GPSolo Magazine - March 2004

Business And Commercial Law
Law So Long, But Not Goodbye: Can A Lawyer Who Retires Face A Restrictive Covenant?

Rule of Professional Conduct 5.6(a) prohibits lawyers from entering into partnership agreements (a term used here to include shareholder agreements and LLC operating agreements) or employment agreements that directly or indirectly contain restrictive covenants or that provide any “financial disincentive” to a lawyer’s decision to part ways with the firm. The rule has been treated by many courts as immunizing lawyers from the application of restrictive covenants. The rule’s primary rationale is that no obstacle should be placed between a client and the client’s choice of lawyer. However, times have changed, and the practice of law has become a business with too many lawyers chasing too few clients. Some courts are recognizing that for a law firm to survive, its agreements must factor in practical considerations such as revenues, expenses, and cash flow.

Whether one is in accord with the proposition that lawyers who leave firms to practice elsewhere should not be subject to restrictive covenants, the blanket statement that any agreement that restricts a lawyer from practicing law is unenforceable presents a problem in its application to the retiring lawyer and the firm that desires to pay retirement benefits on the condition that the lawyer truly retires. The drafters of the rule anticipated this and presciently provided for a retirement exception that carves from the rule’s prohibition “an agreement concerning benefits upon retirement.”

How is one to draft a provision for lawyers’ retirement that falls within the exception and outside the rule? Before attempting to draft a retirement clause, the law firm should consider whether it really wants one. Providing for benefits on retirement has definite advantages. A retirement clause can help ensure that when a senior lawyer hangs up his or her briefcase, the firm will have an edge in retaining the clients and referral sources that the senior lawyer has cultivated over the years. Having a retirement policy in place that provides economic security is also helpful when the senior lawyer has lost a touch of acumen, skill, or energy and needs a nudge to retire. And if a senior lawyer knows he or she is not as sharp as a few years ago, or has lost interest and drive, but is concerned about the financial consequences that would result from retirement, the presence of a retirement benefit in the firm’s agreement may hasten the decision to retire, providing a benefit not only to the lawyer and the firm, but also to the public.

On the other hand, a retirement provision, particularly one that is overly generous, can sow the seeds of destruction for the firm. When partners sign the firm’s agreement containing a retirement provision, each probably views himself or herself as the prospective retiree with the rest of the firm carrying on and paying benefits. Twenty years later, when several partners retire at about the same time and the base of lawyers remaining in the firm has not grown sufficiently wide, the retirement payout may overwhelm the firm’s revenue. One way to deal with this is to fund a retirement plan through current earnings, but the risk is the possibility that a court will award a share of the fund to a lawyer departing to compete because the fund falls into the “previously earned income” category. Another potential solution is to “cap” the amount or percentage of annual income paid out to all retirees.

Assuming the firm decides that a retirement provision in its agreement is desirable, the next issue is to determine the qualifications for retirement. The cases teach that the agreement must include minimum age and service requirements to demonstrate that retirement is bona fide. Retirement should be keyed to “an age at which many Americans typically cease employment.” Once a lawyer, by virtue of age, length of service to the firm, or both, meets the agreement’s conditions, the receipt of retirement benefits should be able to be made subject to the condition that the lawyer refrain in whole or in part from engaging in a competing practice.

The lawyer who qualifies to retire under the agreement’s terms and leaves the firm should be able either to elect to retire (as defined in the agreement) and receive retirement benefits, or to forego those benefits by continuing, or by subsequently resuming, practice. The agreement must spell out the qualifications and define the scope of retirement. Under the retirement exception, how broad or narrow may the noncompetition covenant be?

  • Must the retiree do nothing other than spend his time in a hammock?
  • Can the retiree go into another profession or business so long as she abstains from the practice of law?
  • May the retiree practice law but be limited geographically, for example, to abstention from practice in the United States, or in one or more states, or in one or more counties or municipalities?
  • Can the covenant be limited temporally; that is, a promise to cease legal practice for a period of time?
  • Or may retirement be limited to a promise not to serve clients of the firm or to engage only in pro bono practice?

Assuming that sufficient parameters for retirement have been established and that the scope of the restriction has been acceptably defined, the next task is to define “benefits upon retirement.” Cases considering the retirement exception teach that the consideration for an agreement of noncompetition that is to have a chance of being upheld must be something “extra,” something beyond the amount to which the retiree would be entitled if the firm were to dissolve. In some agreements, this “extra” has been termed an “additional amount” or “continuation payments.” What the firm may not do is extract a promise of noncompetition as a condition to the return of a departing lawyer’s capital account and payment of his or her share of past profits.

The following are also worth considering for inclusion in the retirement clause. The firm might require the preparation and implementation of a plan, several months before the date of retirement, to effect a smooth transition of client matters to other lawyers in the firm. It might require the retiree to:

  • continue in an “of counsel” capacity exclusively to the firm;
  • be available for consultation and advice so that younger lawyers in the firm may obtain the benefit of his or her wisdom and experience;
  • engage in legal practice only through the firm; and
  • refrain from any act that would disparage or adversely affect the firm or its goodwill.

Stuart L. Pachman is a partner in WolfBlock Brach Eichler in Roseland, New Jersey.

For More Information About The Business Law Section

- This article is an abridged and edited version of one that originally appeared on page 51 of Business Law Today, September/October 2003 (13:1).

- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

- Website: www.abanet.org/buslaw/home.html.

- Periodicals: Business Law Today, bimonthly magazine; The Business Lawyer, quarterly law journal.

- Books and Other Recent Publications: Corporate Director’s Guidebook, 4th ed .; The Portable UCC, 4th ed.; The Portable Bankruptcy Code & Rules, 2004 ed .; Fund Director’s Guidebook, 2d ed .; Guidebook for the Directors of Nonprofit Corporations, 2d ed .; Managing Closely Held Corporations: A Legal Guidebook; Prototype Limited Liability Partnership Agreement; Model Asset Purchase Agreement with Commentary; Model Business Corporation Act, 2002.

 

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