On appeal from the Superior Court, Appellate Division, whose opinion is reported at 247 N.J. Super. 266 (1991).
Garibaldi, Wilentz, Clifford, Handler, O'Hern, Stein
The opinion of the court was delivered by
RPC 5.6 of New Jersey's Model Rules of Professional Conduct prohibits lawyers from making employment agreements that restrict the practice of law. Plaintiffs, Cynthia M. Jacob and Richard F. Collier, Jr., attorneys at law, were shareholders and employees of the defendant law firm Norris, McLaughlin & Marcus (NMM), prior to their departure to establish their own law firm. NMM had a Service Termination Agreement that barred plaintiffs from collecting termination compensation if they continued to represent firm clients or solicit firm attorneys or other paraprofessionals within a year of their departure. They thus faced a strong financial disincentive against retaining prior clients or co-workers. The primary issue in this appeal is whether the provisions in the Agreement precluding compensation restrict the practice of law in violation of RPC 5.6 and are thus void as against public policy.
In October 1987, Jacob, Collier, and an associate, Sweet, left NMM to establish their own law firm, Collier, Jacob & Sweet. Together, the three took with them a number of associates, a paralegal, and, according to NMM, clients who had generated approximately $500,000 in annual billings for the firm.
The terms of their departure were governed by two agreements entered into by the parties on February 11, 1986: a Buy-Sell Agreement and a Service Termination Agreement. The Buy-Sell Agreement requires NMM to purchase the shares of any shareholder whose employment with NMM is terminated for any reason at values determined in the agreement. That agreement was executed and is not in dispute.
The Service Termination Agreement (Agreement) provides departing members with compensation above their equity interest in the firm. Paragraph 1 states that "in consideration of Member's services to the Law Firm, the Law Firm agrees to pay the applicable amount of termination compensation * * * and to provide related benefits appropriate to the category of termination as set forth in this paragraph * * *." Those categories include competitive voluntary departure (in which the member solicits firm clients or employees to leave the firm with him or her), non-competitive voluntary departure, mandatory retirement, involuntary departure, disability, and death. When the partner leaves voluntarily and non-competitively, as a result of mandatory retirement, or involuntarily, the Agreement provides the following compensation:
(i) 25% x 110% of the Member's annual draw applicable immediately prior to departure; (ii) 100% of any amount owed to the Member by the Law Firm with respect to any calendar year prior to the year in which departure occurs; and (iii) 110% of the pro rated portion of any net positive balance after reconciling any amount owed to the Member by the Law Firm with any amount owed by the Member to the Law Firm with respect to the current calendar year, such pro ration to be based on the amount of the current calendar year completed as of departure as compared to the full year. In addition, the Member shall have the right to purchase from the Law Firm the life insurance (and any terminable cash reserve) maintained with respect to the Member's life by the Law Firm under any Buy/Sell Agreement then in force.
The Agreement, however, draws a sharp distinction between competitive and non-competitive departures. In a competitive departure, "the Law Firm shall have no obligation to pay and the Member shall have no right to receive any termination compensation." The only benefit provided is the right to purchase life insurance.
A departure is competitive
if within one (1) year of the date of termination of employment the Member either engages in the practice of law involving professional services to clients of the Law Firm, who are clients of the Law Firm at the date of termination, or solicits other professional and/or paraprofessional employees of the Law Firm to engage in the practice of law with the departed Member * * *.
The Agreement's competitive departure provision thus creates a financial disincentive against a departing shareholder's retaining the firm's clients or soliciting its employees.
After leaving NMM, Jacob and Collier together requested $81,125 as compensation under the Agreement. NMM refused the request, arguing that Jacob's and Collier's retention of clients (in violation of the "anti-solicitation" provision) and their raiding of employees (in violation of the "anti-raiding" provision) rendered their departure competitive and thus precluded compensation under the terms of the Agreement.
In January 1989 plaintiffs filed suit against NMM, arguing that the competitive-departure provisions were void as against public policy because they violated RPC 5.6 of the Rules of Professional Conduct. The Chancery Division agreed with plaintiffs, finding that the provisions violated RPC 5.6 by requiring departing attorneys to choose between representing former NMM clients and losing their benefits under the Agreement, and by discouraging attorneys from hiring professionals who they believed would provide the "highest standards of service" to those clients. Moreover, the court found that the primary purpose of the Agreement was to fix compensation for departing members and that severing the "offensive language" from the Agreement would not defeat that purpose. The financial disincentive provisions thus could be severed from the Agreement, thereby entitling plaintiffs to the compensation otherwise provided by the Agreement.
The Appellate Division reversed the Chancery Division. Although conceding that the anti-solicitation provision might have an "incidental effect" on plaintiffs' decision to retain clients on termination, the court held that that effect was not tantamount to the type of restriction on the practice of law prohibited by RPC 5.6. 247 N.J. Super. 266, 272 (1991). The court noted the difficulty a firm faces in compensating its departing members while suffering the contemporaneous loss of client revenue, and held that the Agreement provided "payment or nonpayment of termination compensation * * * in a way that strikes a reasonable balance between the probable needs of a departing member and the consequences to the firm of the member's departure, that is, whether with or without the firm's clients." Ibid. The court did not address the validity of the anti-raiding provision.
The court noted that even if the anti-solicitation provision were unenforceable, Jacob and Collier would still not be entitled to compensation. Finding that the purpose of the Agreement "was to provide financial assistance to a departing member only under circumstances not inconsistent with defendant's economic interest," id. at 273, the court stated that the right to termination compensation was "inextricably coupled" with the competitive-departure provision. Ibid. If the court deemed that provision unenforceable, then the entire Agreement must fall. Ibid.
The Appellate Division also held that equitable considerations should bar plaintiffs' claim. Because both plaintiffs had voluntarily entered into the Agreement, the court believed they would be unjustly enriched by receiving the benefits of the Agreement while being spared its undesirable conditions. Id. at 273-74.
Plaintiffs filed a petition for certification and defendant filed a cross-petition for certification. The Court, considering the matter to be interlocutory in nature, treated plaintiffs' petition as a motion for leave to appeal, which it granted, and dismissed as moot the petition and cross-petition for certification. N.J. (1991).
This Court adopted the Rules of Professional Conduct (RPC) pursuant to its constitutional authority to regulate the practice of law. N.J. Const. art. VI, § 2, P 3. They establish the state's public policies with respect to attorney conduct. Contracts that violate the RPCs violate public policy, and courts must deem them unenforceable.
RPC 5.6 states in pertinent part that
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 RPC's plain meaning indicates that any provision, whether direct or indirect, that operates so as to restrict a lawyer's post-termination practice will contravene the ethical rule.
The history behind the RPC and its precursors reveals that the RPC's underlying purpose is to ensure the freedom of clients to select counsel of their choice, despite its wording in terms of the lawyer's right to practice. The RPC is thus designed to serve the public interest in maximum access to lawyers and to preclude commercial arrangements that interfere with that goal. See Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct 486 (1985).
American Bar Association (ABA) ethical opinions in the 1960s set the stage for the modern rules prohibiting restrictive covenants among lawyers. In Opinion 300 (1961), Opinion 521 (1962), and Informal Opinion 1072 (1968), the ABA's Committee on Professional Ethics invalidated restrictive covenants in several legal-employment agreements. The Committee emphasized the distinction between the business principles governing commercial enterprises and the ethical principles governing the practice of law. The Committee stated that "'clients are not merchandise, lawyers are not tradesmen'", and that restrictive covenants inappropriately "'barter in clients.'" Op. 300 (1961) (citations omitted). The Committee also emphasized the personal relationship between lawyer and client, and noted the tendency of restrictive covenants to "interfere with and obstruct the freedom of the client in choosing and dealing with his lawyer." Informal Op. 1072 (1961) (citations omitted).
In 1969, the New Jersey Bar Association's Advisory Committee on Professional Ethics referred to those ABA opinions in holding that a covenant in a partnership agreement that restricted withdrawing partners from practicing within the county for five years following departure was improper and unethical. Op. 147, 92 N.J.L.J. 177 (March 20, 1969). The Committee stated that the "client market" can be divided "only through individual performance and the establishment of a well-merited reputation for professional capacity and fidelity to trust." Ibid. (citation omitted). A restrictive covenant is an improper "attempt to control and divide the 'client market' by means other than individual performance." Ibid. The Committee also noted the ABA Model Code, soon to be adopted by New Jersey, discussed below. Cf. New Jersey Supreme Court Advisory Committee on Professional Ethics Op. 203 (1971) (in holding that firm losing client to a departing attorney-stockholder must release client's files, Committee stated that "a client has a right to be represented at all times by counsel of his own choosing").
The ABA adopted the Disciplinary Rules of the Model Code of Professional Conduct (DR) in 1969. New Jersey adopted the Model Code in 1971. DR 2-108(A), regarding restrictive covenants, was written against the backdrop of the earlier ethical opinions focusing on the non-commercial nature of the legal profession and the importance of retaining ...