May a New York law firm's partnership or employment agreement impose forfeitable bonuses, conditional loan forgiveness, deferred compensation, or capital deductions that, in effect, discourage a departing lawyer from competing with the firm?

Plain-English summary

The committee builds the opinion on the Court of Appeals decisions in Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989), and Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375 (1993). Cohen voided a provision requiring withdrawing partners to relinquish their share of revenues earned but uncollected if they worked in private practice or as in-house counsel in jurisdictions where the firm had offices. Denburg voided a provision requiring withdrawing partners to pay specified sums to the partnership on demand, but only for lawyers continuing in private practice. The opinion reads Cohen and Denburg as establishing that financial disincentives, not just outright prohibitions, are objectionable because they interfere with client choice of counsel: a clause penalizing competition could "functionally and realistically discourage" a withdrawing partner from serving clients who would prefer that lawyer.

The committee draws from Denburg the critical analytical point: the defining question is not the firm's intent in adopting the provision but whether "its effect is to improperly deter competition and thus impinge upon clients' choice of counsel." The committee treats Matter of Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146 (1995), as confirmation that post-Cohen and post-Denburg firm devices designed to avoid payments to competing departing partners remain within Rule 5.6's reach.

The committee anchors the analysis in Rule 5.6(a)(1), which bars partnership, shareholder, operating, employment, or similar agreements that restrict a lawyer's right to practice after termination, except agreements concerning retirement benefits. The committee cites N.Y. State Bar Op. 1151 (2018) for the dual purpose of Rule 5.6: preserving a lawyer's right to practice and ensuring a client's freedom to select counsel. The committee draws on Comment 1E to Rule 5.6 (recently revised), which provides that agreements "ordinarily violate this rule if they . . . (iv) impose more severe financial penalties on departing lawyers who intend to compete, actually compete, are suspected of competing, or are presumed to be competing with the firm than are imposed on departed lawyers who do not compete."

The committee builds on its prior Formal Op. 2023-1, which reached restrictions during the Pre-Notice and Notice periods, even though Rule 5.6 by its terms applies after termination. The committee restates Formal Op. 2023-1's general framing that contractual restrictions which directly or indirectly prevent or financially discourage a lawyer from moving to a competing firm, or impede a client's ability to continue with the departing lawyer, are impermissible.

The committee identifies a two-part test for evaluating particular provisions: (i) would an objective third party with knowledge of the relevant facts conclude that the terms inhibit partners from competing; or (ii) has the firm applied the terms to penalize partners who left to compete. Provisions that by their text apply differently to competing departures fail. Provisions that apply uniformly to all partners regardless of departure or its circumstances generally do not fail. But facial neutrality does not save a provision whose actual effect is to deter competition.

The opinion provides specific application. A loan forgiveness or capital-return provision conditioned on a lawyer remaining through a certain date, applied irrespective of where the lawyer goes next, is not problematic. The same provision becomes problematic if the firm exercises discretion based on the lawyer's destination: if the firm tends to forgive when the lawyer leaves for in-house or government work but tends to enforce when the lawyer leaves for a competitor, that pattern violates Rule 5.6(a). The committee uses the same analysis for deferred compensation subject to firm discretion at year's end.

The opinion's conclusion: provisions that, in effect, prevent or delay attorney departure when the attorney intends to compete are impermissible. The committee adds that if there are other, permissible reasons for imposing the financial penalty on a departing partner who happens to join a competitor, the restriction is not impermissible.

In practice

Under this opinion, a New York firm may include partnership or employment provisions that condition bonuses, deferred compensation, loan forgiveness, or capital return on a lawyer remaining through a specified date, provided the firm applies those terms uniformly to all departures regardless of where the departing lawyer goes. Per the opinion, terms expressly differentiating among destinations fail Rule 5.6(a). Facially neutral discretionary terms also fail if the firm's actual pattern of exercise treats competitive departures more harshly than non-competitive ones. The committee identifies legitimate non-competitive bases for discretionary forgiveness, including fulfillment of fiduciary duties to the firm or departure for health or personal reasons.

Common questions

Q: Can a firm use a forgivable loan that converts to repayment if the lawyer leaves before a stay date?

A: The opinion concludes yes, if the loan terms apply uniformly to all early departures and the firm's discretion to forgive is exercised on bases unrelated to where the lawyer goes next (such as fulfillment of fiduciary duties, health, or personal circumstances). Per the opinion, the same forgivable loan becomes impermissible if the firm forgives departures to in-house or government but not departures to competitors.

Q: Does intent matter, or only effect?

A: Per the opinion, the defining question is effect, not intent. The committee draws from Denburg the proposition that even firms with no anti-competitive intent fall within Rule 5.6 if the effect of the provision is to deter competition. The committee quotes Hackett v. Milbank Tweed for the proposition that the absence of intent does not save a provision whose effect is to improperly deter competition.

Q: Does the prohibition apply only to partners, or also to associates and in-house counsel?

A: Per the opinion (footnote 3), the analysis applies equally to non-partner law firm lawyers and to restrictions imposed by entities on in-house counsel.

Q: What does the recently-revised Comment 1E to Rule 5.6 say?

A: Per the opinion, Comment 1E identifies agreements that "ordinarily violate this rule" if they impose more severe financial penalties on departing lawyers who intend to compete, actually compete, are suspected of competing, or are presumed to be competing than are imposed on those who do not compete. The committee notes that New York courts adopt the Rules but not the Comments, citing Rules Preamble [13]; the Comments are guides to interpretation.

Q: Are forfeiture provisions for fiduciary-duty breaches permissible?

A: Per the opinion, yes when the firm's basis for forfeiture is the breach of fiduciary duty, not the lawyer's intent to compete. If the same forfeiture mechanism is in practice applied based on whether the lawyer left to compete, the provision becomes impermissible.

Background and rules framework

The opinion interprets New York Rule 5.6(a)(1) (no partnership, shareholder, operating, employment, or similar agreement restricting the right to practice after termination, except agreements concerning retirement benefits), informed by Rule 5.6 Comments 1 and 1E. The opinion builds on Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989), and Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375 (1993), and on Matter of Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146 (1995). The committee builds on its prior NYC Bar Formal Op. 2023-1 on the Notice and Pre-Notice periods.

Citations and references

Rules of Professional Conduct:

• N.Y. RPC 5.6(a)(1) and Comments 1, 1E

Cases:

• Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989), forfeiture of uncollected revenue for competing departures violates predecessor rule.
• Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375 (1993), facial neutrality unavailing when effect deters competition.
• Matter of Hackett v. Milbank, Tweed, Hadley & McCloy, 86 N.Y.2d 146 (1995), post-Cohen/Denburg devices remain within Rule 5.6's reach.

Other opinions cited:

• New York State Bar Op. 1151 (2018): purposes of Rule 5.6(a)(1).
• NYC Bar Formal Op. 2023-1: Notice and Pre-Notice period restrictions on departing lawyers.

See also

• ISBA Op. 23-02: Shareholder Agreement Perpetual Fee-Share
• NYC Bar Op. 2025-4: Contractual Limits on Attorney Discretion
• NY State Bar Op. 1293: Conflict Analysis for Per Diem Attorney

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-2025-3-permissibility-of-financial-disincentives-associated-with-a-lawyers-departure-from-a-law-firm/
• Original PDF: https://www.nycbar.org/wp-content/uploads/2025/08/20221511-OpinionForgivableLoansDeferredCompensation.pdf