December 08, 2017
Law Firm’s Non-Solicitation Agreement Restricts Mobility of Departing Partner
A recent legal ethics opinion from North Carolina provides interesting insight into the ethics of a non-solicitation agreement between law firms that restricts attorney mobility but not necessarily a client’s choice of counsel.
The North Carolina 2017 Formal Ethics Opinion No. 5 analyzed the issue of whether two law firms could enter into a non-solicitation agreement with respect to each other’s employees as part of their merger talks. In the proposed contractual provision, Law Firm A agrees not to induce or solicit any partners, associates or other employees of Law Firm B to join Law Firm A (and vice-versa), for the duration of the merger talks and for a period of two years following the merger discussions. The rationale for the provision was “to foster the trust necessary for both firms to disclose financial information about the productivity of the lawyers in the firms without fear that, should the merger negotiations be abandoned, the other firm would attempt to lure highly productive lawyers or ‘rainmaker’ lawyers away from the other firm” (See Opinion.)
In analyzing this issue, the North Carolina State Bar considered whether the provision was prohibited under ABA Model Rule 5.6(a), which has been adopted by North Carolina and excludes, in most circumstances, the placing of restrictions on an attorney’s right to practice law. [Note that the California Rules of Professional Conduct, Rule 1-500(A) is very similar.]
Specifically, 5.6(a) 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…”
In the fact pattern considered by the North Carolina Ethics Committee, a partner in Law
Law Firm A is interested in joining Law Firm B. She did not participate in meetings, negotiations, or discussions between the law firms relative to the agreement, or to a potential merger with Law Firm B. Nevertheless, the managing lawyers for Law Firm B have refused to talk to her about becoming a partner, because the period of restriction has not expired, unless she obtains a waiver of the restriction from Law Firm A.
Non-Solicitation Provision that Imposes De Minimis Restriction Deemed Ethically Permissible
Under these facts, the North Carolina State Bar found that the subject non-solicitation provision did not violate Rule 5.6(a) because it “imposes a de minimis restriction on the mobility of the lawyers in the firms, does not impair client choice, and is reasonable under the circumstances.” Here, the State Bar emphasized other circumstances in which some restrictions on attorney mobility were deemed permissible, specifically in the sale of a law practice, where certain geographical and other restrictions have been found it be valid. It also noted that financial disincentive provisions for departing partners, when they had a legitimate business purpose, had been found to be permissible in that jurisdiction. However, what is different from those two examples than in the fact pattern here, is that this attorney was not a party to the agreement that is restricting her right to practice law. She did not knowingly agree to such a restriction in exchange for certain other benefits. It is also unknown whether this attorney has other employment opportunities to pursue within her subject matter practice or if Law Firm B represents one of the limited options available to her. It is important to note, however, that this is an ethics opinion and not an analysis of the legal enforceability of such a provision.
What Does This Mean for California Partners Planning to Depart?
Although California has its own, and often unique, Rules of Professional Conduct, most of the ABA rules being relied upon and analyzed by the North Carolina State Bar in its 2017 FEO No. 5, are similar to those in California. Yet, California might have a decidedly different take on this matter.
And, notwithstanding the ethics of such a provision, it is unclear whether such a provision would be enforceable under California law. California Business and Professions Code Section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” And the few narrow exceptions, codified in Section 16601 and 16602, would not apply to this fact pattern.
This is another important reminder that any California partner planning to depart should properly analyze the effect of any non-solicitation or non-compete agreement, that the partner believes he or she may be subject to, prior to considering a move to another firm.
Dena M. Roche
O’Rielly & Roche LLP