May 22, 1991
Partnership, shareholder, and employment agreements of law firms may not restrict a lawyer's rights to practice after termination of the relationship, except an agreement concerning benefits upon retirement.
A contract term which broadly prohibits a departing lawyer from initiating contacts with clients of the former firm which lawyers who were never members of the former firm may make is unethical.
A contract provision which requires the firm's costs and expenses to be paid by the departing lawyer immediately upon transfer of the client's file to the departing lawyer would be improper if it applies special conditions to departing lawyers different from those the firm applies to other successor lawyers.
A contract provision which interferes with the client's right to discharge a lawyer or to hire another lawyer of the client's choice is unethical. A contract term which interferes with a tribunal's discretion to order a lawyer to continue representation is unethical.
A contract provision which conditions the availability of a representation file on a lawyer fulfilling obligations to the lawyer's former firm is improper.
References: MRPC 1.8(e), 1.15(a), 1.16(a), 1.16(c), 5.6(a); CI-1145; ABA Op 300, i1072, i1171; Cohen v. Graham, 44 Wash App 712, 722 P2d 1388 (1986); Gray v. Martin, 663 P2d 1285 (Or 1979).
A lawyer asks whether a new director in the law firm's professional corporation may be asked to agree to the following employment contract terms:
"If a Director considers leaving or leaves the corporation and desires to compete with the corporation or continue professional contact with clients he has represented while an employee of the firm, the following procedures will be followed:
- The corporation will send a letter to each of the director's clients, assigning their case to another attorney and scheduling an appointment to see the new attorney advising the client that he has an option to stay with the corporation or have his file transferred to the departing attorney.
- The director is prohibited from initiating contact with the clients in writing, orally, by telephone, interview, conference or otherwise, inside or outside the office, nor shall the departing director have other persons initiate such contact with the client in any manner whatsoever. Any interference shall constitute a breach of contract and waiver of any rights that the director may have been entitled to from the corporation.
- All files referred by a departing director to another counselor while an employee of the corporation shall remain the sole and exclusive property of the corporation as well as any referral fees that may become due from such other counsel. In the event a referred client maintains his professional relationship with the departing director and a recovery is realized, the departing director must return all costs, and 75 percent of the fee to the corporation.
- In the event any of the departing director's clients, other than those clients who are the subject of 'c' above, should choose to have their case handled by the departing director, the departing director, in the event of recovery in such case(s), pending for trial or awaiting filing, shall immediately return to the corporation all case costs and 25 percent of all fees realized. Fifty percent of any fee in excess of $20,000 shall be returned to the firm.
- All cases on appeal shall remain the sole and exclusive property of the corporation. In the event the departing director's client requests him to continue handling a case that is on appeal, without regard to whether or not briefs have been written, arguments have been completed, or the cases have been returned for a trial, the departing director, in the event of recovery, shall immediately reimburse the corporation for all case costs and 75 percent of any fee recovered."
The Committee does not answer questions of law, and thus does not construe contract terms or resolve questions based upon an interpretation of contract terms. Further, the Committee has not been asked to address a lawyer's retirement from practice, or the sale of a law practice which is addressed in a proposal pending before the Supreme Court.
With regard to ethics issues implicated in the proposed contract, MRPC 5.6 states:
"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."
The definitions in the MRPC Preamble state that "partner" includes shareholders in professional corporations. Plainly, a covenant not to compete or restrictive covenant may not be included in a partnership or shareholder agreement. In accord ABA Op 300, ABA Op i1072. The rule protects future clients against having a restricted pool of lawyers from which to choose, and protects lawyers from bargaining away the right to open their own offices. An agreement which acknowledges a departing lawyer's right to continue to practice but which imposes burdens which make it difficult, if not impossible, for the departing lawyer to represent certain clients, also violates the spirit of the ethics rule.
We are aware of MCL 445.774a (effective for agreements entered into after March 29, 1985) which allows covenants not to compete "reasonable as to its duration, geographical area, and the type of employment or line of business." We note, however, that the Supreme Court's adoption of MRPC 3.6 postdates the statute and is promulgated in furtherance of the Court's supervisory power over the bar. This Committee does not resolve questions of law, and bases its interpretation on the Michigan Rules of Professional Conduct.
Paragraph b of the proposed contract broadly prohibits the departing lawyer from contacting clients, even though certain of the prohibited contacts would be clearly permitted under MRPC 7.1 - 7.3. At least one court has held that an agreement not to solicit clients constitutes a covenant not to compete, Cohen v. Graham, 44 Wash App 712, 722 P2d 1388 (1986). The paragraph further states that the departing lawyer would sacrifice "any rights . . . [to which the departing lawyer] may have been entitled" from the corporation if the departing lawyer makes unauthorized contacts with clients. Penalties such as liquidated damages [CI-1145; District of Columbia Op 181] and reduced profit-sharing because of the departing lawyer's competition with the former firm have been held to be improper. See, Gray v. Martin, 663 P2d 1285 (Or 1979); contrast Cohen v. Lord, Day and Lord, 534 NYS2d 161 (App Div 1988). Both the departing lawyer and the law firm are entitled to advise clients that they are willing to continue the representation, as long as it is clear that the client may choose the law firm, the departing lawyer, or any other lawyer of the client's choosing.
ABA i1171 held that an agreement which would prohibit a withdrawing partner from undertaking a representation in any matter of a person who was a client of the firm during the partner's tenure, except clients initially brought to the firm by the partner, is unethical.
Several provisions of the proposed contract address costs and expenses advanced by the firm on behalf of clients. MRPC 1.8(e)(1) prohibits a lawyer from providing financial assistance to a client in connection with pending or contemplated litigation, except that a lawyer may advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client. A contract provision which attempts to transfer the client's responsibility for reimbursement of costs and expenses to the departing lawyer would be unethical. A contract provision which requires that the costs and expenses incurred by the law firm to be paid from any recovery obtained by a departing lawyer when the client has elected to discharge the law firm and hire the departing lawyer is no more than a charging lien and is not improper. A contract provision which requires the firm's costs and expenses to be paid by the departing lawyer immediately upon transfer of the client's file to the departing lawyer would be improper if it applies special conditions to departing lawyers different from those the firm applies to other successor lawyers.
A client has the right to choice of counsel. MRPC 1.16(a)(3) requires a lawyer to withdraw if the lawyer is discharged by the client. A contract provision which interferes with the client's rights to discharge the lawyer or to hire another lawyer of the client's choice, is unethical. A client's choice of counsel in a matter before a tribunal is subject to the consent of the adjudicator, MRPC 1.16(c).
MRPC 1.15(a) requires a lawyer to safekeep all property of clients and third parties coming into the lawyer's possession. The client retains rights in the representation file to the extent it contains property to which the client is entitled. If the lawyer needs the file to properly represent the client, the file's availability cannot be conditioned upon the lawyer's discharging obligations to the former firm. A declaration that client files are property of the firm does not recognize that the file actually belongs to the client [MRPC 1.15(a), 1.16(d); CI-743, CI-766, CI-722, CI-495], who has the right to direct determine who has custody.
Law firms are entitled to offer and formulate agreements which set forth reasonable conditions affecting a lawyer's departure from the firm. In finding the wording of certain provisions of this proposed agreement improper we do not suggest that there cannot be other provisions or other language which might be acceptable. On the basis of the information presented, however, the provisions discussed are improper.