May a Nebraska law firm require a departing associate to pay liquidated damages for continuing to practice in the same county?

Plain-English summary

A law firm planned to hire an associate and expected to make a significant financial investment in the new lawyer. It proposed an employment clause requiring liquidated damages if the associate later left and continued practicing in the same county.

Rule 5.6 prohibited employment and similar agreements restricting a lawyer's right to practice after the relationship ended, apart from the rule's retirement-benefit exception. The committee considered whether a financial penalty fell within that restriction even though it did not expressly forbid competition.

The opinion followed the majority view that competition-triggered financial disincentives can have the same practical effect as a noncompete. They may force a departing lawyer to choose between compensation and continued service to clients who want to follow the lawyer, interfering with client choice of counsel.

The committee therefore read Rule 5.6 to cover both direct noncompetition clauses and provisions imposing a financial penalty for competition. The proposed liquidated-damages term was unethical unless expressly permitted by the rule.

In practice

The opinion's analysis turns on the trigger for the payment. A charge imposed because the departing lawyer competes operates as a practice restriction even if the agreement does not expressly prohibit the new practice.

Common questions

Q: Is a liquidated-damages clause different from an express noncompete?

A: Not for this Rule 5.6 analysis when payment is triggered by competition. The opinion treats the financial disincentive as an indirect restraint.

Q: Why does client choice matter?

A: The cited authority explains that a financial penalty may push a lawyer to decline clients who want to continue the relationship after departure.

Q: Does Rule 5.6 permit any post-departure restriction?

A: The rule quoted in the opinion excepted an agreement concerning retirement benefits.

Q: Did the firm's investment in the associate change the result?

A: No. Although that investment was part of the facts, the committee still found the competition-triggered damages prohibited.

Background and rules framework

Rule 5.6 protected lawyer mobility and client choice by prohibiting partnership, shareholder, operating, employment, and similar agreements that restrict post-termination practice, subject to its stated exception.

Citations and references

Nebraska Rules of Professional Conduct:

• Neb. R. Prof. C. § 3-505.6

Cases:

• Jacob v. Norris, McLaughlin & Marcus, 307 A2d 142 (NJ SupCt 1992) (citation as printed in the opinion)

Other opinions cited:

• South Dakota Ethics Opinion 94-2

See also

• ABA Formal Op. 06-444: Restrictive covenants and retirement benefits
• Kentucky Ethics Op. E-326: Noncompete tied to withdrawal payments
• Washington Ethics Op. 2118: Lawyer employment noncompete

Source

• Landing page: Nebraska lawyer ethics opinions archive
• Original PDF: Nebraska Ethics Advisory Opinion 06-09

Original opinion text

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

Nebraska Ethics Advisory Opinion for Lawyers No. 06-09

ETHICAL ISSUES

IS IT ETHICAL FOR A LAW FIRM TO INCLUDE A PROVISION IN AN ATTORNEY'S EMPLOYMENT OR OTHER AGREEMENT WHICH PROVIDES FOR LIQUIDATED DAMAGES IF THE ATTORNEY LEAVES THE FIRM AND THEN COMPETES WITH THE LAW FIRM?

STATEMENT OF FACTS

A law firm intends to hire an associate. It expects to make a significant financial investment in this associate and would like to have a liquidated damages clause in the associate's employment contract. The clause would require the associate to pay damages to the firm if the associate left the firm and continued to practice in the same county.

NEBRASKA RULES OF PROFESSIONAL CONDUCT

RULE 5.6 RESTRICTIONS ON RIGHT TO PRACTICE A lawyer shall not participate in offering or making:

(a) a partnership, shareholders, 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; or

(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a client controversy.

DISCUSSION

It is clear from Rule 5.6 that a practice agreement among lawyers cannot restrict a departing lawyer's right to compete except as provided for specifically in that Rule. The issue then is whether a provision which provides for liquidated damages upon termination of employment or association also violates Rule 5.6. According to the ABA Manual on Lawyer's Professional Conduct (p. 51:1205), the answer in most jurisdictions is that a law firm cannot condition the payment of or demand for money on whether a withdrawing lawyer competes with the firm.

“Contractual provisions that impose a financial disincentive on withdrawing lawyers if they choose to go into competition with the firm do not, strictly speaking, prohibit the lawyers from such competition. But indirectly they may have much the same effect as a restrictive covenant because, facing forfeiture of compensation that otherwise would rightfully be theirs, the lawyers may feel financially obligated to decline representation of any of the firm's clients who want to leave with them." ABA Manual on Lawyer's Professional Conduct, p 51:1205

Typical of the rulings or opinions of most states is that of Jacob v Norris, McLaughlin & Marcus, 307 A2d 142 (NJ SupCt 1992):

“By forcing lawyers to choose between compensation, and continued service to their clients, financial-disincentive provisions may encourage lawyers to give up their clients, thereby interfering with the lawyer-client relationship and, more importantly, with clients' free choice of counsel.
Those provisions thus cause indirectly the same objectionable restraints on the free practice of law as more direct restrictive covenants.

With the exception of Maine (which did not adopt Rule 5.6) and California (where the Supreme Court has allowed a reasonable financial disincentive provision), all states which have considered the matter have rejected the imposition of financial penalties in the case of a withdrawing lawyer's competition. As an example, see South Dakota Ethics Opinion 94-2. The Advisory Committee believes, like the overwhelming majority of states, that Rule 5.6 applies not only to specific restrictions on non-competition, but also to provisions which provide for financial penalties for competition.

CONCLUSION

Except as expressly permitted by Rule 5.6, it is not ethical for a law firm to include a provision in an attorney's employment or other agreement which provides for liquidated damages if the attorney leaves the firm and then competes with the law firm.

1997-4/499414