Law firm’s “no poaching” agreement escapes judicial review, and heads to arbitration
May 07, 2019
Neil Sedaka was right. “Breaking up is hard to do.” It’s no easier for law firms. The saga over the departure of key partners from Quinn Emanuel continues, but this time in arbitration, not the courts.
Justice Saliann Scarpulla was faced with a motion by Quinn Emanuel Urquhart & Sullivan LLP to dismiss the Petition brought by the departing partners to stay arbitration in Selendy v. Quinn Emanuel Urquhart & Sullivan LLP. The Petition squarely tees up the thorny and controversial issue of whether the partnership agreement’s post-withdrawal non-compete provision violates New York Rule of Professional Conduct 5.6. The Partnership Agreement provides, in pertinent part, at section 5.1(a)(iii),
[i]f a partner voluntarily withdraws from [Quinn Emanuel], and if, at any time within eighteen (18) months after the effective date of such withdrawal, he, or any enterprise which he joins, performs any legal services in any case or other matter venued within 100 miles of any office of [Quinn Emanuel] for any client who was a client of [Quinn Emanuel] prior to the effective date of such withdrawal, and for which he or his new enterprise performed no legal services prior to the date of the withdrawing partner first became an employee or partner of [Quinn Emanuel], then the partner so withdrawing shall pay to [Quinn Emanuel], as a reasonable estimate of the harm caused to [Quinn Emanuel] and the other partners by his withdrawal as a result of the loss of fees which would otherwise have been received from [Quinn Emanuel’s] clients taken by him, a sum equal to 10% of the total fees billed by him and/or his new enterprise from that client for services rendered by them, or any of them, during the eighteen (18) month period following the effective date of his withdrawal from the partnership.
Rule 5.6(a) of New York’s Rules of Professional Conduct, adopted word for word from the Model Rules, provides,
A lawyer shall not participate in offering or making:
(a) 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.
Comment 1 to the Rule notes that the purpose is to avoid contractual limitations that might otherwise “limit the freedom of clients to choose their lawyer” and restricts a lawyer’s “professional autonomy.”
The courts in New York have consistently taken a dim view of non-compete clauses contained in law firm partnership agreements (see, e.g., Cohen v. Lord, Day & Lord and Denburg v. Parker, Chapin, Flattau & Klimpl, both of which refused to enforce such provisions), finding the clauses violative of public policy. So does the court make a threshold decision on the issue, or is an arbitrator empowered to do so?
This is precisely what Justice Scarpulla was called upon to decide. That is, not the ultimate issue of the validity of the clause, but rather whether an alleged violation of Rule 5.6 that implicates New York public policy should be decided initially by the court or instead in the arbitration proceeding. Specifically, do the public policy concerns of a non-compete provision contained in a law firm partnership agreement preempt the mandatory arbitration provision in the Partnership Agreement? Relying on the dyad of Hackett v Milbank Tweed cases (see Hackett I here and Hackett II here), Justice Scarpulla concluded that the public policy concerns raised, namely, whether the clause is “prohibitively anticompetitive,” simply do not override the broad arbitration clause and the state’s strong policy favoring arbitration. Accordingly, the Court denied and dismissed the petition, directing judgement be entered accordingly. The parties will now have to proceed to arbitration.
So . . . we’ll have to stay tuned for the motion to confirm or set aside the arbitration award sometime in the future to learn the outcome of the enforceability clause.