There is one case where a noncompete agreement is inherently unenforceable under New York law - when it pertains to lawyers. But the reasoning underlying the unique status accorded to lawyer in this context is awfully weak, as pointed out by a Federal judge for the Southern District of New York in Ipsos-Insight, LLC v. Gessel.
What Happened in Ipsos-Insight, LLC v. Gessel
In this case, the plaintiff sought to enforce the 12-month noncompete clause that was contained in the employment agreement voluntarily signed by their now former general counsel, defendant Gessel, who had left to go work for a competitor. Indeed, and further working in their favor, Ipsos-Insight's agreement required them to pay Gessel his full salary during the period of the post-employment non-compete.
In response to the complaint, Gessel filed a motion to dismiss the claims predicated on his purported violation of the noncompete on the grounds that the clause was inherently unenforceable as a matter of New York law because it runs afoul of Rule 5.6(a) of the New York Rules of Professional Conduct, which provides that "[a] lawyer shall not participate 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." N.Y. RULES OF PRO. CONDUCT r. 5.6(a) (N.Y. State Bar Ass'n 2020).
In response, Ispos-Insight asserted a number of arguments, including that:
(1) there were no binding New York cases holding that the ban on noncompetes for lawyers applied to in-house counsel (as was the case herein);
(2) by signing on to the noncompete agreement in the first instance, Gessel himself violated the aforementioned Rule 5.6(a) of Professional Conduct, and it would therefore be unfair to allow Gessel to benefit from his own ethical violation; and,
(3) there is no compelling policy reason to apply a different analysis for lawyers (who in other contexts may not be held to a noncompete) from other learned professions, such as accountants or doctors (against whom noncompetes have been held enforceable).
What the Federal Court Held
Ultimately, the Court dismissed those claims in the complaint that were predicated on the violation of the noncompete, holding that the noncompete was, in fact, per se unenforceable as a matter of law against Gessel. But the Court also left no doubt that it was only compelled to do so by virtue of binding precedent from New York State's Court of Appeals, as it was highly dubious of that court's rationale for according lawyers unique status vis-a-vis noncompetes, stating:
"The New York Court of Appeals has not addressed the precise question presented here. But it has twice ruled that an agreement between a lawyer and law firm that violates Rule 5.6(a) or its precursor is unenforceable as a matter of public policy. First, in Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 551 N.Y.S.2d 157, 550 N.E.2d 410 (1989), the court considered the enforceability of a forfeiture-for-competition provision in a law firm partnership agreement, which conditioned a withdrawing partner's receipt of earned-but-uncollected fees on his agreement not to practice law in any state where the law firm maintained an office or in any neighboring state. Id., 551 N.Y.S.2d 157, 550 N.E.2d at 410-411. The court acknowledged that the forfeiture-for-competition provision did not entirely preclude the withdrawing partner from practicing law in competition with the firm, but merely created a financial disincentive. Id., 551 N.Y.S.2d 157, 550 N.E.2d at 411. Nevertheless, the court held that *373 the disincentive constituted an “impermissible restriction on the practice of law” within the meaning of New York Disciplinary Rule 2-108(A) (the precursor to Rule 5.6(a)). Id., 551 N.Y.S.2d 157, 550 N.E.2d at 411. The court then traced the history and purpose of the Rule. It explained that its “purpose” is “to ensure that the public has the choice of counsel,” and it quoted approvingly from a pair of state and national bar association ethics opinions that set forth the policy later codified in the Rule. Cohen, 551 N.Y.S.2d 157, 550 N.E.2d at 411. Those opinions reasoned: “Clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. An attempt, therefore, to barter in clients, would appear to be inconsistent with the best concepts of our professional status.” Id. (quoting ABA Comm. on Pro. Ethics, Formal Op. 300 (1961) (hereinafter “ABA Formal Opinion 300” or “ABA Formal Op. 300”)) (quoting N.Y. Cnty. Laws.’ Ass'n, Comm. on Pro. Ethics, Op. 109 (1943)). Because the forfeiture-for-competition provision at issue violated Disciplinary Rule 2-108(A), the court held, the clause was “unenforceable in [the] circumstances [of the case] as against public policy.” Id., 551 N.Y.S.2d 157, 550 N.E.2d at 410 ...
In the absence of these cases, the Court would almost certainly reject Gessel's argument that the Non-Compete Clause is categorically unenforceable. For starters, in the absence of a per se rule of unenforceability, such agreements would still be subject to challenge under the reasonableness inquiry that governs non-compete agreements in other professions. See ECF No. 21 (“Pl.’s Opp'n”), at 22-25. Except as applied to lawyers, non-compete clauses in employment contracts are generally enforceable under New York law “to the extent that [they are] reasonable in time and area, necessary to protect the employer's legitimate interests, not harmful to the general public and not unreasonably burdensome to the employee.” Jefferies LLC v. Gegenheimer, 849 F. App'x 16, 18 (2d Cir. 2021) (summary order) (quoting BDO Seidman, 690 N.Y.S.2d 854, 712 N.E.2d at 1223) ...
A per se rule against non-compete clauses for lawyers is all the more difficult to defend given that, under New York law, such clauses may be enforced — subject to the reasonableness analysis set forth above — against other professionals who hold positions of public trust and owe special ethical duties to their clients, such as physicians and certified public accountants. See, e.g., BDO Seidman, 690 N.Y.S.2d 854, 712 N.E.2d at 1222, 1226-27 (partially enforcing a non-compete clause in a certified public accountant's employment agreement); Gelder Med. Grp. v. Webber, 41 N.Y.2d 680, 394 N.Y.S.2d 867, 363 N.E.2d 573, 575 (1977) (enforcing a clause in a physician's employment agreement that prohibited him from competing within a radius of thirty miles of his former partnership for a five-year period after his expulsion) ... Finally, reasoning from first principles, the case for prohibiting non-compete agreements between companies and their in-house lawyers is even weaker than is the case for prohibiting such agreements between law firms and lawyers ... [because] "in the in-house context, there is obviously no need to protect the interests of existing clients who might wish to follow their current lawyer to a new firm, which was a primary concern of the Cohen court ..."
Ipsos-Insight, LLC v. Gessel, 547 F. Supp. 3d 367, 372-375 (S.D.N.Y. 2021).
