OPINION 96-5
(May 1996)

Facts

Inquirer is an attorney who works as a manager of technical compliance services for a non-law firm employer (employer or firm). In this position, Inquirer's responsibilities include designing, drafting, reviewing and implementing qualified and non-qualified retirement plans, health and welfare plans and 403(b) annuity programs; performing operational and compliance reviews of employee benefit plans for compliance with IRS, DOL and PBGC requirements and developing and implementing corrective action clans; assisting clients in responding to IRS and DOL examinations of their benefit plans; designing employee benefit plan administrative manuals and compliance calendars; preparing employee communications including summary plan descriptions and employee notices; preparing determination letter applications for plan amendments and discussing proposed plan changes with the IRS; preparing government forms, including Form 550 annual return/reports; providing research and technical advice services concerning employee benefit, human resource, tax, audit and compensation issues; reviewing and preparing administrative forms; and performing participation, coverage and non-discrimination testing.

Inquirer's employer has asked that a number of employees, including the Inquirer and other attorneys, sign a letter of employment. Among other things, the letter of employment includes a non-competition clause, which provides as follows:

If you should leave the Firm, you agree that during the two year period following your departure, you will not directly or indirectly solicit, agree to perform or perform services of any type that the Firm can render (Services) for any person or entity who paid or engaged the Firm for Services, or who received the benefit of Firm Services, or with whom you had any substantial dealing while employed by the Firm. However, this restriction with respect to Services applies only if such Services were rendered by you or an office or unit of the Firm in which you worked or over which you had supervisory authority. You also may not assist any employer or other third party in the foregoing.

Should you violate this non-competition agreement, you agree that in addition to any other legal and equitable remedies the Firm may have, you will pay to the Firm an amount equal to twenty-five percent of the gross fees paid within thirty days after each fee payment is received by you or any such employer or third party. Such percentage shall be paid in respect of all services rendered to such person or entity during a period of five years commencing with the date of acceptance of such person or entity as a client.

With respect to non-competition, it is not relevant that a client desires or prefers someone other than the Firm to render the Services or that the client is also served by you or any person or entity with which you become associated.

The letter of employment also provides that if an employee leaves the Firm, the employee may not, for a period of two years, directly or indirectly solicit or retain, or assist others in soliciting or retaining, current or former Firm employees to perform services of any type that the Firm can render. The letter provides that if an employee solicits or retains a current or former employee, the employee will pay to the Firm an amount equal to the annual compensation the individual received over his or her last twelve months at the Firm.

Finally, the letter of employment provides that the employee will provide for inspection of all books, billing records and documents requested by the Firm to assist it in determining the extent of the obligations incurred under the letter of employment.

Certain employees who are attorneys have questioned the employer concerning the applicability of the letter of employment to their future activity if engaged in law practice as individual practitioners or with law firms. The employer has responded that because the Firm is precluded from the practice of law, no Firm partner or employee presently renders legal services to clients of the Firm. Thus, the employer has stated that if an attorney leaves the Firm and renders legal services to clients of the Firm which can only be rendered by attorneys, the non-compete clause would not apply. However, with respect to services that can be rendered both by the Firm and by attorneys, particularly if the employee's intent is to divert business away from the Firm, the employer has stated the non-compete clause will apply and be enforced.

Inquirer has informed the Committee that being an attorney is one of the job requirements for his position and that in his job, he constantly deals with legal issues. Further, when proposals for services are presented to clients or prospective clients of the Firm, staff profiles always refer to Inquirer as an attorney.

Inquirer has asked the following questions:

  1. Would the provision regarding for inspection of documents to determine the extent of the obligations of an employee under the letter of employment violate the obligation to uphold the attorney-client privilege?

  2. Would the non-competition provisions of the letter of employment conflict with the public policy prohibition on non-competition agreements applicable to practicing attorneys in Pennsylvania?

  3. Would the terms and conditions stated in the letter of employment cause an attorney who signs the letter to violate any other rules governing professional responsibility or ethics?

Discussion

It is the opinion of the Committee that the letter of employment violates or potentially violates several of the Rules of Professional Conduct, including Rule 1.6, pertaining to confidentiality of information, Rule 5.4, pertaining to the professional independence of a lawyer, and Rule 5.6, pertaining to restrictions on the right to practice.

Rule 5.6 provides that a lawyer shall not participate in offering or making an employment or other type of agreement that restricts the right of a lawyer to practice after termination of the relationship. The comment to Rule 5.6 makes clear that the purpose of this rule is both to maintain lawyers' professional autonomy and to maintain clients' freedom to choose a lawyer.

This Committee has previously noted that restrictive covenants in the legal profession are prohibited. See Guidance Opinion 89-3; Guidance Opinion 87-24. Likewise, opinions of the American Bar Association (ABA) for over thirty years have found restrictive covenants to violate the applicable rules of ethics including, most recently, Rule 5.6. See, e.g., Formal Opinion 94-381 (May 9, 1994); Informal Opinion 1301 (Mar. 25, 1975); Informal Opinion 1171 (Feb. 4, 1971); Informal Opinion 1072 (Oct. 8, 1968); Formal Opinion 300 (Aug. 7, 1961). Although none of these opinions addresses the exact factual situation which is presented here, the ABA opinions do make clear that the ethical prohibition on restrictions on the right to practice applies not only to employment agreements between lawyers, but also to employment agreements between a lawyer and a non-law firm employer.

The most recent ABA opinion on restrictive covenants, Formal Opinion 94-381, considered whether an employment agreement which prohibited corporate counsel from representing anyone against the corporation in the future would be impermissible under Rule 5.6. The ABA concluded that it would, reasoning that to restrict a lawyer from ever representing one with interests adverse to the corporation would impermissibly restrain a lawyer from engaging in his profession. Moreover, it would restrict the public from access to lawyers who, by virtue of their background and experience, might be the best available lawyers to represent them. The ABA noted that any concern about the corporation's confidentiality interests would be sufficiently addressed by Rule 1.9 and, therefore, any further restriction would unnecessarily compromise a strong policy in favor of providing the public with a free choice of counsel.

Turning to the facts presented here, the letter of employment which Inquirer's employer has asked him to sign provides that the employee will not perform services of any type that the Firm can render to persons or entities who have engaged the Firm for services. Based on the description given by Inquirer of his responsibilities, it is clear that certain services which the Firm can render are also services which can be, and often are, rendered by an attorney. Thus, on its face, the letter of employment, as drafted, would restrict Inquirer from rendering legal services to persons who are clients of the Firm. Therefore, the provision is a restriction on Inquirer's right to practice after termination of his relationship with the Firm and, as such, violates Rule 5.6. 1

The provision of the letter of employment which provides that an employee may not directly or indirectly solicit or retain current or former employees also violates Rule 5.6 to the extent that it applies to employees of the Firm who are attorneys. By restricting the right of association, this provision restricts the right of a lawyer to practice. See ABA Informal Opinion 1417.

In addition, the provision regarding payment of 25% of the gross fees earned by rendering services to any person who previously engaged the firm for services violates Rule 5.4. This Rule provides that a lawyer shall not share fees with a nonlawyer, subject to a number of exceptions that are not applicable here. Since the Firm is not a lawyer or a law firm, Inquirer would violate Rule 5.4 were he to pay a percentage of fees he may earn as an attorney to the Firm.

Finally, the letter of employment potentially violates Rule 1.6. This Rule provides in relevant part that a lawyer shall not reveal information relating to representation of a client unless the client consents after consultation. If Inquirer were to leave the Firm to engage in the practice of law and a dispute arose under the non-competition provision, Inquirer may be required under the letter of employment to provide the Firm access to books, billing records and documents relating to his clients. Unless the clients were to consent after consultation, this would violate Rule 1.6.

Notes


1. Inquirer has asked for guidance from the Committee regarding whether the non-competition provision of the letter of employment is impermissible not only if he leaves the Firm to go to a law firm or into private practice, but if he leaves the Firm to go to another company to do what he is presently doing. Based on the information available to the Committee, it is not in a position to opine as to whether Inquirer would be engaged in the practice of law if he went to another company to do what he does for his present employer. However, because the non-competition provision of the letter of employment would clearly apply were Inquirer to leave the Firm to go to a law firm or into private practice, this provision, as drafted, restricts the right to practice law in violation of Rule 5.6.

The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.