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The Limited Case Where NY Lawyers Can Be Held to a Non-Compete


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11/6/2020
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Yes, the general rule in NY is that lawyers can't be held to a non-compete. But the Court of Appeals has acknowledged a rare exception to that rule.

Why, Generally Speaking, Lawyers Can't Be Held to a Non-Compete in New York

Rule 5.6(a)(1) of the New York Rules of Professional Responsibility, like the ABA Model Rule, states, in pertinent part, as follows:

“[A] lawyer shall not participate in offering or making a partnership…agreement that restricts the right of a lawyer to practice after termination of the relationship[.]”

The comment to Rule 5.6(a)(1) explains further that the underlying rationale for the Rule, stating

“[A]n agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer.”

Simply put, the Rule disallows a post-termination agreement for a lawyer that will impinge on his/her ability to practice law because it comes up against the strong public policy favoring a client's right to choose the counsel they want.

To that end, New York's Court of Appeals, while acknowleding the legitimate business interest that a law firm had in ensuring its own economic survival, nevertheless held invalid a clause in a law partnership agreement that forced departing partners that compete against the firm to forfeit their share of earned, but still uncollected, revenue because

“[The] significant monetary penalty [the provision] exacts, if the withdrawing partner practices competitively with the former firm, constitutes an impermissible restriction on the practice of law.” Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 550 N.E.2d 410, 411 (1989).

The Limited Exception Where NY's Courts Have Allowed Non-Competes for Lawyers

As with nearly all general rules, there are, of course, some exceptions. And this one is no different.

In Hackett v. Milbank, Tweed, 86 N.Y.2d 146, 654 N.E.2d 95, 630 N.Y.S.2d 274 (1995) the Court of Appeals revisited the issue of non-competes as they pertain to lawyers, but in that instance, Unlike the clauses disapproved in Cohen and in Denburg, the Milbank, Tweed supplemental payment provision is not inevitably anticompetitive on its face. Where the Parker Chapin clause clearly discriminated between partners departing for private practice and those, for example, entering academia or government service, section 15.4 makes no such distinction: the reduction in supplemental payments applies to the withdrawing partner's earned income from any source.a provision that limited supplemental payments made to departing partners - with no distinction made between those partners that were competing, or simply leaving the practice of law altogether.

In upholding this provision, the Court of Appeals stated as follows:

"Unlike the clauses disapproved in Cohen and in Denburg, the Milbank, Tweed supplemental payment provision is not inevitably anticompetitive on its face. Where the Parker Chapin clause clearly discriminated between partners departing for private practice and those, for example, entering academia or government service, section 15.4 makes no such distinction: the reduction in supplemental payments applies to the withdrawing partner's earned income from any source. Where the Parker Chapin clause exempting lower-paid partners from the agreement was applicable only to those lower paid partners who did not subsequently do work for former Parker Chapin clients, the Milbank, Tweed $100,000 cutoff applies to all withdrawing partners and no financial disincentive specifically devolves on partners withdrawing to compete with Milbank, Tweed in contrast to all other withdrawing partners."

The Takeaway

In short, the Court of Appeals held that under New York law, a provision which causes departing partners to forfeit monies, but is competition-neutral, i.e., is not specifically tied to whether they go on to compete against the law firm or not, will be upheld; on the other hand, to the extent it is tied to competition, such provisions will continue to be voided as against public policy.



Category: Non-Compete & Employment Agreements

Jonathan Cooper
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Non-Compete, Trade Secret and School Negligence Lawyer

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