Ezel / Ethics Opinions / LACBA
LACBA 1995-03-07

Under California Rule 1-500, may a law partnership agreement impose a reasonable cost on departing partners who compete with the firm in a limited geographical area?

Short answer: The opinion concluded that, following Howard v. Babcock, a law partnership agreement may impose a reasonable cost on departing partners who compete with the firm in a limited geographical area; such an agreement does not violate Rule 1-500. The committee identified the validity of the cost as depending on whether it amounts to reasonable liquidated damages rather than an unenforceable forfeiture, and identified that, absent such an agreement, the partnership relationship is governed by Fracasse, Fox, and Jewel.
Currency note: this opinion is from 1995
Subsequent statutory amendments, court decisions, or later opinions or rule amendments may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Disclaimer: Advisory only. Not binding precedent.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked at the bottom of this page, or PDF in the sidebar) is the authoritative source for any reliance.
View original ethics opinion (PDF)

LACBA Ethics Opinion 480: Restrictions on Lawyer Competition in Partnership Agreements

Short answer: Under former California Rules 1-500, 2-200, and 4-200 as analyzed in 1995 and following Howard v. Babcock, the committee concluded that a law partnership agreement may impose a reasonable cost on departing partners who compete with the firm in a limited geographical area; such a provision does not violate Rule 1-500 and is not void on its face as against public policy. The committee identified the validity of the cost as turning on whether the provision is a reasonable liquidated-damages-style cost rather than an excessive cost categorized as an unenforceable penalty under Business and Professions Code sections 16600 et seq. In the absence of such an agreement, the relationship between the partnership and its former partners is governed by Fracasse v. Brent, Fox v. Abrams, and Jewel v. Boxer.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the Los Angeles County Bar Association's view of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.

Currency note

This opinion was issued in 1995, before California's November 1, 2018 adoption of the renumbered Rules of Professional Conduct. Former Rule 1-500 corresponds to current Rule 5.6 (restrictions on the right to practice); former Rule 2-200 corresponds to current Rule 1.5.1 (fee splitting); former Rule 4-200 corresponds to current Rule 1.5 (fees for legal services). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

View original opinion

Plain-English summary

The committee considered a partnership-agreement provision requiring a withdrawing partner to pay the firm 25% of legal fees collected during the twelve months after withdrawal for services to any individual or entity that had been a partnership client in the prior twelve months.

The committee began with Champion v. Superior Court, which identified three rules that might bear on such provisions: Rule 4-200 (unconscionable fees), Rule 2-200 (fee splitting among lawyers), and Rule 1-500 (restrictions on the right to practice). Champion held the 25% consulting fee unenforceable on unconscionability grounds, identifying that the fee was not compensation for services and was untethered from the partnership's or the withdrawing partner's relationship to the client; it could apply even where the client had earlier terminated the firm for dissatisfaction or where the relationship preceded the firm.

The committee then turned to Howard v. Babcock, which took a different approach. Without citing Champion, Howard concluded that there is no reason to distinguish the legal profession from other professions subject to the general rule that a partnership agreement may bar competition by withdrawing partners in a limited geographical area, citing Business and Professions Code sections 16600 et seq. Howard adopted the analysis of Haight, Brown & Bonesteel v. Superior Court that validity depends on whether the provision is an agreement for liquidated damages or one resulting in a forfeiture.

Quoting Howard, the committee identified the holding: "We hold that an agreement among partners imposing a reasonable cost on departing partners who compete with the law firm in a limited geographical area is not inconsistent with rule 1-500 and is not void on its face as against public policy." The committee identified that an absolute ban on competition would be per se unreasonable and inconsistent with assuring client choice and an attorney's right to practice. The result is a liquidated-damages-style analysis distinguishing reasonable, enforceable costs from excessive costs that become unenforceable penalties.

The committee identified the Howard fact pattern (forfeiture of all withdrawal benefits other than capital return) as not involving payments from former partners to the firm; the court therefore did not address Rule 2-200 or Rule 4-200.

The committee concluded that if a partnership agreement imposes only reasonable costs on the departing partner, the agreement is enforceable under sections 16600 et seq.; under Howard, it appears such an agreement is not subject to fee-splitting or unconscionability analysis (though the committee could not so conclude with certainty from Howard's limited-forfeiture facts). If the agreement does not survive sections 16600 et seq. analysis, the attorneys may face Rules 1-500, 2-200, and 4-200.

In the absence of a partnership agreement imposing only reasonable costs, the relationship between the partnership and former partners is governed by the traditional partnership analysis: Fracasse v. Brent (client's quantum meruit reimbursement to the prior firm), Fox v. Abrams, and Jewel v. Boxer (post-dissolution allocation of fees according to each partner's pre-dissolution interest, with no extra compensation for completing unfinished business absent contrary agreement).

Common questions

Q: Can a California law partnership agreement charge a withdrawing partner for competing with the firm?

A: Per the opinion, yes, where the charge is a reasonable cost. Howard v. Babcock holds that such an agreement, in a limited geographical area, does not violate Rule 1-500 and is not void on its face.

Q: What makes the charge "reasonable" versus an unenforceable penalty?

A: Per the opinion, the analysis tracks a traditional liquidated-damages analysis. The cost must distinguish itself from an excessive forfeiture.

Q: Does the 25% Champion-style consulting fee survive after Howard?

A: Per the opinion, the analysis is now driven by Howard. The committee identified that under Howard the test is reasonableness; the partnership agreement at issue (25% consulting fee) would need to be evaluated under Business and Professions Code sections 16600 et seq. If it does not survive that analysis, the attorneys may face Rules 1-500, 2-200, and 4-200.

Q: What governs absent such an agreement?

A: Per the opinion, the traditional partnership analysis: Fracasse v. Brent's quantum meruit principle, and Fox v. Abrams and Jewel v. Boxer's allocation of fees according to each partner's pre-dissolution interest without extra compensation for completing unfinished business.

Background and rules framework

The opinion interprets former California Rules of Professional Conduct 1-500 (restrictions on the right to practice), 2-200 (fee splitting), and 4-200 (unconscionable fees), with reference to Business and Professions Code sections 16600 et seq. (non-compete provisions generally). The Howard v. Babcock framework treats a partnership-agreement non-competition cost as enforceable when reasonable and as falling outside Rule 1-500's prohibition.

Citations and references

Rules of Professional Conduct (former):

  • California Rule 1-500 (no restriction on right to practice)
  • California Rule 2-200 (fee splitting)
  • California Rule 4-200 (unconscionable fees)

Statutes:

  • California Business and Professions Code sections 16600 et seq.

Cases:

  • Champion v. Superior Court, 201 Cal.App.3d 777 (1988), 25% consulting fee unconscionable
  • Fox v. Abrams, 163 Cal.App.3d 610 (1985), partnership-dissolution fee allocation
  • Fracasse v. Brent, 6 Cal.3d 784 (Cal. 1972), client's absolute right to discharge; quantum meruit
  • Haight, Brown & Bonesteel v. Superior Court, 234 Cal.App.3d 963 (1991), liquidated-damages framework
  • Howard v. Babcock, 6 Cal.4th 409 (Cal. 1993), reasonable-cost provision permissible
  • Jewel v. Boxer, 156 Cal.App.3d 171 (1984), partnership-law allocation of unfinished business

See also

Source