Articles Posted in Professional Practices

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  • An agreement that barred a lawyer from soliciting clients within a geographic area was unenforceable after the lawyer left the firm under the rules governing the professional conduct of attorneys.

  • An agreement prohibiting a former associate attorney from soliciting clients of the firm after his resignation may be enforceable in New York, thus a case alleging a breach of that agreement could proceed to trial.

  • Attorney Rule of Professional Conduct 5.1 that prohibits restrictions on the practice of law is unlikely to shield non-attorneys who act on behalf of a lawyer from liability.

Can a lawyer be prohibited from soliciting the clients of his former firm? The general rule is that restrictions on the practice of law, including any non-competition agreements, are void and unenforceable.

It came as a surprise to me, therefore, that the appellate division in the first department in New York had affirmed the trial court’s decision that let a case go to trial alleging the breach of a non-solicitation agreement signed by a former lawyer.

The case is Feiner & Lavy v. Zohar. Here are the three most important holdings in the decision. First, an agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable. Continue reading

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  • A charging lien protects the interest of a lawyer in fee that is to be paid from a contingent-fee recovery.  A statutory lien may be enforced through a petition filed in an underlying action.

  • The amount of a charging lien, and the lawyer’s compensation, is determined using principles of quantum meruit, or “so much as he deserves.  Quantum meruit creates an implied contract to pay an amount based on the contribution of the former lawyer to the ultimate result.

  • A charging lien claim is subject to the general requirements for trial by jury.  Once a jury trial is demanded by either party, it can be waived only with consent.  Whether a party is entitled to trial by jury depends on whether a jury trial is available in the underlying action.

New Jersey’s attorney charging lien statute (N.J.S.A. 2A:13-5) permits a discharged attorney to file a lien petition in a matter makes clear that the trial court has the authority, in the first instance, to establish and enforce the charging lien, but it is silent on the issue of whether a jury trial is required to determine the ultimate outcome.jury-box

When is a Charing Lien Subject to Trial by Jury?

That question – jury trial or not – is likely to turn on where the case was pending at the time the lien was asserted, according to a decision of the Appellate Division of Superior Court in Toscano Law Firm v. Haroldson (opinion here).  The appellate reversed the trial court’s decision in a long-running fee dispute, made without a jury, and remanded the dispute for a new trial.

Thus, although discharged attorneys in  contingent-fee matters are generally compensated under principles of quantum meruit, an implied contractual theory that is equitable in nature, the parties may have a right to trial by jury.  In the Toscano, litigation, the Appellate Division held, the trial court had confused the equitable nature of a quantum meruit claim with the fact that it is a legal remedy.  (The quantum meruit claim is one that results in money damages payable to the successful charging lien petitioner.) Continue reading

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  • Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.

  • A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction. 

  • A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

An attempt by United Health Care to block an executive from joining a competitor failed when a federal judge found the medical insurance and services company had failed to establish it was likely to succeed when the case goes to trial.  The dispute identifies some of the steps that a new employer take to prevent its just-hired employee from running afoul of a restrictive covenant.united-Logo

The defendant Carlos Louro in this this case, United Health Care v. Louro, was an executive supervising the underwriting of national accounts at United.  He had recently been promoted to vice president and served on a high-level, national accounts strategy group.  He had also received stock options and restricted stock awards, which contained restrictive covenants and non-disclosure provisions..

Anthem-logoThe trial court construed Louros agreements with United that and restricted him from:“[e]ngag[ing] in or participat[ing] in any activity that competes, directly or indirectly, with any Company activity, product, or service that [Louro] engaged in, participated in, or had Confidential Information about during [Louro’s] last 36 months of employment with the Company” or assist anyone in any of those activities for one year after Louro’s termination of employment.” Continue reading

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  • Physicians are subject to reasonable restrictions on post-employment activities that will limit their competition with a previous employer.

  • A restrictive covenant that prohibits competition must protect a legitimate interest, impose not undue hardship on the former employee and not injury the public interest.

  • Restrictive covenants must be narrowly tailored so as to only restrict activities in which the employer has a legitimate interest.  Courts consider the geographic scope, duration and activities limited.

  • Enforcement of a restrictive covenant may also turn on such circumstances as how the covenant was agreed to and the circumstances of the separation of the physician.

Restrictive covenants limiting the activities of a physician may be disfavored, but they are not per se unenforceable.  As with other restrictive covenants, the issue is whether the agreement not to compete is reasonable in scope and protects a legitimate interest of the beneficiary of the agreement not to compete.Cases-of-Note-Professionals-1024x536

The issue was last before the New Jersey Supreme Court in The Community Hospital Group v. More (full opinion here), a 2005 opinion in which the court was asked to overrule its existing precedent that permitted enforcement of restrictive covenants against physicians.  The Supreme Court decided the issue just months after the appellate division had held that a restrictive covenant was unenforceable against a psychiatrist.  (See Psychologists, Like Lawyers, Not Subject to Restrictive Covenants) Continue reading

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A case in which a restrictive covenant was enforced against an accountant who happened to be beneficiary under her deceased former employer’s will is among recent business divorce cases worthy of note.

Restrictive Covenant Given in Purchase Agreement Survives Death

A covenant not to compete given in connection with the sale of an accounting practice is enforceable against a beneficiary of will who happened to be a competitor of the practice that bought theCases-of-Note-Non-Competition-1-1024x536 deceased account.  Here is what happened in McCarthy & Co, P.C. v. Steinberg, a case before a federal court in Pennsylvania.    Harris Fox sold his accounting practice to the plaintiff with a multi-year restrictive covenant.  The terms of the sale provided for payment of 25 percent of the revenue earned from Fox’s clients during the five-year period.  The restrictive covenant remained in place for three years after the last payment under the sale agreement.  The defendant, Judith Steinberg, had worked for Fox for 24 years and at the time of the sale, Fox had asked that plaintiff hire her.  Steinberg stayed for four years, then resigned started practicing with a direct competitor. Continue reading

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  • Restrictive covenants preventing competition by former employers are enforceable only to the extent that they are reasonable under New Jersey law.

  • Lawyers and psychologists are exceptions to the general rule, however, because both are subject to disciplinary rules that prohibit restrictions against competition.

  • Courts have recognized that the personal relationship and confidentiality that exist between a lawyer or psychologist and their clients are such that a restriction on competition is appropriate.

  • Physicians continue to be subject to restrictions on competition that protect a legitimate interest and that do not impose unreasonable restrictions on the party subject to the agreement.

In the world of business divorce, one of the key issues is the existence or absence of restrictive covenants that prohibit competition from former shareholders, partners, members or employees.  It affects the value of a business – particularly professional and sales-driven businesses – because restrictive covenants generally protect the good will of the enterprise.

There are only two classes of professionals for whom restrictions on competition are always unenforceable.  These are lawyers and psychologists, not because of psychologist-5154576_1920-1024x683any specific distinction between them and other deeply personal relationships, but  because the professions are subject to unique restrictions.  Attorneys are prohibited from restricting competition by the Rules of Professional Conduct that govern lawyers.  Psychologists are subject to an administrative regulation that have the same effect.

Restrictions on Competition Barred by Regulation

In a 2005 decision, the New Jersey Appellate Division distinguished between physicians, who are subject to “reasonable” restrictions on competition, from those imposed on psychologists.

There are also two classes of restrictive covenants to consider.  The are those restrictive covenants in which there has been some purchase of good will, which courts will distinguish  from a traditional employment business.  Enforcing a restrictive covenant against a party that has sold a business, for example, is going to be quite different from enforcing a restrictive covenant against

When there is no contractual limation to restrict the key players from competing, or when restrictive covenants are unenforceable, the value of the good will in the business is typically diminished.  Consider the rainmaker who leaves a law firm with his or her large book of business.  All of the good will tied up in those relationships is portable, and any valuation of the firm has to consider the loss of those clients and so much of the reputation of the firm that was tied to the departing attorney. Continue reading

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  • Attorney separation agreements may require that a lawyer give reasonable notice to his firm before resignation, reducing conflict with departing lawyers.

  • Lawyers may agree in advance how they will handle such issues as billing, transfer of file responsibilities and return of equipment.

  • Joint notice to clients by the law firm and the departing lawyer is the preferred method of advising clients of an attorney’s departure from the firm.

Attorney separation agreements that contain provisions for a minimum notice period before an attorney’s resignation and other terms for notice, transfer of files and billing should be common.  They are not, and it is likely bad for the clients and the firm.Canva-Two-Person-Shake-Hands-683x1024

The free-for-all that may follow a resignation is something that can be avoided, and a recent opinion of the ABA’s standing committee holds that the minimum notice requirement is ethical as long as it does not restrict competition by the departing lawyer or limit the client’s ability to choose counsel.

Separation Agreements to Manage Lawyer Resignations

What would such an agreement look like?  We suggest that the following issues should be addressed whether dealing with withdrawing principals or resigning attorneys.

Minimum Notice to Law Firm of Intended Departure

In many circumstances the withdrawal of a senior lawyer from a law firm for another practice is a process that is implemented over weeks or months.  The orderly transition of files by a process that is mutually acceptable to everyone involved serves a number of interests held by all involved, particularly the clients. Continue reading

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  • Law firms may not limit the ability of lawyers to resign, solicit clients and compete with the firm, but they may contract for a reasonable notice period necessary for the orderly transfer of client matters.

  • Both the departing lawyer and the law firm share an ethical obligation to assure the client of continued competent representation during the transition period before the lawyer’s departure.

  • The notice requirement cannot act as a financial disincentive to competition and the departing lawyer’s willingness to cooperate in the transfer of matters and post-departure billing is a factor in determining whether the notice period is reasonably imposed.

There are some very good reasons for lawyer firm management to fear the “grab and go.”  A key lawyer resigns with little or no notice and immediately begins to solicit clients.  In some instances, the result can devastate the fortunes of a law firm, drawing out cash flow and personnel, but leaving the firm to continue to carry the same level of expenses.

Canva-Stack-of-Old-Suitcases-1024x683

The Law Firm Grab and Go

It’s sometimes known as the “grab and go.” It occurs when one or more lawyers resign without notice while simultaneously soliciting the firm’s clients to follow them.   In some cases, the grad and go will strip a small firm of a substantial portion of its revenue while leaving it with large liabilities such as leases, advanced expenses and personal financial exposure for the remaining principals.  Can a law firm contract with its principals and attorneys to prevent the grab and go? Continue reading

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  • Law firms should recognize that lawyer resignations and the loss of clients are inevitable in the modern law practice due to prohibitions on agreements that restrict competition.

  • Law firms can protect the interests of clients and the firm by adopting best practices that govern lawyer resignations.

  • Law firms should recognize the investments made in the firm’s intellectual property and adopt policies that limit misappropriation.

Law firms must survive in a world in which key employees are free to leave at any time and to take as much of the firm’s business with them as they can.  Many lawyers, motivated by the financial incentives that are part of their separation,  believe that there are no rules limiting their solicitation of clients, copying of key documents and compensation for their old firm.  This view may be mistaken, but sorting it out after the resignation or withdrawal is expensive, time-consuming football-1717630_1280-1024x682and threatens to draw off the time and attention of key managers.

The grab and go is the unexpected resignation without notice combined with the immediate unilateral solicitation of clients. Its corollary is the law firm lockout, in which a lawyer that has indicated his or her intention to leave is locked out of the firm and cut off from clients while the clients are intensely solicited by the firm.

Best Practices to Manage Lawer Resignations

Here is a list of some of 10 policies that a law firm should have in place before a key lawyer decides to move his or her practice.  But first, the reality check.  Lawyers will leave and lawyers will take clients.  Not only that, but lawyers have a right to leave and take clients.  The only issue on the table is managing the process.

Law firms, the individual lawyers that work there and the clients that we serve are better served by articulating a clear set of rules beforehand, by adopting key internal policies and by recognizing that resignation need not equate with conflict.  Lawyers and their former law firms should remember that life goes on after the departure.  But when one side tries to gain an unfair advantage over the other, however, life gets complicated and messy. Continue reading

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  • Courts determine whether an individual has an equity interest in a law firm partnership by examining the financial investment and risk taken by the claimed owner, such as payment of capital and guarantees of obligations.

  • The rise of the non-equity partner in law firms management has changed the status associated with the title partner.  Nearly half of all law firm partners are now classified as non-equity or limited equity.

  • The way in which the firm reports the income of a partner to the IRS in its tax filings are evidence of an equity interest in many cases, but describing an individual as an equity owner may not be conclusive.

The last refuge of the general partnership may be the law firm.  However, the term “partner” in a law firm can have a number of different meanings and it often does not identify only the traditional equity owner of the enterprise.  In many circumstances, “partner” is a title that indicates a senior attorney, usually at the top of the firm’s professional structure.  It does not, however, provide a particularly reliable indication of either management responsibilities or a financial interest in the firm.partnership-526413_1280-1024x562

Not all partners are created equally.  In fact, the rise of non-equity partner, those that do not share in the profits or capital of the law firm, is rising rapidly.  Only 56 percent of the partners in law firms in 2018 were equity partners.  (Above the Law, 3 Reasons to Embrace the Rise of Non-Equity Partners).  That trend is a 250 percent increase over the past two decades. In 1999 the figure was 17.1 %.(Altman Weil, Inc. What Should Law Firms Do about Non-Equity Partnership).

Not surprisingly, the existence of an equity interest, or not, is not an uncommon area for dispute.  In this post we consider here involving the effect of tax documents on the claim of an attorney that he held an equity interest in a well-known personal injury firm.  Treatment for income tax purposes is invariably a key component of holding equity.  Is it dispositive?  In this case, no. Continue reading

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Jay R. McDaniel, Esq.
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Weiner Law Group LLP
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