Ideas from the Front
Some Courts May Be Changing Course on Corporate Counsel Mobility
Posted Dec 25, 2006 3:07 AM CDT
By Molly McDonough
When breast implant maker Inamed was purchased by an international pharmaceutical company last March, the Santa Barbara-based company’s general counsel suddenly found himself out of a job.
Joseph A. Newcomb spent the next two months working without a salary as general counsel at Web.com. Then he got an offer right up his alley.
In June, he joined Mentor Corp., another breast implant manufacturer in the same California town. Mentor, which is in a heated race with Inamed to win FDA approval for new breast implant and augmentation products, brought Newcomb aboard as its new vice president, secretary and general counsel.
Inamed cried foul.
Arguing that Newcomb violated his agreement not to work for a competitor for at least a year, Inamed asked a court in Santa Barbara to issue an injunction that would bar Newcomb from a whole host of activities at Mentor, such as working on patent and FDA applications, negotiating licensing and vendor contracts, and appearing at administrative hearings. Inamed also claimed Newcomb violated his fiduciary duty to Inamed under attorney ethics rules and engaged in an unfair business practice in violation of state law.
Newcomb’s lawyers argued the injunction would have “sidelined” Newcomb, stripping him of any ability to function as a general counsel.
The court rejected the injunction request, but litigation over Newcomb’s new job is ongoing.
The case has captured the attention of lawyers, both in-house and at outside law firms, who increasingly are developing their practices and moving on, sometimes in direct competition with their former employers and practices. It’s an issue that seems a natural result of changes in the way lawyers chart their career trajectories.
Lawyers are increasingly moving from one firm to another, taking along clients and staff. An ongoing American Bar Foundation study of lawyers who graduated in 2000 shows that at the three-year mark, 44 percent had planned to move to another firm within two years.
New Rules of the Game
“We live in an era of free agency,” says Jon Lindsey, managing partner in New York City of the legal recruiting and consulting firm Major, Lindsey & Africa. “Baseball players used to stay with their teams for life. No longer. It’s the same thing with lawyers.” And Lindsey says in-house lawyers, for different reasons, also aren’t staying put as long. Some begin at one corporate department, learn valuable skills, then “move up the food chain” to a better opportunity at a different company or a law firm, he says. Others fall victim to corporate tumult. As general counsel become a greater part of the management team, they are more likely to be replaced when a new CEO takes over.
This increase in mobility is creating tension with long-standing ethics rules, including those meant to protect lawyer autonomy and client choice.
Indeed, at the heart of the Inamed case and others involving restrictive covenants and lawyer mobility is Rule 5.6 of the ABA Model Rules of Professional Conduct. The rule prohibits lawyers from entering into partnerships or employment agreements that restrict the right of a lawyer to practice after the termination of a relationship.
While many lawyers will sign employment agreements that waive their rights under the Model Rule, they do so under an assumption that restrictive covenants won’t be enforced for partners in private practice or for in-house counsel working for a corporation. Case law in the majority of jurisdictions that have addressed the issue supports that view. New Jersey made that plain in a July ethics advisory opinion. It found that the general consensus of an “overwhelming majority” of state bars and courts is that “noncompete agreements are unethical because they unduly limit the freedom of clients to choose their lawyer and improperly impinge upon the lawyer’s professional autonomy.” New Jersey Advisory Committee on Professional Ethics, Opinion 708.
Jurisdictions such as New York and New Jersey have broadly applied Rule 5.6 to discourage even financial disincentives tied to partnership agreements and employment agreements.
Yet some jurisdictions are taking a fresh look at noncompete agreements and are permitting restrictions. Arizona is the latest. Not long after New Jersey’s ethics opinion, the Arizona Supreme Court ruled that law firms can enforce financial disincentives to discourage partners from leaving and competing directly with the firm. The court held 4-1 that noncompete agreements should be evaluated the same way agreements are evaluated for nonlawyers.
“We are unable to conclude that the interests of a lawyer’s clients are so superior to those of a doctor’s patients (whose choice of a physician may literally be a life-or-death decision) as to require a unique rule applicable only to attorneys,” the majority ruled in Fearnow v. Ridenour, Swenson, Cleere & Evans, 138 P.3d 723 (July 18). “The language of ER 5.6 does not support such a sweeping special treatment of lawyers, nor does protection of clients mandate such a result.”
‘A reasonable toll’
The Arizona court acknowledged it was taking a minority view previously espoused mainly by courts in California. The Arizona court was most persuaded by a 1993 California Supreme Court opinion, Howard v. Babcock, 863 P.2d 150, which enforced an agreement that imposed “a reasonable toll on departing partners who compete with the firm.” The court said that when partnership loyalty was the norm, law firms’ capital investments weren’t at risk. But as partners become increasingly mobile, such agreements help protect firms that invest substantial money in client development and support, the court said.
So do opinions in Arizona plus California add up to a trend to enforce at least portions of restrictive covenants for lawyers? Not according to University of California at Davis law professor Robert W. Hillman.
Hillman, author of Hillman on Lawyer Mobility: The Law and Ethics of Partner Withdrawals and Law Firm Breakups, laments that Model Rule 5.6 developed “through the back door” from an ABA ethics opinion. “There was never a big discussion,” he says. “Nobody, at least at the level of the bar, has really taken a hard look at this to see if it makes sense.”
Hillman, a former general counsel for Star-Kist Foods, has taken a hard look and disagrees with much of Rule 5.6. “It doesn’t make sense to me that special rules ought to be carved out for lawyers,” he says. “I don’t think there’s any policy justification for that conclusion.”
Susan Hackett, senior vice president and general counsel for the Washington, D.C.-based Association of Corporate Counsel, says the issue is a simmering one for in-house lawyers, who are often intertwined with the businesses they represent. At the highest levels, corporate counsel oversee intellectual property, corporate compliance and other sensitive matters. “The rules for professional conduct were written with outside practice in mind and are trying to provide guidance and regulation for people who work in a different context,” says Hackett.
Neither Hackett nor the ACC has taken a position on the topic of noncompete agreements. But she says as more in-house lawyers change jobs, they need to be thinking about conflicts and other ethical issues. The issue of lawyer mobility was a CLE topic in October at the ACC’s annual meeting in San Diego.
While Hackett believes lawyers who work for corporations and those who work for law firms should be held to the same ethical standards, she says there may be a need for in-house lawyers to sign some version of a restrictive covenant that wouldn’t be necessary for outside lawyers.
The New Jersey opinion recognized there may indeed be such a need. And it acknowledged that in-house counsel may be asked to sign nondisclosure and confidentiality agreements, so long as these agreements don’t interfere with a lawyer’s ability to practice elsewhere.
Even in California, courts frown upon restrictions on employment options. Newcomb’s lawyer, Rico Rosales of Palo Alto, is counting on the courts to recognize that in-house lawyers should be able to choose where they want to work.
“The issue is obviously of interest to thousands of attorneys in the state of California and elsewhere because it potentially creates a special class of employees that are exempt from the normal employee mobility rules that generally allow an employee to move from one company to another so long as they respect the law,” Rosales says.
He disputes any suggestion that in-house lawyers must be restricted from working for a former employer’s competitor. “To suggest that in-house counsel cannot live up to those rules in going to work for a competitor raises questions as to whether or not outside counsel can do so when regularly called upon to do so,” Rosales says. “It is no surprise that every major firm in America has occasion to represent competitors and, subject to traditional conflict rules, is able to do so.”