permits a penalty for post-departure competition, it also doesn't matter which prong of D.C. Rule 8.5(b)(2) applies. The departing lawyer principally practices in the other jurisdiction, and the predominant effect of the penalty provision falls upon that lawyer. Hence in that case, the other jurisdiction's version of Rule 5.6(a) would apply to the departing D.C. Bar member and the D.C. Bar members in her former firm. In such a case, D.C. should not penalize those lawyers for acting in accordance with the other jurisdiction's rule.
Conclusions
We conclude, then, that a law firm may not provide for or impose liquidated damages on a lawyer who, after departure, competes with the firm. The firm and the lawyer may have liability to one another, though, for work done before the lawyer’s departure. Also, a firm may not restrict a departed lawyer’s subsequent professional association or affiliation with partners or employees of the firm, except insofar as such activity is subject to legal limitations outside the Rules of Professional Conduct. Finally, whether a choice of law provision in a partnership or employment agreement can avoid application of the D.C. Rule governing lawyer departures usually will depend on the location where the departing lawyer principally practiced.
Published: February 2015
1. This opinion does not address the rule's exception for "benefits upon retirement."
2. This rule, promulgated in 1991, is substantively indistinguishable from DR 2-108(A) of the former D.C. Code of Professional Responsibility. See Neuman, 715 A.2d at 130 n. 5.
3. Although Cohen was decided under New York law, the New York rule is similar to ours and the D.C. Court of Appeals has characterized Cohen as "perhaps the leading case interpreting Rule 5.6(a) or its equivalent." Neuman, 715 A.2d at 132.
4. Stevens applied Illinois law. The D.C. Court of Appeals noted in Neumann, however, that given the similarity of D.C. Rule 5.6 to Model Rule 5.6 and analogous rules of other jurisdictions, it had "freely consulted the various sources we have found that construe those codes." Neuman, 715 A.2d at 130 n. 5. For this reason, it is appropriate to take note of decisions elsewhere that interpret similar rules.
5. D.C. Legal Ethics Opinions 1 through 209 were issued under the former D.C. Code of Professional Responsibility. Because the prohibition in D.C. Rule 5.6(a) substantively is the same as former D.C. DR 2-108(A), see note 2, supra, and none of this committee's earlier opinions interpreting DR 2-108(A) has been expressly or impliedly overruled, we consider those opinions as well as those decided under the D.C. Rules.
6. Comment 2, which was added to the D.C. Rules in 2006, does not have a counterpart in the comments to Model Rule 5.6. The D.C. Rules define "substantial" as denoting "a material matter of clear and weighty importance." D.C. Rule 1.0(m).
7. Some jurisdictions permit "reasonable" financial assessments against former partners who compete with the firm if such assessments accurately reflect the reduction in the firm's value due to the departure. E.g., Howard v. Babcock, 863 P.2d 150 (Calif. 1993); Jacob v. Norris, McLaughlin & Marcus, 607 A.2d 142, 151-52 (N.J. 1992). This is distinctly the minority rule, however. Restatement (Third) of the Law Governing Lawyers § 13 rptr. n. b. (2000); Ellen J. Bennett, Elizabeth J. Cohen & Martin Whittaker, Annotated Model Rules of Professional Conduct 489 (7th ed. 2011).
8. This committee does not opine on legal questions outside the D.C. Rules but often must discuss its understanding of such issues in order to provide context for its views on the D.C. Rules.
9. In a different context, the sales article of the D.C. Commercial Code permits liquidated damages "only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty." D.C. Code § 28:2-718 (2014).
10. We know of no D.C. appellate rulings on the issue of post-departure compensation for hourly fee matters, and this opinion does not address that issue.
11. This committee cannot opine on whether an agreement that violates D.C. Rule 5.6(a) can be enforced as a matter of contract law. Rule C-4, Rules of the District of Columbia Bar Legal Ethics Committee (1995); accord D.C. Legal Ethics Op. 65 (1979) (declining to address enforceability of agreement that violated predecessor of Rule 5.6(a)); see also N.Y.C. Bar Ass'n Formal Op. 1999-03 (1999) (same). The D.C. Court of Appeals does not appear to have ruled on the enforceability issue. A 1994 U.S. District Court ruling in D.C. held such a provision unenforceable. Shainis v. Baraff, Koerner, Olender & Hochberg, P.C., 1994 U.S. Dist. Lexis 21971 (Civil Action No. 93-2253 (NHJ)) (July 18, 1994). Case law elsewhere is divided. Compare Feldman v. Minars, 658 N.Y.S.2d 614, 617 (App. Div. 1997) (enforcing agreement even though it violated Rule 5.6(b)), with Denburg v. Parker Chapin Flattau & Klimpl, 624 N.E.2d 995 (N.Y. 1993) (holding unenforceable a provision that violated Rule 5.6(a)), Stevens, 682 N.E.2d at 1131-32 (same), Jacob, 607 A.2d at 155 (same), and Cohen, 550 N.E.2d 410 (same).
12. Ashcraft & Gerel, which upheld a departing lawyer's contractual liability for liquidated damages, is not to the contrary. D.C. Rule 5.6 "is inapplicable," said the court, "because the liquidated damages were not linked to [the departing lawyer's] decision to compete with the firm" and hence were "readily distinguishable from a contract not to compete." Ashcraft & Gerel, 244 F.3d at 955. Moreover, Ashcraft & Gerel, which applied District of Columbia law, was decided in 2001. In 2006, the D.C. Court of Appeals added comment 2, which expressly includes "substantial financial penalt[ies]" in the prohibition of D.C. Rule 5.6(a). Given that subsequent change in D.C. law, it is conceivable that Ashcraft & Gerel would be decided differently were it to arise today.
13. Again, we express no view on whether such a clause may be enforceable in the context of the underlying contract dispute. See supra n. 11.
14. Opinion 181 also involved a liquidated damages clause—one that the committee described as "truly oppressive." The opinion added that "[t]he in terrorem effect of this sword of Damocles hanging over the head of a departing lawyer is not to be underestimated." D.C. Legal Ethics Op. 181 (1987).
15. For the sake of simplicity, we assume that only one other jurisdiction is involved. The basic principles outlined here also apply if more than one other jurisdiction is involved.
16. Note that ABA Model Rule 8.5(b) differs from D.C. Rule 8.5(b) in several respects. Among them is the fact that under the Model Rule, a lawyer may be subject to rules of a jurisdiction where the lawyer is not admitted to practice. ABA Model Rule 8.5.
17. The 1983 initial version of the ABA Model Rules was silent on the issue. Its comments merely directed readers to "principles of conflict of laws" and "applicable rules of choice of law." ABA Model Rules of Professional Conduct, Rule 8.5 cmts. 2, 3 (1983). Current D.C. Rule 8.5(b)(2) follows the 1993 amendment to Model Rule 8.5(b). See id. Rule 8.5(b) (1993).
18. The ABA Opinion added that a lawyer admitted in D.C. and State X ethically could be a partner in both the D.C. firm and a State X firm, but only if the State X practice "was conducted through another firm that was both fiscally and managerially separate from and independent of the D.C. firm." ABA Opinion n. 12.
19. The New York version of Rule 8.5(b)(2) is substantively indistinguishable from D.C. Rule 8.5(b)(2).
20. The "predominant effect" prong is to be applied narrowly, see D.C. Rule 8.5 cmt. [4]; N.Y.S. Bar Ass'n Ethics Op. 1027 (2014), but we conclude that this fact pattern triggers it.
