Lawyer Risk Management Newsletter, January 2022

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In this article, we examine whether corporate lawyers violate ethical rules when entering into non-competition agreements and whether these agreements are enforceable.

Are in-house counsel non-compete agreements enforceable?

The recent opinion of Ipsos-Insight, LLC vs. Gessel, No. 21-CV-3992 (JMF), 2021 WL 2784634 (SDNY July 2, 2021) addressed the issue of whether a former in-house attorney’s non-competition agreement was unenforceable. The Court granted the motion to dismiss filed by Defendant Gessel, the Plaintiff’s former in-house counsel, because the non-competition clause with Plaintiff violated Rule 5.6(a). The Court cited case law from the New York Court of Appeals that similar restrictive covenants between an attorney and a law firm in violation of Rule 5.6(a) are unenforceable as a matter of public policy. However, the Court also noted that New York courts have enforced similar clauses against other professions and enforced agreements that violated ethical rules in order to prevent a lawyer from evading contractual obligations. Notwithstanding its decision here, the Court challenged the application of Rule 5.6(a) to in-house counsel, citing legal commentary that privilege and Rule 1.9 apply to legal services of in-house counsel and settlement agreements. non-competition are necessary to protect business consultations and confidences (as opposed to an attorney’s obligation to keep a client’s information confidential, as set out in rules 1.6 and 1.9). Despite its ruling here, based on the previous director in New York that such agreements are unenforceable, which he felt compelled to enforce, the Court invited plaintiff to appeal to the Second Circuit in order to make certify the matter to the New York Court of Appeals. ..

As noted in Ipsos-Insight, LLC, only one other court appears to have reviewed the enforceability of a non-competition clause with in-house counsel. In DISH Network Corp. against Shebar, No. 2017-CV-31079, 2017 Colo. Dist. LEXIS 87 (Dist. Ct. Colo. May 9, 2017), the trial court found that the non-competition agreement was enforceable under Colorado’s policy of enforcing such agreements with respect to the management and management personnel when their purpose is the protection of trade secrets. . The court determined that defendant Shebar, a former corporate lawyer, could not use an ethical rule to evade his obligations to the detriment of a client. Further, the Court held that the Rules of Professional Conduct applied to lawyers and could not be used to prevent a non-lawyer from enforcing an otherwise binding agreement. The Court rejected Shebar’s assurances that he was prevented by Rule 1.6 and his fiduciary duties from revealing DISH’s confidential information, finding that Shebar had already justified breaching Rule 5.6 for financial benefit.

Relevant here, ABA Model Rule 5.6 states in part:

A lawyer must not be involved in the offering or making of:

(a) a partnership, shareholders, operating, employment or other similar type agreement that restricts a lawyer’s right to practice after the relationship has ended, except an agreement concerning the retirement benefits; Where

Comment [1] to Rule 5.6 adds, in part, “An agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer”.

The question of the ethical admissibility of non-competition clauses for corporate lawyers has already been addressed in informal opinion ABA 1301 (1975), which concluded, based on reasoning similar to that of PLATE, that an in-house attorney’s covenant not to compete was not in technical violation of the predecessor to Rule 5.6(a), which only prohibits inter-attorney restrictive covenants. However, the opinion noted that the underlying ethical considerations are the same for covenants between lawyer and client, and such an agreement was “an undesirable surplus because, from an ethical point of view, adequate protection confidences already exist”. See also SC Op. 2000-11 (2000) (non-competition would violate Rule 5.6, but noting that corporations may rely on the Trade Secrets Act and the provisions of Rules 1.6, 1.7 and 1.9 to prevent certain other uses later).

In 1994, ABA Formal Notice 94-381 (1994) addressed the issue of whether an outside attorney could agree to represent a company on a specific matter, provided that the attorney agrees never to represent who whether against the company in the future. Citing Rule 1.9 and Notice 1301, the Notice explains that an attorney is already ethically prohibited from representing an adversary in materially related matters, but that further restricting further representation would “run afoul” of the Rule 5.6(a) and strong public policy in favor of providing the public with free choice of counsel.

On the other hand, since the ABA’s opinions, other state and local bar associations have held that in-house counsel who enter into a non-competition clause would violate Rule 5.6. See NJ Op.708 (2006); Phila. op. 1996-5 (1996); VA op. 1615 (1995). Halfway through, some states have concluded that a lawyer can enter into a non-competition clause with an escape clause stating that the provision will be interpreted to comply with all applicable rules of professional conduct, with some opinions taking the further step of have the clause expressly cite rules 5.6, 1.6 and 1.9. See for example Oh op. 2020-01 (2020); WA op. 2100 (2005); CT op. 02-05 (2002). Other opinions have concluded that drafting a restrictive covenant for the non-legal services of in-house counsel is still a violation of Rule 5.6, unless such services are clearly distinguishable from legal services. See Phila. op. 2003-9 (2003) (“[T]The duties described as “non-legal” by the investigator are not distinct from legal obligations, and indeed that a lawyer is not entitled to allow a non-lawyer to impose on him a definition of what constitutes legal services. “). But other opinions conclude that a separation clause will not remedy any violation of Rule 5.6. See NV Op. ___ (Unpublished draft for public consultation), https://www.nvbar.org/wp-content/uploads/NV-Ethics-Opinion-re-In-House-Employment_Stock-Agreement-public-comment-draft.pdf “It doesn’t matter that the restrictive covenant provision at issue ends by saying that a court may vary or strike out any part of the covenant it deems unenforceable. This generic severance clause does not eliminate the ethical breach because it : (1) requires legal action; and (2) does not specifically address Rule 5.6.”).

Therefore, the only guiding rule as to the enforceability of non-competition agreements is that it is still an evolving issue that depends on the law and ethical opinions of the jurisdiction in which enforcement is requested. However, ethics notices generally state that an in-house lawyer is still bound by rules 1.6 and 1.9 to maintain the confidentiality of the former employer and not to harm them, and an editor would be wise to ensure that any non-competition clause contains a safeguard clause.

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