When two law firms negotiating a merger agree not to solicit or hire each other's lawyers for a set period, does that no-poach clause violate Rule 5.6(a)?

Plain-English summary

Two firms exploring a merger signed an agreement that, alongside confidentiality terms, barred each firm from soliciting or hiring the other's partners, associates, or employees during the agreement and for two years after termination, with carve-outs for general-advertising hires and unsolicited applicants who had not participated in the merger discussions. Because the agreement runs one year but can be terminated on ten days' notice, the restriction could last as long as three years. A partner at Firm A wanted to join Firm B but was told Firm B would not talk to her until the restriction expired or Firm A waived it; she had not participated in the merger discussions. The question is whether the provision is prohibited by Rule 5.6(a).

The committee concludes it is not. Rule 5.6(a) bars a lawyer from making or offering a partnership, shareholder, employment, or similar agreement that restricts a lawyer's right to practice after the relationship ends, except for retirement benefits; per 2012 FEO 12 the prohibition protects clients' freedom to choose a lawyer and promotes lawyer mobility and professional autonomy. The committee notes that this is a matter of first impression because prior opinions (2007 FEO 6, 2008 FEO 8, 2012 FEO 12) addressed financial disincentives on departure rather than agreements that restrict mobility directly.

Drawing on Rule 1.17 (sale of a law practice, which permits a 100-mile noncompete) and the financial-disincentive opinions, the committee reasons that the Rules permit some limits on mobility where a reasonable business purpose exists. The provision here is primarily a restriction on the firms' recruiting; to the extent it restricts the lawyers, it is short, defined, and limited to employment with one other firm, leaving the lawyers free to join any other firm, and it does not prevent a client from following a departing lawyer to a firm not subject to the agreement. The committee surmises the clause was meant to foster the trust needed to exchange financial information during merger talks. On those facts the restriction is de minimis, does not impair client choice, and does not violate Rule 5.6(a). The committee expresses no opinion on the provision's legal enforceability.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the committee holds that the specific no-solicitation provision before it does not violate Rule 5.6(a). The opinion ties that conclusion to particular features: the restriction is primarily on the firms' recruiting activity; any effect on individual lawyers is for a relatively short, defined period; it bars only employment with the one other firm, so the lawyers remain free to join any other firm; and it does not inhibit a client from following a departing lawyer to a firm outside the agreement. The committee frames these as the factors that make the restriction de minimis and consistent with client choice.

The opinion is expressly fact-specific. Its end note states that whether such a restriction is reasonable depends on factors including the specific terms, the number of firms involved in the merger negotiations, and the likelihood of employment opportunities with firms not involved. The committee also states it expresses no opinion on the legal enforceability of the provision.

Common questions

Q: Does a no-poach clause between merging firms violate Rule 5.6(a)?

A: Not necessarily. The opinion holds the clause before it does not violate Rule 5.6(a) because it imposes only a de minimis restriction on lawyer mobility, does not impair client choice, and is reasonable under the circumstances.

Q: Why isn't this the kind of restriction on the right to practice that Rule 5.6(a) prohibits?

A: The opinion reasons the provision is primarily a restriction on the firms' recruiting; any effect on individual lawyers is short, defined, and limited to one other firm, and it does not prevent a client from following a departing lawyer to a firm outside the agreement.

Q: What factors make such a clause reasonable?

A: The opinion's end note identifies the specific terms of the restriction, the number of law firms involved in the merger negotiations, and the likelihood of employment opportunities with firms not involved in the negotiations.

Q: Does the opinion say whether the clause is legally enforceable?

A: No. The committee states that no opinion is expressed on the legal enforceability of the provision or other similar provisions.

Background and rules framework

The opinion interprets Rule 5.6(a) (Model Rule 5.6), which prohibits a lawyer from participating in offering or making a partnership, shareholder, operating, employment, or other similar agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement. Comment [1] explains the prohibition protects clients' freedom to choose a lawyer and promotes lawyer mobility and professional autonomy.

The committee situates the question against Rule 1.17 (Model Rule 1.17, sale of a law practice), which permits a seller's covenant not to practice within a 100-mile radius, as evidence that the Rules tolerate some limits on mobility where a reasonable business purpose exists. It reads the Rules as "rules of reason" under Rule 0.2, Scope, comment [1], and relies on its prior departure-compensation opinions (2007 FEO 6, 2008 FEO 8, 2012 FEO 12) for the principle that a restriction affecting mobility may be permissible when supported by a reasonable business purpose.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.6 / NC Rule 5.6(a) and cmt. [1] (restrictions on a lawyer's right to practice)
• Model Rule 1.17 / NC Rule 1.17 (sale of a law practice; 100-mile noncompete)
• NC Rule 0.2, Scope, cmt. [1] (Rules are rules of reason)

Other opinions cited:

• 2007 FEO 6 and 2008 FEO 8: a financial disincentive on a departing lawyer may be permissible if fair and not based solely on lost client billings.
• 2012 FEO 12: Rule 5.6(a) protects client choice and lawyer mobility; financial-disincentive analysis.

See also

• DC Bar Op. 325: Firm-Merger Restriction on Former-Firm Profits
• Colorado Bar Op. 151: Restrictive Covenants and Anti-Poaching Clauses
• ABA Formal Op. 06-444: Restrictive Covenants and Retirement Benefits

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2017-formal-ethics-opinion-5/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

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.

End Notes

• 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.