The questions presented deal with the propriety of a restrictive covenant in an employment contract between a lawyer employed as an associate of a law firm as employee, and a law firm, as employer.
Specifically, the inquiries required for a resolution are:
1. Is it proper for a firm to have a contract of employment with an associate lawyer providing that, following termination of the associate's employment for any reason and in the event the former employee or his subsequent employer provides legal services for compensation to any clients of his former employer, the former employee or his subsequent employer shall be required to pay to the former employer, as liquidated damages, a sum equal to the same percentage of such fee as the former employer would have received if said work had been done during the associate's employ?
2. Is it proper, in order to facilitate the agreement, to characterize the firm's clientele as property of the firm?
Although a restrictive covenant providing for the division of fees between an attorney or his current firm, and the attorney's former employer is a question of first impression before the committee, the general question of a restrictive covenant based upon limitations on geographic areas of practice or clientele have been dealt with, as set forth in Ethics Opinion 422 (Texas Bar Journal, Feb. 1985), specifically in answers to Queries 1 and 3.
Controlling the question is DR 2-108(A), which reads as follows:
"A lawyer shall not be a party to or participate in a partnership or an employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits."
Such restrictive covenants were seen to violate DR 2-108(A) in two ways. First, they are clear violations of the explicit prohibition against attorneys entering into an agreement restricting the right of an attorney to practice law, which recognizes no exceptions for limitations of geography or time. Secondly, they violate a basic tenet of the professional responsibility of all lawyers that every person have ready access to the independent professional services of a lawyer of integrity and competence. (EC 1-1). In order to accomplish this, a potential client must have free access to the attorney of his choice.
The agreement in question is deceptive in its wording. Although it purports to hold "that there shall be no restriction upon employee's right to practice law" the statement is followed by a very real restriction. The interjection of a fee to a third party obviously impairs the creation of a lawyer-client relationship between the departing lawyer and clients of his former firm. The impairment arises on both sides of the transaction. The attorney may be unwilling to work at substantially reduced rates for even his best clients, and pressure against acceptance in favor of clients paying full value to the firm would rise within the new employer. The attorney would thus be compelled to decline employment and the client would be deprived of the attorney of his choice. The restrictions may not be explicit, but the result clearly violates DR 2-108(A).
We note that the prohibition of any restriction extends to partnership agreements under DR 2-108(A) and our opinion is equally applicable thereto. Additionally, although DR 2-108(A) provides an exception for agreements dealing with the payment of retirement benefits, the exception will not apply for restrictive covenants utilizing a fee splitting mechanism due to the violation of DR 2-107(A), as discussed below.
The division of fees among attorneys who are not partners, or associates of, a firm is inappropriate unless:
The agreement clearly violates the first two provisions. No request for consent of the client is required nor even contemplated. The former firm renders no service to the client, nor assumes any responsibility for the prompt and proper completion of the task required. Again, these are violations of the explicit wording of the rule. Additionally, however, such an arrangement may lead to the abuse contemplated by the third provision as a firm desiring to retain the work may be enticed to raise their fee beyond that which is reasonable in order to make it economically viable, considering the substantial fee to be paid the former employer.
Our result comports with the decisions of bar associations that have considered the ethical nature of similar restrictive covenants. (D.C. Opinion 65, March 14, 1979) as cited in Olavi Maru, 1980 Supplement to the Digest of Bar Association Ethics Opinions 125, Log No. 10761, (1982) and Opinion No. 628 (December 9, 1978), 67 Ill. B.J. 380 (February, 1979).
Question two relates to the characterization of clients. If clients and their related files are characterized as property of the firm with their loss from the firm to a former employee giving rise to liquidated damages, the characterization is improper. In dealing with the restrictive covenant based upon geography of practice, the ABA in Formal Opinion 300 (1961)has noted:
"Clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. An attempt, therefore, to barter in clients, would appear to be inconsistent with the best concepts of our professional status."
Since clients are not merchandise and are free to seek the lawyer of their choice, an attempt to recognize a proprietary interest in clients is improper.
1. It is not proper for a firm to have a contract of employment with an associate, or a partnership agreement with a partner, providing that, upon leaving the firm the associate or partner would be required to pay to his/her former employer a percentage of fees earned thereafter from clients brought from his/her former employer.
2. It is not proper for a firm and a partner or associate thereof to enter into an agreement that categorizes clients and their related files as property of the firm which could give rise to a claim for damages for the purpose of inhibiting a former employee or partner in accepting employment from any such client.