Lawyer’s payout forfeiture barred by ethics rule

A law firm cannot enforce a 50-percent penalty clause in its payout contract for departing attorneys who take firm clients with them, an Alexandria federal judge has ruled.

The Nov. 6 ruling could be worth as much as $150,000 to the departing lawyer, according to figures disclosed in an earlier opinion in the case.

The judge decided a lawyer’s contract payout restriction that violated a bar ethics rule was void and unenforceable.

Rule 5.6 of the District of Columbia Bar generally bars a lawyer from making an agreement that restricts the lawyer’s right to practice after termination of a partnership relationship. Virginia has a similar ethics rule.

Attorney Simor L. Moskowitz said he was entitled to money from his accrual basis account after he left the Washington intellectual property firm of Jacobson Holman PLLC in 2013. But the firm’s operating agreement had a forfeiture provision in which a departing partner gave up one half of his payout if he took clients with him.

U.S. District Judge Liam O’Grady explained the background in an earlier opinion. The firm practices intellectual property law and regularly represents clients before the U.S. Patent and Trademark Office.

Firm breakup

The firm underwent a breakup in 2013. Jacobson and Holman told the other equity partners they wanted to create a new law firm and dissolve the existing firm. The asked any partner who wanted to join the new firm to advise them within 30 days and assumed any who did not would leave the firm.

Within four months, all equity partners except the two name partners gave their notices and, ultimately, withdrew from the firm.

The partnership agreement provided that a withdrawing equity partner would be paid the amount in his accrual basis account, subject to a 50-percent forfeiture if the partner took clients of the firm.

Moskowitz sued for the full payout. The firm counterclaimed based on the forfeiture provision and brought the matter on for a hearing.

O’Grady said the issue was one of first impression in the District of Columbia, but he noted a split in other states examining the scope of Rule 5.6. Courts disagreed about whether the rule covered indirect restraints on practice such as the “financial disincentive” in Moskowitz’ contract.

The majority view was that the rule covers indirect restraints, but the firm conceded the point, O’Grady said. Nevertheless, the firm argued the admitted violation was not sufficient to make the forfeiture provision unenforceable.

O’Grady first decided that a bar’s ethics rule could be used as a basis for civil liability, at least in the limited context of the law firm’s penalty provision.

The judge then determined that a contract provision that violated the bar’s ethics rule should be considered void and unenforceable.

The case “implicates a specific rule of professional conduct that prohibits a specific type of contract provision and a contract provision that falls within that prohibition,” O’Grady wrote.

O’Grady rejected the firm’s “public policy calculus” that sought to weaken the application of the ethics rule.

The rule itself provided the relevant public policy determination, the judge said.

“Rule 5.6 is the result of a careful balancing of concerns for client choice and attorney autonomy with the interest of contract enforcement. There is no need for additional balancing,” he wrote.

Moskowitz’ defense “stands on solid ground,” O’Grady concluded.

In an earlier opinion in the case, O’Grady said Moskowitz’ accrual basis account, and thus his payout, was set at $300,233.

The Jacobson Holman firm was represented by John J. Brennan III of Alexandria. He did not return a call for comment.

Philip J. Harvey represented Moskowitz. He responded to a call for comment, but arrangements for an interview were incomplete at press time.