Lawyers’ Risk Management Newsletter, January 2022: Clyde & Co

0

In this article, we examine whether in-house lawyers violate the Rules of Professional Conduct when entering into non-compete agreements and whether those agreements are enforceable.


Are in-house lawyer non-compete agreements enforceable?

Recent opinion in Ipsos-Insight, LLC v Gessel, No. 21-CV-3992 (JMF), 2021 WL 2784634 (SDNY July 2, 2021) addressed the issue of whether the non-compete agreement of a former legal advisor was unenforceable. The Court allowed the motion to dismiss brought by the defendant Gessel, the plaintiff’s former in-house counsel, because the non-compete clause with the plaintiff violated rule 5.6 (a). The court cited the New York Court of Appeals precedent finding that similar restrictive covenants between a lawyer and a law firm in violation of Rule 5.6 (a) are unenforceable on public policy grounds. However, the court also noted that courts in New York have applied similar clauses against other professions and enforced agreements that violated rules of professional conduct in order to prevent a lawyer from evading his contractual obligations. . Notwithstanding its ruling in this case, the Court challenged the application of rule 5.6 (a) to in-house counsel, citing a legal comment that the privilege and rule 1.9 apply to the legal services of in-house counsel and non-compete agreements are necessary to protect business advice and confidentiality (as opposed to a lawyer’s duty 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 were inapplicable, which she felt compelled to apply, the court invited the plaintiff to appeal to the Second Circuit so that the matter be certified in the New York Court of Appeals. ..

As noted in Ipsos Insight, LLC, only one other court appears to have examined the applicability of a non-competition clause with an in-house lawyer. In DISH Network Corp. vs. Shebar, n ° 2017-CV-31079, 2017 Dist. LEXIS 87 (Dist. Ct. Colo. May 9, 2017), the trial court concluded that the non-compete agreement was enforceable as part of Colorado’s policy of enforcing those agreements with respect to the managerial and managerial staff when their objective is the protection of trade secrets. . The court determined that the defendant Shebar, a former in-house legal adviser, could not use a rule of ethics 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 applying an otherwise binding agreement. The Court rejected Shebar’s assurances that he was precluded by Rule 1.6 and his fiduciary obligations from revealing confidential DISH information, finding that Shebar had already justified the breach of Rule 5.6 for financial gain.

Relevant here, the ABA 5.6 model rule states in part:

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

(a) a partnership, shareholders, operating, employment or other similar type of agreement which restricts the right of a lawyer to practice after the termination of the relationship, except for a agreement on 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 issue of the ethical admissibility of non-compete clauses for corporate legal advisers has already been addressed in ABA Informal Opinion 1301 (1975), which concluded, on the basis of similar reasoning to that of PLATE, that an in-house solicitor’s non-compete undertaking was not a technical violation of previous rule 5.6 (a), which only prohibits restrictive inter-lawyer covenants. However, the opinion noted that the underlying ethical considerations are the same for restrictive covenants between a lawyer and a client, and such an agreement was “an unwanted surplus because from an ethical point of view, adequate protection of confidences already exist ”. See also SC Op. 2000-11 (2000) (non-competition would violate rule 5.6, but noting that companies may rely on trade secrets law and the provisions of rules 1.6, 1.7 and 1.9 to prevent certain other subsequent uses ).

In 1994, ABA Formal Notice 94-381 (1994) stated whether an outside lawyer could agree to represent a company on a specific issue, provided the lawyer agreed never to represent anyone against the company. company in the future. Citing Rule 1.9 and Opinion 1301, the Opinion explains that it is already ethically prohibited for a lawyer to represent an adversary in substantially related cases, but that further restricting subsequent representation would “run counter” to the law. Rule 5.6 (a) and strong public policy in favor of giving the public free choice of lawyer.

On the other hand, since the ABA opinions, other state and local bars have ruled that in-house lawyers entering a non-compete clause would be in violation of rule 5.6. See NJ Op. 708 (2006); Phila. Op. 1996-5 (1996); VA Op. 1615 (1995). Halfway, some states have concluded that a lawyer can include a non-compete clause with a saving clause stating that the provision will be interpreted as complying with all applicable ethical rules, with some opinions taking the extra step. to 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 legal advisers is still in violation of Rule 5.6, unless such services are clearly distinct from legal services. See Phila. Op. 2003-9 (2003) (“[T]The functions described as “non-legal” by the applicant are not separate from legal obligations, and indeed, that a lawyer is not allowed to allow a lay person 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 makes no difference that the restrictive covenants provision in issue ends by saying that a court can modify or sever any part of the clause it deems unenforceable. This generic severance clause does not eliminate the breach. ethical 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-compete agreements is that it is always an evolving issue that depends on the legal and ethical opinions of the jurisdiction in which enforcement is sought. However, ethics opinions generally make it clear that a corporate lawyer is still required by Rules 1.6 and 1.9 to maintain and not breach the former employer’s confidentiality, and a drafter would be wise to ensure that any non-competition clause contains a savings clause.


The newsletter can be downloaded as a file here.

Share.

About Author

Comments are closed.