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By Samson Habte
Nov. 13 — A clause in a law firm operating agreement that requires departing partners to forfeit half their equity stake if they take firm clients with them can't be enforced if a jury decides the provision violates the ethics rule prohibiting most restrictions on the right to practice law, the U.S. District Court for the Eastern District of Virginia held Nov. 6.
Judge Liam O'Grady said this lawsuit—a diversity action in which District of Columbia law applied—raised a question of first impression regarding the enforceability of an agreement that violates D.C. Rule of Professional Conduct 5.6(a), which prohibits law firms from adopting partnership or employment agreements that restrict a departing lawyer's right to practice.
Nevertheless, O'Grady said he was convinced D.C.'s highest court will join the “clear majority of courts” which have held a provision that contravenes Rule 5.6 is unenforceable as a matter of law.
The court rejected the firm's notion that restrictive covenants in law firm employment and partnership agreements must be treated like “analogous provisions for other professions” and “subjected to an additional public policy analysis” before they are declared void.
“This argument completely fails to consider the possibility that Rule 5.6 supplies the relevant public policy determination,” O'Grady wrote.
He noted that the prohibition on overbroad noncompete agreements in the law firm context was inspired not only by concerns about their effect in limiting the professional autonomy of departing lawyers but also by concerns about their effect in limiting the freedom of clients who may wish to follow a lawyer.
“Rule 5.6 is the result of a careful balancing of concerns for client choice and attorney autonomy with the interest of contract enforcement,” O'Grady said.
O'Grady's opinion memorializes the reasons underlying his denial of a law firm's motion for judgment on the pleadings in a breach of contract lawsuit that attorney Simor Moskowitz filed against his former law firm, Jacobson Holman PLLC.
Moskowitz filed the lawsuit after he was denied 50 percent of his equity interest in the firm under a forfeiture clause in the firm's operating agreement that penalizes departing partners who take clients with them. The firm filed counterclaims seeking to recover alleged overpayments of Moskowitz's equity interest that it said were caused by accounting mistakes.
Moskowitz answered the counterclaims by asserting as an affirmative defense that the forfeiture clause violates Rule 5.6 and is void and unenforceable.
The firm moved for judgment on the pleadings, challenging the legal sufficiency of that defense.
Conceding for purposes of its motion that the agreement violates Rule 5.6, the firm asked the court to find as a matter of law that a violation of an ethics rule, without more, cannot render a contract provision void.
Rather, the firm said an “otherwise valid contract may be deemed unenforceable in that circumstance only if it also violates public policy,” and the “public policy calculus” should be made by applying the same standard that is applicable to other types of restrictive covenants.
O'Grady disagreed. “The clear majority of courts find that a provision that violates Rule 5.6 is unenforceable without requiring any additional showing,” he said.
“Given the wealth of case law from other jurisdictions addressing their counterparts to D.C. Rule of Professional Conduct 5.6, the Court does not find the two cases cited by the Firm, which address different rules, persuasive,” O'Grady added in a footnote.
Brennan Law LLC represented Jacobson Holman. Moskowitz was represented by Harvey & Binnall PLLC and the Law Offices of Philip J Harvey PLLC.
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