The Ethics Of Departure Penalties

The District of Columbia Court of Appeals affirmed a judgment in favor of an attorney against her former firm and, notably, provides guidance on departure restrictions.

On the facts here, a forfeiture of half an attorney’s equity was prohibited by D.C. Rule 5.6(a)

This appeal arises out of a dispute over contractual terms in a law firm’s operating agreement governing the payout to an equity partner leaving the firm. Marsha Gentner sued Jacobson Holman, PLLC (“the firm”), for breach of contract because it refused to pay the equity interest she believed was due to her under the firm’s operating agreement (actually a collection of agreements). Specifically, she claimed that the firm, where she had worked for three decades, had improperly calculated her equity share by failing to rely on the last annual financial statement issued prior to her notice of withdrawal as required by the operating agreement. She also asserted that a provision in the operating agreement which forced her to forfeit half of her equity interest if she took any clients from the firm violated D.C. Rule of Professional Conduct 5.6(a) and was thus unenforceable. The Superior Court concluded that Ms. Gentner was entitled to judgment as a matter of law, both as to the payout of her equity share under the operating agreement and as to the enforceability of the forfeiture provision. The firm appealed both components of the trial court’s ruling. We affirm and publish this opinion to ensure that the members of the District of Columbia Bar understand the strictures of Rule 5.6(a). 

Plaintiff joined the predecessor firm as an associate in 1983

In March 2013, Ms. Gentner and the other equity members of the firm received a memo from the two named members, Harvey Jacobson and John C. Holman, announcing their intent to dissolve the firm as it was currently comprised and create a new entity. The equity members were given a choice to leave the firm or join the new entity under new terms that Ms. Gentner deemed unfavorable to her.

After departure

Upon learning that the firm not only refused to pay her any amount of her equity interest, but also alleged she owed the firm money, Ms. Gentner sued for breach of contract in Superior Court.

She was granted summary judgment.

As to ethics rules

Preliminarily, we consider whether Rule 5.6(a) bars both agreements that place express restrictions on the practice of law and agreements that have that effect, and whether any such restrictions need be absolute or something less.

…we hold that an implied, partial restriction on the practice of law, in the form of imposing a substantial financial penalty for representing clients previously represented by the firm, is invalid under Rule 5.6(a), and we turn our attention to considering whether the forfeiture provision in Paragraph 1 functions as a substantial penalty. We conclude that it does. 

Substantiality

Whatever the outer limit is for a “substantial penalty,” we conclude a 50 percent forfeiture of a departing partner’s earned equity interest for taking even one client with them falls well within its bounds.

Our conclusion that Paragraph 1 violates Rule 5.6(a) necessarily compels a conclusion that this provision is unenforceable as against public policy, and we reject the firm’s argument that we must separately analyze enforceability of this provision. The firm relies on cases where, in other contexts not concerning lawyers, we have addressed the validity of restrictive covenants based on their reasonableness according to certain factors. But we see no need to assess the reasonableness of Paragraph 1 under these factors because Rule 5.6(a) itself is a statement of policy approved by this court and it prohibits agreements such as the one at issue here

Associate Judge Easterly authored the opinion joined by Associate Judge McLeese and Senior Judge Washington. (Mike Frisch)