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  • May 19, 2021

    Ethical Dilemma: May I Sign a Noncompete Agreement?

    Does signing a noncompete agreement violate ethics rules? If I am forced to sign one to keep my job, what should I do?

    Timothy J. Pierce

    question mark bubble

    May 19, 2021 – If your position requires you to sign a noncompete agreement, will you violate a disciplinary rule?

    Question

    After working for several years at a private law firm, I was offered a job as in-house counsel at a local company. Shortly after I was hired, the managing attorney in the company’s legal department told me I would be required to sign a noncompete agreement prohibiting me from working for any other company in the same business for two years after departing employment with the company.

    I stated that it was my understanding that noncompete agreements were impermissible for lawyers, but the managing attorney told me that every lawyer who worked for the company was required to sign the agreement, and that if I refused, my employment would be terminated. I certainly don’t want to violate any disciplinary rule, but I also don’t want to lose my job

    May I sign this agreement?

    Answer

    SCR 20:5.6, Restrictions on Right to Practice, states in part:

    A lawyer shall not participate in offering or making:

    (a) a partnership, shareholders, 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;

    This rule is plain on its face, and there is no exception for lawyers employed as in-house counsel. Note that it is misconduct both for the lawyer who accepts such and the lawyer who offers such an agreement. This self-evident conclusion was discussed in New Jersey Ethics Op. 708 (2006):

    The fact that the restrictive covenant agreement in question arises in the corporate context, rather than within a law firm, is of no moment. The Court Rules make clear that in-house counsel in New Jersey, whether licensed by this State or not, are bound to follow our Rules of Professional Conduct, including RPC 5.6. And the result we reach is consistent with every other state and local committee that has looked at the applicability of this rule to in-house lawyers.1

    Similarly, Nevada Ethics Op. 56 (2019), stated;

    Rule 5.6 contains no language limiting its application to agreements among attorneys in law firm settings: The Rule more generally prohibits lawyers from participating "in offering or making" an employment agreement that restricts the attorney's right to practice. NRPC 5.6 (emphasis added). Thus, as the ABA Committee on Ethics and Professional Responsibility concluded more than twenty years ago, Rule 5.6 both prohibits in-house (or outside) counsel from offering, and prohibits lawyers from accepting, in-house employment that restricts the in-house attorney from representing anyone against the corporation in the future. ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 94-381 (1994). "Just as in the partnership situation, restricting a lawyer from ever representing one whose interests are adverse to a former client would impermissibly restrain a lawyer from engaging in his profession." Id.; see also ABA Comm. on Ethics and Prof'l Responsibility, Informal Op. 1301 (March 25, 1975) (reasoning under a predecessor rule that the ethical considerations are the same whether the attorney is in private practice or serving as in-house counsel).

    This truly creates a dilemma for the lawyer forced to choose between violating a disciplinary rule and losing a job.

    The Nevada opinion, however, offers a suggestion as to how a noncompete might be signed without violating SCR 20:5.6(a):

    The Committee believes that compliance with Rule 5.6 requires either a carve-out in the non-compete clause itself or a separate, specific "savings clause" that recognizes Rule 5.6 and requires the non-compete clause to be interpreted consistent with that Rule. See Wash. State Bar Advisory Op. 2100 (2005) (concluding that the broad non-compete clause did not implicate Rule 5.6 because it was followed by an express qualification that, "[a]s it relates to the practice of law, this provision shall be interpreted consistent with the Washington RPCs ... including RPCs 5.6, 1.9, and 1.6.").

    This is because SCR 20:5.6(a) only prohibits a lawyer from agreeing to a restriction on the right to practice law, and does not prohibit a lawyer from agreeing to a future restriction on nonlegal employment. Therefore, a lawyer could agree to a noncompete prohibit future nonlegal work without violating SCR 20:5.6(a).2

    At the very least, in the case of a recalcitrant employer who refuses to insert a formal saving clause, a lawyer may consider clearly stating and memorializing that the agreement is being signed with the understanding by the lawyer that the agreement is to be interpreted consistently with the lawyer’s professional obligations.

    Two Related Questions

    Two other questions that are not governed by the disciplinary rules arise out of this situation.

    Tim PierceTim Pierce is ethics counsel with the State Bar of Wisconsin. Reach him by email or through the Ethics Hotline at (608) 229-2017 or (800) 254-9154.

    If the lawyer refuses to sign the noncompete because it violates SCR 20:5.6(a) and is therefore fired, does the lawyer have a civil claim for wrongful discharge?

    In granting a motion to dismiss for failure to state a claim for which relief can be granted, a federal district court recently answered that question in the negative.3 The in-house lawyer in that case was indeed fired for refusing to sign a noncompete agreement because the lawyer believed it violated SCR 20:5.6(a). The lawyer then brought a claim for wrongful discharge, but, relying on prior case law, the court held that termination for refusing to violate a rule of professional conduct did not fall within the public policy exception to Wisconsin’s employment-at-will doctrine.

    While this result may be surprising, the rules themselves are clear that violation of a disciplinary rule should not give rise to a civil cause of action or create a presumption that a legal duty has been breached.4

    If the lawyer does in fact sign the noncompete that violates a rule of professional conduct, would that agreement later be enforceable?

    The rules of professional conduct do not determine the enforceability or validity of contracts, and courts in other jurisdictions have been split as to whether noncompetes that violate disciplinary rules are enforceable.

    In Jarvis v. Jarvis,5 a Kansas court held reasoned that if a contract violated a disciplinary rule (in this case Rule 5.6) then it violated the public policy expressed in that rule and cannot be enforced.

    Similarly, in Cardillo v. Bloomfield,6 a New Jersey court held that a contract that violated Rule 5.6 was void and unenforceable for public policy reasons, and furthermore, a lawyer who had signed the agreement was not equitably estopped from challenging the validity of the agreement. Other courts, however, view the question of enforceability of an agreement and violation of a disciplinary Rule as separate questions. These courts have be willing to hold that, even though an agreement may violate 5.6, and the lawyers who participated in such agreements should be subject to investigation and possible prosecutions by disciplinary authorities, the contracts are enforceable.7

    In Wisconsin

    While there appears to be no Wisconsin case directly on point, in a recent case, the Wisconsin Supreme Court held that “Supreme Court Rules that regulate the ethical practice of law in Wisconsin cannot be used as an absolute defense in a civil action in which an attorney is a party.”8

    While that specific case did not involve the enforcement of a noncompete agreement, it might suggest that a Wisconsin court would consider the purported violation of a disciplinary rule to be a factor, but not the deciding factor, in considering the enforceability of a contract.9

    Conclusion: Get It in Writing

    Despite the clarity of the disciplinary rule and the lack of support in civil law for a lawyer who abides by SCR 20:5.6(a), there appears to be no examples of an in-house lawyer being publicly disciplined for violating any state’s version of SCR 20:5.6(a).

    A lawyer faced with such a difficult choice would be wise to consider the risk management advice discussed above, and memorialize the fact that the lawyer is interpreting any agreement signed consistently with the lawyer’s professional obligations.

    In Case You Missed It: Read Past Ethical Dilemmas

    Ethical Dilemmas appears monthly in InsideTrack. Check out these topics from recent issues:

    Endnotes

    1 Va. St. Bar Conn. Op. LEO#1650, supra; Ill. St. Bar Ass'n, Advisory Op. on Prof. Conduct, Op. No. 92-14, supra; Conn. Bar Ass'n Comm. on Prof. Ethics, Information Op. No. 02-05, supra; Wash. St. Bar Ass'n, Informal Op. No. 2100, supra; Phila. Bar Ass'n, Prof. Guidance Com., Guidance Op. No. 96-5, supra; Wash. D.C. Bar Ass'n, Op. 291, supra.

    2 Such an agreement might, for example, prevent the lawyer from working as a director of human resources but not in-house counsel at a competitor. This assumes that such an agreement is otherwise lawful – the author professes no expertise in the law of non-compete agreements.

    3 Gaines v. Schneider National 2018 WL 5282902. The court stated; “More specifically, as applied to the allegations in this case, Gaines has failed to articulate a clear public policy that the termination of her employment violates. Even if as a general matter, requiring an employee to violate Wisconsin’s Rules of Professional Responsibility for Lawyers could fall within the public policy exception to the State’s employment-at-will doctrine, SCR 20:5.6 does not clearly articulate the kind of “fundamental and well-defined public policy” that Brockmeyer requires. 113 Wis. 2d at 574. Gaines’ discharge for refusing to sign the non-compete agreement in this case does not “contravene the public welfare and gravely violate the paramount requirements of public interest.” Wandry, 129 Wis. 2d at 43. This is because the application of SCR 20:5.6 to the kind of non-compete agreement that Schneider required of its in-house counsel is unclear on its face and questionable as to its purpose and effect.” The court also, in dicta, questioned whether SCR 20:5.6(a) should apply to in-house counsel.

    4 See Scope and Preamble, paragraph [20].

    5 Jarvis v. Jarvis, 758 P.2d 244 (Kan. Ct. App. 1988).

    6 Cardillo v. Bloomfield, 411 N.J. Super. 574, 988 A.2d 136 (N.J. 2010).

    7 See e.g. Feldman v. Minars, 658 N.Y.S.2d 614 (App. Div. 1997); Shebay v. Davis, 717 S.W.2d 678 (Tex. App. 1986).

    8 See Sands v. Menard, 2017 WI 110, 904 N.W.2d 789 (2017).

    9 Section 13(1), comment b., of the Restatement (Third) of the Law Governing Lawyers suggests that agreements that impose financial penalties for completion are unenforceable.




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