by Alex Domingue
Introduction
With 23,241 licensed attorneys in our state,[1] one area of Louisiana law that is particularly regulated is a lawyer’s ability and freedom to practice.[2] With such a high number of attorneys, and consequently, a large number of law firms, the movement of attorneys among firms raises the issue of restrictions between a law firm and an individual attorney. This issue relates to both the business arrangement between the attorney and the firm upon the attorney’s departure and the consequences of financial obligations between the two of them.
Rule 5.6 of Louisiana’s Rules of Professional Conduct regulates this area. The rule provides that a lawyer cannot participate in a business arrangement that restricts another lawyer’s ability to practice after the termination of their relationship.[3] The policy justification behind such a stringent rule is to ensure that lawyers can practice freely and that clients are not restricted in choosing which attorney will represent them.[4] Despite its purpose, the rule can be relaxed, namely, through the exceptions listed in the rule and Louisiana jurisprudence. However, these exceptions, although drafted with good intent, have arguably made the rule even harder to follow.[5]
I. Exceptions Within the Rule
Rule 5.6 provides the first two exceptions.[6] First, the rule does not apply to restrictions placed on an attorney’s ability or freedom to practice law that are incidental to retirement.[7] For example, a solo practitioner close to retirement age and a young attorney may enter into a partnership agreement that gives retirement benefits to the former until his death in exchange for the latter receiving all of the partnership’s assets upon the former’s retirement. This first exception is straightforward; however, the second is not as simple.
The second exception states that the rule’s restrictions do not prohibit any sale of a practice that Rule 1.17 of Louisiana’s Rules of Professional Conduct permits.[8] Rule 1.17 permits the sale of a practice or an area of law practice, including goodwill, as long as the selling lawyer has not been disbarred or permanently resigned from the practice of law in lieu of discipline, and permanently ceases to engage in the practice of law, or has disappeared or died.[9] This exception is more complex because it involves several requirements that must be met in order to appropriately sell a practice.[10]
These exceptions to Rule 5.6 slightly deviate from the rule itself. The courts, however, have provided further deviation from Rule 5.6 by allowing attorneys to enter into agreements that go beyond the exceptions discussed above. However, the jurisprudence is not uniform, complicating the application of Rule 5.6.
II. Exceptions from Case Law
Further exceptions to Rule 5.6 come from Louisiana jurisprudence. In Louisiana, non-competition agreements are generally unenforceable.[11] Despite this prohibition, courts in Louisiana have engaged in a factual analysis to determine whether agreements, provisions, or other business arrangements that indirectly restrict an attorney’s ability to practice effectively violate Rule 5.6.[12] Before examining the jurisprudence that analyzes which types of “restrictive” contracts could be enforceable and ethical, it is important to determine which contracts are indisputably unenforceable.
Accordingly, non-competition agreements in Louisiana are generally unenforceable unless they fit within a recognized exception.[13] This state-law policy was reinforced through the Louisiana First Circuit Court of Appeal’s decision in Nodier v. Ungarino & Eckert, L.L.C., which found that a non-competition agreement between a departing attorney and his old firm was “null and void ab initio” under Rule 5.6 and under Louisiana statutory law.[14]
Other related jurisprudence is not as straightforward. In Minge v. Weeks, the Louisiana Fourth Circuit Court of Appeal refused to uphold an employment agreement that required a departing attorney to pay his former firm 80% of any attorney’s fees derived from clients that he solicited from his former firm.[15] The court found that the fee created a financial disincentive that would restrict the departing attorney’s ability to continue practicing law, violating the “spirit of Rule 5.6.”[16] Following Minge, employment agreements that do not directly restrict competition may violate Rule 5.6 when they impose a financial barrier for a lawyer to continue practicing law after departure from a firm.[17] However, courts in similar cases have reached conclusions that ease the prohibitions found in Minge, thus creating conflicting jurisprudence.
In Roy v. Gravel, a partnership agreement provided that upon dissolution of the partnership, the attorneys working on a specific case would continue to do so, but all the attorneys at the firm would have a financial interest in each of the matters, even if they were not working on that specific case.[18] The plaintiff in Roy did not want to split fees with the other attorneys, as required by the dissolution agreement, and argued that the agreement should be found null and void because it restricted his ability to practice law.[19] The Louisiana Third Circuit Court of Appeal disagreed. In its opinion, the court stated, “A partnership retains its juridical personality or ‘life’ for purposes of liquidation” when a partnership is dissolved, and the ongoing case files remain the property of the partnership until the conclusion of the present contracts, which includes contingency fee contracts.[20] Further, since the clients could still discharge the firm despite its dissolution, the court found no public policy reason to find that the arrangement violated Rule 5.6.[21]
Other Louisiana courts have opined that certain types of agreements requiring repayment of fees are permissible when an individual leaves a law practice. For example, in Warner v. Carimi Law Firm, an employment contract provided that upon leaving the firm and taking clients with him, an exiting attorney must repay any expenses that the firm had paid in respect to that client and his litigation prior to the attorney’s departure.[22] The Louisiana Fifth Circuit Court of Appeal upheld the firm’s contract under the reasoning that attorneys must consider the financial consequences of their actions.[23] The court also stated that a client’s former attorney should not be shouldered with the burden of financing litigation, but rather the current attorney should take that responsibility.[24] The Fourth Circuit reached a similar holding in Fox v. Heisler, finding that fee-sharing agreements may continue after an attorney’s departure from a firm when the client’s choice is not limited.[25] When the plaintiff attorney in Fox left the defendant’s firm, he orally committed to share 50% of a contingency fee with his former partner, the defendant in the case.[26] The plaintiff later argued that this fee sharing arrangement was unethical under Rule 5.6 because the two attorneys were no longer working for the same firm, and it would thereby impede on his ability to practice law freely.[27] The court disagreed and upheld the arrangement because it did not affect the client’s ability to choose his representation.[28] These two cases lead to the following conclusions: (1) a firm requiring a departing attorney to reimburse past costs upon the attorney and client’s exit from the firm may be an enforceable agreement and (2) unless there is a public policy reason—notably a strain on a client’s ability to choose his representation—similar contractual terms may be enforceable.
Some courts have even permitted partners to restrict compensation of withdrawing and terminated partners to their capital accounts at the firm.[29] In Kops v. Lee, the Fourth Circuit declined to render a partnership agreement unenforceable when the departing attorney believed that it restricted his ability to practice law because it burdened him financially.[30] The court held that because the provisions of the partnership agreement were severable, even if some portions of the agreement were an unenforceable non-competition provision, the portion that allowed the partnership to pay the departing attorney only his capital account was still enforceable.[31] Similarly, in Wagner & Bagot v. Gleason, the Fourth Circuit held that a partnership agreement providing that a departing attorney was entitled only to funds in his capital account and the total of any contributions made by him was enforceable.[32] These rulings from the Fourth Circuit mean that it may be permissible to pay a departing attorney the balance of his capital account, rather than the value of his ownership interest in the total assets of the firm.
Finally, in drafting partnership agreements, courts have generally allowed leniency and deferred to the intentions of the parties when it comes to the “payouts” for an attorney when the attorney leaves.[33] For example, in Hoffman v. Lemle & Kelleher, the partnership agreement entered into by the firm and the departing attorney provided that the attorney would be entitled to his share of profits for the year of his withdrawal.[34] The departing attorney[?] objected to the agreement upon his exit, but the court gave deference to the fact that he had been involved in the drafting of the partnership agreement.[35] The court ultimately held that the provision affording only profits upon exit was not contrary to Rule 5.6 due to the nature of the provision and the negotiation engaged in by the departing attorney.[36]
This conflicting jurisprudence demonstrates that it is uncertain how the Louisiana appellate courts will rule on these types of agreements, despite the unambiguous language within Rule 5.6. Importantly, there is no applicable decision from the Louisiana Supreme Court. At this point in time, it is unclear whether it is possible to enter into enforceable agreements restricting a lawyer’s ability to practice law. However, it is clear that lawyers must approach the drafting of such agreements with extreme caution
Conclusion
Some narrowly tailored contractual financial provisions that protect law firms and their interests in their clients and investments may be permissible; however, these provisions and contracts may not violate the public policy created by the non-competition statute generally and demonstrated more specifically by Rule 5.6. For example, these agreements may not make it difficult for existing clients to exit the attorney-client relationship and find other representation. The case law is very limited on this issue, but the most important rule that can be derived from the jurisprudence is that the drafting attorneys must pay attention to the actual practical effects of the agreement to ensure they are not violating the policies mentioned above.
[1] E-mail from Kim Lane Vitale, Member Records Coordinator, Louisiana State Bar Association, to author (Dec. 9, 2021, 6:43 PM CST) (on file with author).
[2] See La. Rules of Pro. Conduct r. 5.6.
[3] Id.
[4] See Minge v. Weeks, 629 So. 2d 545, 547 (La. Ct. App. 4th Cir. 1993); see also Regional Urology, L.L.C. v. Price, 966 So. 2d 1087, 1095 (La. Ct. App. 2nd Cir. 2007) (Brown, C.J., dissenting) (noting that the rule is a matter of public policy, which facilitates a client’s trust in the client’s lawyer).
[5] In the early 2000s, there was a widespread redraft to the Louisiana Rules of Professional Conduct. Although Rule 5.6 was amended alongside the majority of the other rules, its substance remained the same. Thus, the case law cited in the publication is still applicable and explanatory of the situation involving this rule.
[6] La. Rules of Pro. Conduct r. 5.6.
[7] Id.
[8] Id.
[9] Id. r. 1.17.
[10] These requirements include the following:
(a) The selling lawyer has not been disbarred or permanently resigned from the practice of law in lieu of discipline, and permanently ceases to engage in the practice of law, or has disappeared or died;
(b) The entire law practice, or area of law practice, is sold to another lawyer admitted and currently eligible to practice in this jurisdiction;
(c) At least ninety (90) days in advance of the sale, actual notice, either by in-person consultation confirmed in writing, or by U.S. mail, is given to each of the clients of the law practice being sold, indicating:
(1) the proposed sale of the law practice;
(2) the identity and background of the lawyer or law firm that proposes to acquire the law practice, including principal office address, number of years in practice in Louisiana, and disclosure of any prior formal discipline for professional misconduct, as well as the status of any disciplinary proceeding currently pending in which the lawyer or law firm is a named respondent;
(3) the client’s right to choose and retain other counsel and/or take possession of the client’s files(s); and
(4) the fact that the client’s consent to the transfer of the client’s file(s) will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of the notice.
(d) In addition to the advance notice to each client described above, at least thirty (30) days in advance of the sale, an announcement or notice of the sale of the law practice, including the proposed date of the sale, the name of the selling lawyer, the name(s) of the purchasing lawyer(s) or law firm(s), and the address and telephone number where any person entitled to do so may object to the proposed sale and/or take possession of a client file, shall also be published: 1) in the Louisiana Bar Journal; and 2) once a week for at least two (2) consecutive weeks in a newspaper of general circulation in the city or town (or parish if located outside a city or town) in which the principal office of the law practice is located.
La. Rules of Pro. Conduct r. 1.17 (2022).
[11]La. Rev. Stat. § 23:921 (2021).
[12] See Kops v. Lee, 871 So. 2d 1187 (La. Ct. App. 4th Cir. 2004).
[13] Id.
[14] Nodier v. Ungarino & Eckert, L.L.C., No. 2006-1461, 2007 WL 1300805, at *1 (La. Ct. App. 4th Cir. May 4, 2007).
[15] Minge v. Weeks, 629 So. 2d 545, 546–47 (La. Ct. App. 4th Cir. 1993).
[16] Id. at 547.
[17] See id.
[18] Roy v. Gravel, 570 So. 2d 1175, 1178–79 (La. Ct. App. 3d Cir. 1991).
[19] Id. at 1183.
[20] Id. at 1184.
[21] See id.
[22] Warner v. Carimi Law Firm, 678 So. 2d 561 (La. Ct. App. 5th Cir. 1996).
[23] Id.
[24] Id.
[25] Fox v. Heisler, 874 So. 2d 932 (La. Ct. App. 4th Cir. 2004).
[26] Id. at 935.
[27] Id.
[28] Id. at 938–39; see also Lawrence v. Wynne, 598 So. 2d 1293, 1294–95 (La. Ct. App. 4th Cir. 1992) (holding that a contract between two partners regarding the division of fees between the two parties survived after the termination of the partnership and that a former partner was still entitled to his portion of the fees from his partner’s clients).
[29] See Kops v. Lee, 871 So. 2d 1187 (La. Ct. App. 4th Cir. 2004); see also Wagner & Bagot v. Gleason, 840 So. 2d 31 (La. Ct. App. 4th Cir. 2003).
[30] Kops, 871 So. 2d at 1193–95.
[31] Id. at 1195.
[32] Wagner, 840 So. 2d at 35–36.
[33] Hoffman v. Lemle & Kelleher, 824 So. 2d 1253 (La. Ct. App. 4th Cir. 2002).
[34] Id. at 1255.
[35] Id. at 1258.
[36] Id. at 1259.