Agreement Not to Solicit or Hire Lawyers from Another Firm As Part of Merger Negotiations
Adopted: October 27, 2017
Opinion rules that an agreement between law firms engaged in merger negotiations not to solicit or hire lawyers from the other firm for a relatively short period of time after expiration of the term of the agreement is permissible because it is a de minimis restriction on lawyer mobility that does not impair client choice and is reasonable under the circumstances.
Inquiry:
Law Firm A entered into an agreement with Law Firm B to explore merger of the two law firms. In addition to provisions addressing non-disclosure of confidential client and proprietary firm information, the agreement included the following provision:
Non-Solicitation. During the term of this Agreement and, should Law Firm A and Law Firm B decide not to merge, for a period of two (2) years after termination of this Agreement (the “Non-Solicitation Period”), (i) Law Firm A agrees that it shall not induce or solicit any of the partners, associates, or other employees of Law Firm B to join Law Firm A; and (ii) Law Firm B agrees that it shall not induce or solicit any of the partners, associates, or other employees of Law Firm A to join Law Firm B. The foregoing restriction shall not apply to (i) associates or other employees who are hired through a party’s recruiting efforts resulting from the placement of general media advertisements or the retention of “headhunters” (provided that the headhunters are not specifically directed to solicit associates or other employees from the other party), or (ii) the hiring by a party of the other party’s associates or other employees who make unsolicited contacts seeking employment so long as such individuals did not directly participate in meetings, negotiations, or similar discussions between the parties concerning the terms of the potential merger. Each party agrees not to hire or engage as partners or counsel any individual who is currently a partner or counsel with the other party to this Agreement for a period of two years from the termination of this Agreement.
The term of the agreement is one year, but is subject to early termination based upon ten days’ notice by a party. Therefore, the potential period of restriction may be as long as three years.
Attorney X is a partner in Law Firm A and is interested in joining Law Firm B. She did not participate in meetings, negotiations, or discussions between the law firms relative to the agreement or to a potential merger with Law Firm B. Nevertheless, the managing lawyers for Law Firm B have refused to talk to her about becoming a partner because the period of restriction has not expired. Law Firm B will talk to Attorney X about joining the firm if she obtains a waiver of the restriction from Law Firm A.
Is this provision of the agreement prohibited under Rule 5.6(a)?
Opinion:
No, because it imposes a de minimis restriction on the mobility of the lawyers in the firms, does not impair client choice, and is reasonable under the circumstances.
Rule 5.6(a) prohibits a lawyer from participating in offering or making 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. As explained in 2012 FEO 12, “[t]his prohibition on restrictive covenants protects the freedom of clients to choose a lawyer and promotes lawyer mobility and professional autonomy.” Rule 5.6, cmt. [1].” Ethics opinions interpreting the rule usually address the former concern. For example, three State Bar opinions evaluate whether financial disincentives upon departure from a law firm are disguised penalties for competition because “firm” clients will follow the departing lawyer. See 2007 FEO 6, 2008 FEO 8, and 2012 FEO 12. There are no opinions that provide insight into agreements that solely restrict the mobility of lawyers as does the agreement at issue. Therefore, this is a matter of first impression.
Restrictive covenants are not, however, foreign to the Rules of Professional Conduct. Rule 1.17, Sale of a Law Practice, permits a lawyer to sell a law practice or an area of law practice, including good will, if a number of conditions are satisfied, including the following: “the seller ceases to engage in the private practice of law, or in the area of practice that has been sold, from an office that is within a one-hundred (100) mile radius of the purchased practice...” Rule 1.17(a). Where a reasonable business purpose exists, the Rules permit some limitations on lawyer mobility.
Similarly, 2007 FEO 6 and 2008 FEO 8 recognize that a financial disincentive upon the departure of a lawyer may be permissible. Those opinions permit partnership, shareholder, or other similar agreements to include a post-departure repurchase, buy-out, or fee division provision if the provision is fair, takes into account the loss in firm value generated by the lawyer’s departure, and is not based solely upon loss in value due to the loss of client billings. Again, if there is a reasonable business purpose, a restriction that impacts lawyer mobility may be permissible.
The non-solicitation provision in this inquiry is primarily a restriction on the law firms that are a party to the agreement in that it restricts the recruiting activities of the firms. To the extent that the provision restricts the mobility of lawyers in the two firms, the restriction is for a relatively short, defined period of time and only with regard to employment with one other law firm; the lawyers in the firms are free to seek employment with any other law firm. In addition, the provision does not prevent or inhibit a client from following a lawyer who departs one of the firms for employment with a firm not subject to the agreement. Thus, the provision imposes a de minimis restriction on lawyer mobility and does not impair client choice
As noted in the Scope section of the Rules, “[t]he Rules of Professional Conduct are rules of reason. They should be interpreted with reference to the purposes of legal representation and of the law itself.” Rule 0.2, cmt. [1]. It is surmised that the non-solicitation provision was included in the agreement to foster the trust necessary for both firms to disclose financial information about the productivity of the lawyers in the firms without fear that, should the merger negotiations be abandoned, the other firm would attempt to lure highly productive lawyers or “rainmaker” lawyers away from the other firm. The provision was reasonable1 under the circumstances and, given its limited duration and effect, does not violate Rule 5.6(a).
No opinion is expressed on the legal enforceability of the provision in this inquiry or other similar provisions.
Endnote
- Whether a restriction on lawyer mobility in an agreement between law firms engaged in merger negotiations is reasonable will depend on various factors, including the specific terms of the restriction, the number of law firms involved in the merger negotiations, and the likelihood of employment opportunities with law firms not involved in the merger negotiations.