Arthur J. Ciampi

As most lawyers know, restrictive covenants concerning lawyers, with the exception of bona fide retirement plans, are generally unenforceable pursuant to New York law. New York Rules of Professional Conduct 5.6. In New York, a client's choice of counsel is preeminent, and, as restrictive covenants limit that choice of counsel, they are, generally speaking, unenforceable.

New York public policy also favors the broad interpretation and enforcement of arbitration clauses in agreements. This rule equally applies to arbitration provisions in law firm partnership agreements.

In the past, these two policies have conflicted, and, in Hackett v. Milbank Tweed Hadley & McCloy, 86 N.Y.2d 146, 152 (1995), the Court of Appeals enforced an arbitrator's award which found a restrictive covenant in the Milbank partnership agreement to be enforceable largely due to the public policy which requires courts to defer to an arbitrator's ruling. Last month, the New York County Commercial Division, in Gay v. Quinn Emmanuel Urquhart & Sullivan, 2019 WL 1782358 (2019), issued a decision which addressed both of these important concerns and also raised interesting considerations regarding the application of choice of law principles.

'Gay'

In Gay, several New York partners of the Quinn Emmanuel law firm withdrew from the firm in January and February 2018 to form their own partnership. The Quinn Emmanuel partnership agreement included a provision which required withdrawing partners, who within 18 months of their withdrawal from the firm performed any legal services within 100 miles of any firm office for certain firm clients, to pay 10% of the total fees billed during this 18-month period. The Quinn Emmanuel partnership agreement also provided that California law would apply to any dispute and that disputes were subject to arbitration.

Quinn Emmanuel filed a demand for arbitration in California to enforce the restrictive covenant. In May 2018, the petitioners commenced a proceeding in New York State Supreme Court to permanently stay and enjoin the arbitration proceeding and Quinn Emmanuel moved to dismiss the petition. The New York State motion court granted Quinn Emmanuel's motion and dismissed the petition.

The Court's Analysis

The court examined the relevant New York law concerning lawyer non-compete agreements. In particular, it stated: “New York courts, for example, have denied enforcement of anticompetition clauses as violative of public policy. See Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989) (denying the enforcement of a provision which exacted a substantial financial penalty for competing with the former firm, because the provision restricts the right of a former lawyer to practice in violation of rule 5.6); Denburg v. Parker, Chapin, Flattu & Klimpl, 82 N.Y.2d 375 (1993) (same).”

The motion court then discussed the Hackett decisions. Hackett was a partner of Milbank who, upon his withdrawal, sought supplemental payments from his former firm. The firm refused to make such payments based upon the terms of the firm's partnership agreement. Milbank demanded arbitration, and Hackett filed a petition to stay the arbitration claiming that public policy exempted the dispute from arbitration because, he claimed, the Milbank agreement contained a forfeiture for competition provision.

While both the motion court and the Appellate Division, First Department approved the stay based upon their rulings that the Milbank agreement violated New York public policy, the court of Appeals held that an arbitrator should decide the issue in the “first instance.” Hackett, 80 N.Y.2d at 871. An arbitration was held and the arbitrator ruled in favor of Milbank. Ultimately the Court of Appeals upheld the arbitrator's ruling, finding that the stronger public policy was that of arbitration requiring deference to the arbitrator's ruling upholding the clause in question.

In light of Hackett, the motion court in Gay concluded that “[a]lthough petitioners submit competent proof supporting their argument that section 5.1(a)(ii) of the partnership agreement is anticompetitive under New York law…it is for the arbitrator in the first instance to consider these submissions when determining whether the provision at issue is an unenforceable forfeiture-for-competition clause.” Gay, 2019 WL 1782358 at 5.

The motion court in Gay also held that “Petitioners may also raise before the arbitrator the important issue of whether the partnership agreement's choice of law provision, which provides that California law is applicable, should apply to determine the enforceability of section 5.1(a)(iii) against New York attorneys. As petitioners note, unlike New York courts, California courts are more likely to enforce restrictive covenants in law firm agreements, despite the same prohibition in that state's lawyer code.”

The Rules

An examination of the relevant Rules of Professional Conduct may prove useful in this analysis. Rule 8.5(2)(i) of the New York Rules of Professional Conduct governs choice of law concerning the authority to discipline attorneys and may be helpful in determining the enforceability of non-compete agreements governed by laws other than those of New York. The Rule, as the comments indicate, tries to be “as straight-forward as possible, consistent with recognition of appropriate regulatory interests of relevant jurisdictions.”

In pertinent part, Rule 8.5(2)(i) states that “[i]f the lawyer is licensed to practice only in this state, the rules to be applied shall be the rules of this state.” Rule 8.5(2)(ii) states that “[i]f the lawyer is licensed to practice in this state and another jurisdiction, the rules to be applied shall be the rules of the admitting jurisdiction in which the lawyer principally practices; provided however, that if particular conduct clearly has its predominant effect in another jurisdiction in which the lawyer is licensed to practice, the rules of that jurisdiction shall be applied to that conduct.”

Accordingly, an attorney only admitted in New York or admitted in more than one jurisdiction but who “principally practices” in New York or whose conduct has a “predominant effect” in New York should be governed by the rules of New York.

As it relates to restrictive covenants, New York Rule 5.6 bars restrictive covenants among lawyers. Rule 5.6 states in relevant part: “A lawyer shall not participate in offering or making: (1) a partnership, shareholder, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship except an agreement concerning benefits upon retirement.” Moreover, New York courts interpreting Rule 5.6, as quoted by the Gay motion court above and otherwise, strongly disfavor non-compete agreements among law firms and lawyers, and California's contrary position is at odds with New York law and public policy.

Accordingly, the application of the law of a foreign jurisdiction in a law firm partnership agreement, such as the application of the law of California in the Quinn Emmanuel partnership agreement, which permits lawyer non-competes in certain circumstances, should not, it is submitted, be applicable to New York admitted lawyers who “principally practice” in New York and whose conduct has the “predominant effect” in New York.

In addition, as New York public policy clearly disapproves of lawyer restrictive covenants, the application of foreign law which undermines that public policy should not be permitted to determine the choice of clients in New York who retain lawyers who are admitted to practice in and practice law predominantly in New York. Brown & Brown v. Johnson, 25 N.Y.3d 364, 370 (2015) (finding restrictive covenant based upon Florida choice of law provision to be violative of New York public policy and unenforcible). This is particularly the case as the California law which permits certain lawyer restrictive covenants is not merely at odds with New York law but is clearly a minority view contrary to the the law of the majority of jurisdictions.

Conclusion

Despite the plain language of Rule 5.6 of the New York Rules of Professional Conduct and the repeated holdings of the New York Court of Appeals refusing to enforce restrictive covenant, disputes concerning lawyer non-competes are relatively frequent. If the law firm agreement provides for arbitration, the determination of such provisions' enforceability will likely be in the province of the arbitrator applying not only the applicable law based upon the partnership agreement, but also choice of law principles.

Arthur J. Ciampi is the coauthor of the treatise 'Law Firm Partnership Agreements' and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to the firm, assisted in the preparation of this article.