In-house Counsel Non-Competes: Fair or Foul?

By Paul E. Starkman

There have been recent reports of some large companies trying to lock their in-house attorneys into non-competition, non-solicitation and other restrictive covenants.  Other companies thinking about jumping onto this bandwagon may find that they cannot treat their in-house counsel like other employees when it comes to post-employment restrictions.

As a general rule, in most states, an employment agreement with a general counsel or in-house lawyer (or any attorney for that matter) which attempts to prohibit the lawyer from joining a competitor as a lawyer is probably unenforceable.  However, the answer is less clear when it comes to a restrictive covenant that tries to prevent an attorney from working for a competitor in a non-lawyer capacity.  Lawyer agreements that prevent the disclosure of confidential information or the solicitation of customers have been upheld in some instances.  Even attorney agreements that try to deter post-employment competition through the use financial disincentives, such as the threat of losing retirement benefits, may also pass muster.  The bottom line is that companies trying to prevent the loss of legal talent to competitors may have to tread carefully, but they are not without options.

The Rule Against Lawyer Non-Competes.

In Illinois, it is clear that Rule 5.6 of the Illinois Rules of Professional Conduct effectively prohibits restrictions on the rights of a lawyer to practice after termination of an employment or partnership relationship. 134 Ill.2d R. 5.6(a)(providing: “A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . .”);  Dowd & Dowd, Ltd. v. Gleason, 181 Ill.2d 460, 481, 693 N.E.2d 358 (1998)(holding that non-compete agreements are unenforceable as to attorneys based on Rule 5.6 of the Rules of Professional Conduct because it prohibits attorneys from entering into non-compete agreements based on the “public policy” that clients should have the freedom to choose their attorneys).

The American Bar Association and bar associations in other states, such as New Jersey, have also rejected the use of agreements that try to restrict who a corporate counsel may represent after leaving the company. ABA, Comm. Prof. Ethics, Informal Op. No. 1301 (Mar. 25, 1975); N.J. Advisory Comm. on Prof’l Ethics, Op. 708 (reported in N.J.L.J. July 3, 2006)(striking down a non-compete for an in-house attorney and stating that Illinois and other states have done the same). In ABA Formal Opinion 94-381 (1994), the ABA Committee on Ethics and Professional Responsibility interpreted Model Rule 5.6 declared that a provision in an employment agreement between a corporation and its in-house counsel, which restricted the attorney from representing any party against the corporation in the future, was an impermissible restraint on the attorney’s right to engage in the legal profession, even though the attorney may not have been involved in the specific matter during his or her employment with the corporation.

In-House Counsel Non-Disclosure/Non-Solicitation Agreements.

The law is not so clear when it comes to other types of restrictive covenants.  The Illinois State Bar Association (ISBA), has indicated that attorney non-disclosure/non-solicitation agreements may be enforceable.  In ISBA Advisory Opinion on Professional Conduct No.  92-14, 1993 WL 836947 (ISBA January 22, 1993) which involved an attorney who was the co-owner and general counsel of a retail collection agency, when he decided to sell his share in the business, he was asked to enter into a  2-year agreement which would have: (a) restricted his use of the information acquired while an officer of the company; and (b) prohibited him from contacting the company’s customers.  The ISBA found no professional impropriety in the attorney entering into the agreement because “any supposed encroachment on the attorney’s practice is at best indirect….”  Id. at *1.  However, an earlier opinion, Illinois Ethics Opinion 91-12 (1991) rejected a restrictive covenant that prevented lawyers from contacting or representing a firm’s clients for three years after departure.

Financial Disincentives to Deter Attorney Departures.

Can companies use the threat of losing financial benefits to deter in-house counsel from jumping ship?  Some Illinois courts say they can. In Hoff v. Mayer, Brown & Platt, 331 Ill.App.3d 732, 772 N.E.2d 263 (1st Dist. 2002), an attorney who had been with Mayer, Brown & Platt (“MBP”) for 36 years resigned and became a founding partner of a new firm. MBP refused to pay his retirement income in excess of $93,000 per year, plus additional cost-of-living adjustments, pursuant to MBP’s Restated Partnership Agreement, Retirement, Disability & Death Benefit Program (“Plan”), claiming that his resignation was not a “retirement” as defined by the Plan, because he continued to practice law after he left and therefore he forfeited his retirement income. The former partner sued alleging that the denial of his retirement income  was in violation of Illinois Rule of Professional Conduct 5.6, as the Plan was basically a restrictive covenant.  However, the First District affirmed the dismissal of his claim because: (1) that the Plan was a bona fide retirement plan that could deny benefits to a retiring member who continued to practice law, and (2) Rule 5.6 contained an exception that provides: “A lawyer shall not participate in offering or making: (a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . .” (emphasis added). The First District determined that the exception applied and the provision in MBP’s retirement plan causing the forfeiture of more than $93,000 in retirement benefits per year should the departing attorney practice law anywhere following his resignation was not an onerous condition that unduly restricted his ability to practice law.

More recently, in Hoffman v. Levstik, 369 Ill.App.3d 144, 860 N.E.2d 551, 307 Ill.Dec. 897 (1st Dist. 2006), the Illinois Appellate Court for the First District refused to invalidate a law firm’s partnership agreement as against public policy, even though it also contained financial disincentives for leaving.

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