Post-Employment Restrictions In The Professions, The Financial Services Industry, And The New Economy

I. Post-Employment Restrictions

1. Law

1. Restrictive Covenants

   Rule 5.6 of the Rules of Professional Conduct prohibits post-employment restrictions on a lawyer's right to practice, except in the case of an agreement concerning benefits upon the lawyer's retirement. See The Hyman Companies v. Brozost, 964 F. Supp. 168 (E.D. Pa. 1997).

   Cases under Rule 5.6 rarely deal with absolute prohibitions on competition, because such prohibitions would so clearly violate the Rule. Instead, Rule 5.6 cases usually deal with forfeitures (e.g., of retirement benefits and accumulated profits) imposed on the departing attorney. No Pennsylvania appellate case has addressed Rule 5.6. By contrast, New Jersey appellate courts have repeatedly invalidated forfeiture provisions in attorneys' partnership or shareholder agreements, most recently in Apfel v. Budd Larner Gross Rosenbaum Greenberg & Sade, 324 N.J. Super. 133, 734 A.2d 808 (1999). The Apfel case contains a discussion of other key New Jersey appellate decisions.

   Three Pennsylvania decisions have dealt with Rule 5.6, with very different results, as follows:

   In Miller v. McNees, Wallace and Nurick, 118 Dauphin Co. L.R. 1 (1997), the Court of Common Pleas of Dauphin County invalidated a restrictive covenant which had no geographic limit, and which forfeited pension rights of lawyers who competed after forced retirement at age 70. The Court equated forced retirement to termination, and held that the covenant effectively prohibited the lawyer from practicing law and was unreasonable and against public policy, although the covenant complied with Rule 5.6.

   In Thomas Lowry, P.C. v. Vaughan, 34 Pa. D. & C.4th 164 (Montg. Co. 1997), rev'd w/o reported opinion, Lowry v. Vaughan, 726 A.2d 420 (Pa. Super. 1998), appeal denied, 558 Pa. 620, 737 A.2d 343 (1999), the Court of Common Pleas of Montgomery County enforced a 12-month restriction against soliciting or accepting work from specified clients against a departing lawyer. The Court of Common Pleas held that the agreement did not restrict the attorney's right to practice law, and therefore did not violate Rule 5.6. The Pennsylvania Superior Court reversed because of an arbitration/ mediation clause.

   In In re LaBrum & Doak, 227 B.R. 391, 415 (Bankr. E.D. Pa. 1998), the United States Bankruptcy Court for the Eastern District of Pennsylvania held that recovery of hourly fees generated before a law firm's dissolution did not violate Rule 5.6. The Court decided the case under the Pennsylvania Uniform Partnership Act, since the former firm's partnership agreement did not address the issue.

   NOTE: Clients' interest in continuing service with a lawyer does not necessarily lead courts to invalidate a restrictive covenant. Compare Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 18, 607 A.2d 142 (1992) (invalidating the restriction because of interference with the client's wishes) and Thomas Lowry, P.C. v. Vaughan, supra (in which the Court of Common Pleas reached the opposite result).

   2. Confidential Information / Trade Secrets

   Rule 1.9(a)

   In The Hyman Companies, Inc. v. Brozost, 964 F. Supp. 168 (E.D. Pa. 1997), the United States District Court for the Eastern District of Pennsylvania enjoined an in-house corporate real estate lawyer from using confidential business information acquired while serving as general counsel to a former employer in the same highly competitive costume jewelry business.

   The lawyer was not subject to a restrictive covenant and the Court did not prohibit the lawyer from working for the new employer or using his general knowledge of the industry. 964 F. Supp. at 174.

   The Court held that the lawyer's activity in pursuing the same shopping center leases as the former employer violated Rule 1.9(a), which provides that

   "A lawyer who has formerly represented a client in a matter shall not thereafter: (a) represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client."

   964 F. Supp. at 172.

   The District Court preliminarily enjoined the lawyer from handling any lease negotiations on which the lawyer worked for his previous employer; from handling any negotiation for any retail space that the past and present employers were competing for; and from disclosing any information regarding his former employer's retail leases. 964 F. Supp. at 175. In granting a permanent injunction, the Court expanded the relief to prohibit the lawyer from handling lease...