CI-1145

April 16, 1986

SYLLABUS

It is unethical for lawyers to enter into contracts of employment which contain provisions that, upon the termination of employment the former employee is obligated to pay "liquidated damages" to the former employer to recover the "goodwill" of clients who chose to continue a relationship with the former employee.

References: MCPR Canon 2, DR 2-108(A); Op 266, CI-495, CI-618; ABA Op 300.

TEXT

A lawyer asks about the propriety of including the following provisions in a contemplated employment agreement:

"As an employee of Employee of Employer, lawyer may have access to client files, trade secrets, and other confidential information of Employer. Moreover, his continued employment will be instrumental to the continuity and development of Employer's business. Therefore, Attorney acknowledges that notwithstanding the fact that this agreement is terminable at will upon notice, the restrictions contained in paragraph 6 of this agreement are a reasonable and necessary protection of the legitimate interests of Employer, that any violation of these restrictions would cause substantial injury to Employer, and that Employer would not have entered into this agreement with Attorney without receiving the additional consideration offered by the Attorney in binding himself to these restrictions.

"If an Attorney shall, within a period of two (2) years following his or her voluntary termination of employment with the employer, directly or indirectly provide legal services to any client of the employer, the attorney shall be deemed to have utilized confidential information obtained from the employer and such attorney shall immediately purchase from the employer the goodwill associated with such client. In view of the difficulty in evaluating goodwill, it is hereby agreed that the price of said goodwill shall be measured by the billable time spent by the employer or its employees in servicing such client during the twelve (12) months immediately preceding the date of termination, at the billing rates in effect as of such date. This amount shall be paid by the employee over a thirty-six (36) month period of time, with ten (10%) percent down and the balance in equal monthly payments, with interest at the rate of seven (7%) per annum."

In recent cases the Michigan Supreme Court has recognized that an employer in certain situations may provide for the form of remedy that is under consideration here. Follmer Rudzewicz & Co. v. Kosco, 420 Mich 394, 362 NW2d 676 (1984); Hayes-Albion Corp. v. Kuberski, 421 Mich 170, 364 NW2d 609 (1984). While the Committee's jurisdiction is limited to questions of ethics, and the Committee does not opine on any questions of law, the cited cases are not controlling here because of the existence of the Michigan Code of Professional Responsibility. Neither of the cited cases were concerned with the interpretation or application of a set of canons and/or disciplinary rules which lawyers are obligated to follow.

The proposed employment provisions are contrary to MCPR Canon 2 and DR 2-108(A). Canon 2 provides that a lawyer should assist the legal profession in fulfilling its duty to make legal counsel available. MCPR DR 2-108(A) states:

"(A) A lawyer shall not be a party to orparticipate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits."

While this specific issue has not been addressed in Michigan, other jurisdictions have opined that agreements which tend to restrict the right of an individual to retain the lawyer of his or her choice are improper. ABA i521 (November 12, 1962), provided in part:

"Efforts, direct or indirect, in any way to encroach upon the business or another lawyer, are unworthy of those who would be brethren at the bar."

See also, ABA i1171 (February 4, 1971), citing ABA Model Code of Professional Responsibility DR 2-108 and ABA i1072 (October 8, 1968). While admittedly these opinions discuss restrictive covenants as to area of practice, the reasoning of the opinions is applicable here, as MCPR DR 2-108 prohibits any agreement which restricts the right of the lawyer to practice law.

While it can be argued that a reasonable liquidated damages clause does not run afoul of MCPR DR 2-108(A), the rule does not make distinctions between degrees of restriction, but is a complete prohibition as to any device that could forseeably hinder a lawyer from serving a client or, conversely, hinder a prospective client from retaining counsel of choice. As stated in CI-495, which discussed the propriety of payments to lawyers for services rendered upon the dissolution of a law firm:

"The covenant in the agreement you refer to would, in effect, prevent the withdrawing attorney from representing a former client of the firm of which he was a member. Of paramount importance is the client's freedom to select an attorney of his or her choosing. The reputation and skill of the departing lawyer could well be the reason the firm represents the particular client. To deny the client access to a former partner of the firm, particularly under circumstances where the former partner was the principal contact with the client and, primarily responsible for the client's affairs, would be contrary to public policy. The files properly belong to the client, not to the partnership or the particular attorney, subject to the attorneys lien to secure payment for services under certain circumstances. Of secondary importance is the provision against the unwarranted restriction of the lawyer right to practice law."

Further, it appears to the committee that the provision under consideration is also improper as it provides for the sale and/or purchase of the goodwill of a former client. A lawyer who is retiring from the active practice of law may not sell the business and goodwill of the law practice. CI-618.

ABA Op 300 (August 7, 1961) states:

"Restrictive covenants of the type described are sometimes used in connection with commercial transactions, such as the sale of a business, often being associated with the sale of the "goodwill" or "going concern value" of the enterprise.

"The practice of law, however, is a profession, not a business or commercial enterprise. The relations between attorney and client are personal and individual relationships (Canon 35). The practice of law is not a business which can be bought or sold."

"It was held by this Committee in Opinion 266, issued June 21, 1945, that it would be improper for a lawyer to purchase the practice and goodwill of a deceased lawyer who was not his partner. In this Opinions the Committee stated:

'The goodwill of the practice of a lawyer is not, however, of itself an asset which either he or his estate can sell . . . It appears to this committee that a restrictive covenant of the type described would be an attempt to barter in clients.'"

See also, New York City Ethics Op 633:

"Clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. An attempt, therefore, to barter in clients would appear to be inconsistent with the best concepts of our professional status . . . ."

Based upon the foregoing, a provision which requires a former employee to purchase the goodwill of former clients is precluded by MCPR DR 2-108 and the general principle that lawyers may not sell, and, therefore, may not purchase, the "goodwill" of a client.