This is the fifth article in a continuing series, “The Restricting Covenant.” I originally thought this article would contain, at most, one or two sentences on the issue of lawyers and restrictive covenants. Those two sentences would read something like, “A non-compete does not apply to lawyers. The end.” However, as with almost everything associated with restrictive covenants, things are not that straightforward. There are some nuances on this topic worth exploring, particularly with respect to in-house lawyers employed at private companies in the United States.
Non-Competes in Private Law Firms?
In general, post-employment non-competition agreements that directly restrict an attorney’s ability to practice law are not enforceable in private law firms in the United States. American Bar Association Model Rule of Professional Conduct 5.6 (Restrictions on Right to Practice) prohibits a lawyer from making “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.” The comments to this Rule reflect the ABA’s view that the prohibition on lawyer non-competes is intended to protect attorneys’ “professional autonomy” and to ensure “the freedom of clients” to select counsel of their choice. Almost every state has adopted the same or a similar version of the ABA’s RPC 5.6 in their local rules of professional conduct for attorneys-at-law.
Non-Competes for In-House Lawyers?
Does this non-competition prohibition apply to an in-house attorney asked to sign a restrictive covenant by a private employer? New Jersey was one of the first states to address directly the applicability of RPC 5.6 to practicing in-house lawyers at private companies (as opposed to a businessperson who happens to hold a law degree but does not engage in the practice of law).
In 2006, the New Jersey Supreme Court Advisory Committee on Professional Ethics, Opinion 708, addressed a situation that involved an in-house attorney who was asked by a private company to sign an employment agreement containing four distinct restrictive covenants:
- a one-year post-employment non-compete from working with a competitor;
- a non-disclosure of trade secrets, proprietary and confidential information restriction;
- an assignment of inventions provision; and
- a non-solicitation of the employer’s employees restriction.
The Committee examined each of these covenants separately because New Jersey is a “blue pencil” jurisdiction. This concept of “blue penciling” will be discussed in more detail in future articles in this Series, but generally, here, it means that even if certain restrictive covenants imposed on in-house lawyers violated the RPCs, the remainder of the contract might remain enforceable if the offending provisions do not defeat the central purpose of the agreement and could be severed from the agreement.
(1) The One-Year Non-Compete: The Committee determined that the lawyer’s one-year non-compete restriction was not enforceable, notwithstanding the general permissibility and enforceability of restrictive covenants under New Jersey law in commercial contexts. The Committee cited to the New Jersey Supreme Court’s decision that “direct and indirect restrictions . . . on the practice of law violate both the language and spirit of RPC 5.6.” The Committee did not make a distinction between a corporation or a private law firm that employs the New Jersey-based attorney, since the Rules of Professional Ethics apply to them with equal force and effect.
(2) The Non-Disclosure Restriction: The Committee noted that because in-house lawyers are entitled to the same attorney-client privilege protections as outside counsel, communications made by and to in-house attorneys in connection with representatives of a corporation seeking and obtaining legal advice might be protected by the attorney-client privilege. However, the Committee concluded that because not all the duties of an in-house lawyer involves the practice of law, “it may be reasonable for a corporation to request its lawyers to sign a non-disclosure or confidentiality agreement, provided that it does not restrict in any way the lawyer’s ability to practice law or seek to expand the confidential nature of information obtained by the in-house lawyer in the course of performing legal functions beyond the scope of the RPCs.”
Similarly, the New York State Bar Association Committee on Professional Ethics has followed New Jersey’s approach of allowing employers to ask in-house attorneys to agree to certain confidentiality restrictions as a condition of employment, so long as these restrictions do not restrict the attorney’s right to practice law. In March 2011, the New York Ethics Committee, Opinion 858, concluded that a New York-based General Counsel for a not-for-profit corporation could ethically require staff attorneys to sign a post-employment confidentiality agreement if the agreement made clear that such confidentiality obligations did not restrict the staff attorney’s right to practice law and did not expand the scope of the staff attorney’s duty of confidentiality under the RPCs.
(3) The Assignment of Inventions Clause: The New Jersey Committee approved of assignment of inventions clause without much discussion. Because this restriction did not relate to legal advice or the practice of law, the Committee concluded that no ethical considerations were implicated.
(4) The Non-Solicitation Provision: The Committee determined that the non-solicitation of the employer’s employees violated RPC 5.6, and therefore was unenforceable. It relied on an earlier New Jersey Supreme Court decision, Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10 (1992), which held that an “anti-raiding provision” with respect to the hiring of other attorneys and paralegals violated the RPCs.
Other Types of Restrictive Covenants Might Apply to Lawyers
The New Jersey Ethics Opinion 708 and the New York Ethics Opinion 858 both highlight the no “one size fits all” approach to restrictive covenants, which is a recurring theme discussed in this Series. These two ethics Opinions also show that lawyers, who are generally believed to be impervious to restrictions on their ability to practice law, in some limited circumstances, might be asked by an employer to agree to certain types of restrictions designed to protect an employer’s legitimate business interests. In any given situation, there might be several distinct types of restrictive covenants designed to protect business interests and prevent competition, including a non-disclosure, a non-solicitation, or an assignment of inventions. Each of these restrictions should be evaluated separately.
The distinction between a business person who holds a law degree, as opposed to an attorney hired internally by a company to provide legal advice, highlights one of the key issues that in-house attorneys should consider in the context of whether certain restrictive covenants would be enforceable if he or she were to leave and take a job to join a competitor.
A recent case involving a former in-house attorney who left his employer to join a competitor as its Chief Executive Officer is Lenox Corporation v. Robedee in the District of New Jersey. In 2015, Lenox sued its former Chief Legal Officer, alleging unfair competition, civil conspiracy, and breaches of fiduciary duty, duty of loyalty, and contract. Lenox claimed, among other things, that Robedee had misappropriated confidential information to solicit business in his new job as CEO of Nambe, a competitor of Lenox. Robedee was not successful on a motion to dismiss the complaint, and in September 2016, Lenox won a motion to compel the production and review of Robedee’s computer hard drive. The case settled in the spring of 2017.
Finally, in addition to more traditional forms of restrictive covenants, there also might be agreements that financially disincentivize competition and act as de facto non-competes, while not necessarily restricting an attorney’s right to practice law for a period of time in a particular geographic area. Some states allow these types of financial penalty or “forfeiture” clauses and others do not. For example, the Arizona Supreme Court in Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C. (2006), following the California Supreme Court’s decision in Howard v. Babcock (1994), upheld such an agreement among attorneys where the shareholder agreement required a withdrawing lawyer to tender back his partnership interest/stock for no compensation if he thereafter competed with the firm. Compare Gray v. Martin (Or. Ct. App. 1983) (finding that a contract that prevented a withdrawing attorney from receiving termination benefits if the attorney continued to practice in certain counties was unenforceable).
The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants and a particular occupation or industry. It is not intended to provide and should not be construed as providing legal advice. Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs. Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for many other occupations and industries, including engineers, exterminators, executives, and others.