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Fourteen years after the state Supreme Court told firms they could not limit defecting partners’ practices, New Jersey’s ethics gurus have extended the doctrine to in-house lawyers. In Opinion 708, made public last week, the Supreme Court’s Advisory Committee on Professional Ethics struck down a proposed employment agreement limiting the right of in-house lawyers at Florham Park’s BASF Corp. to move to competitors. The opinion applies to all the state’s companies. No-compete covenants are unethical under Rule of Professional Conduct 5.6 because they deny clients’ rights to counsel of their choice. Companies that want to woo away a competitor’s in-house lawyers have the same right, according to the opinion. The rule is in line with decisions by other jurisdictions. But the comprehensiveness and point-by-point dissection of BASF’s no-compete covenant is likely to make the opinion as widely cited around the country as the leading case against law firm no-compete clauses, Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10 (1992). “The fact that the restrictive covenant agreement in question arises in the corporate context, rather than within a law firm, is of no moment,” last week’s opinion says. Courts have upheld no-compete clauses in employment contracts that prevent executives and other key employees from taking their know-how to competing companies. But because lawyers, including those employed by corporations, are bound by ethics rules requiring them to keep ex-client’s confidences, a covenant requiring such secrecy is superfluous, the opinion says. Unique, strategic role claimed The opinion does not mention BASF, but general counsel David Stryker, who heads the chemical giant’s 50-lawyer office department, told the Law Journal last December that an unidentified member of the staff who opposed the employment agreement touched off the committee’s inquiry. Stryker said on June 29 he was disappointed by the opinion. He said it failed to recognize there are substantive differences between private attorneys and senior in-house counsel involved in high-level business strategy. At the same time, he said he wasn’t surprised, given previous rulings applying Jacob in a corporate setting. “The default setting was against me,” he said. Stryker, who joined BASF from Siemens Corp. in 2003, said last year that he rewrote BASF’s employee covenants when he arrived. The new covenants applied to all key employees and made no distinctions between nonlawyers, junior lawyers and senior counsel. And according to employees of BASF who declined to be identified, the penalty for not signing the clause was dismissal. Stryker withheld enforcement of signing the requirement while the committee’s inquiry was pending. Under a crucial clause, employees had to agree that they would not go to work for competitors within a year of leaving BASF or recruit other BASF employees to do so. That violated RPC 5.6, the opinion says. Under another clause, lawyers were required to keep corporate secrets during and after employment with the company. The opinion acknowledges that not all information a lawyer obtains while working for a company is privileged and such information may include secrets. It might be reasonable for a corporation to request its lawyers to sign a nondischarge of confidentiality agreement, provided that it does not restrict the lawyer’s ability to practice law, the opinion says. But the panel said the language of the clause — written for all employees and lacking any mention of how it might affect lawyers — was void because it failed to mention the interplay between the RPCs and the confidentiality requirements. A threshold question for the committee was whether it had jurisdiction over in-house counsel, including those not admitted in New Jersey. It did, under new Supreme Court rules granting limited licenses to corporate lawyers working in New Jersey but not admitted to practice in the state. Rule 1:27-2, part of a package that permits multijurisdictional practice, allowed in-house counsel to engage in transactional work without taking the state bar exam, but they had to obtain a limited license that required a character background check and had to agree to be subject to the state’s ethics and discipline system. Since the rule went into effect on Jan. 1, 2004, more than 800 in-house counsel in New Jersey have applied for the limited license. “It is our opinion that in-house or corporate counsel in New Jersey must abide by the Rules of Professional Conduct, regardless of whether they are members of the bar of our state,” the opinion says. Theoretically, a corporation could promulgate a no-compete covenant for its lawyers, but it would be useless to do so because the rules — and now the advisory opinion — prohibit lawyers from signing them. Stryker says that during the past 10 years or so, state bar associations and courts have done a good job of treating in-house lawyers and what they do with the same respect and dignity accorded to private attorneys and their work. What he had hoped, he says, was that the regulators would also recognize that “in-house lawyers are unique in that they do play a business and strategic role in the business that is not legal.” “We wanted recognition that lawyers who are integrated in the business pose a threat if they go to work for another corporation,” he says. “A senior business lawyer is a member of the senior business decision-making team. By definition he or she is doing more than practicing law.” Last December, when the committee began its inquiry, Stryker said he had researched the issue and had found no authority that precluded him from promulgating the agreement. A common finding Yet the committee said the result it reached was consistent with every other state and local committee that had studied the applicability of RPC 5.6 to in-house counsel, and it cited opinions from Virginia, Connecticut, Illinois, Washington state, Washington, D.C., and Philadelphia. Says Kristi Vaiden, president of the New Jersey chapter of the American Corporate Counsel Association: “It’s no surprise that the rules apply to in-house counsel.” Given New Jersey’s concentration of large corporations, it was good for the committee to address the issue, says Vaiden, deputy general counsel of Metropolitan Corporate Counsel, a monthly newspaper. David Machlowitz, general counsel at Medco Health Solutions Inc. in Franklin Lakes, says, “It is always good to have a clear, definitive opinion to resolve uncertainty, and this opinion resolves the debate. “It will place some in-house lawyers in a difficult position of explaining why they are the only corporate employees who do not have to sign an agreement that everyone else is required to sign — and which the lawyers are asked to draft and enforce,” Machlowitz says. “It will also not be clear to executives that a corporation’s rights are no greater than a law firm’s even though, unlike the law firm, the corporation is not only the in-house lawyer’s employer, but his or her client as well.” Rees Morrison, a consultant with Hildebrandt International in Somerset, N.J., who advises corporate law departments, says it would be a mistake for corporate law departments to take the position that senior lawyers have a special status that makes them different from lawyers in private practice. From a practical standpoint, imposing noncompete clauses would hurt corporate law departments’ attempts to recruit the best staffs, Morrison says. “It’s a challenge to find and hire and retain good lawyers,” he says. “This would be an obstacle to doing that if you said, ‘we want to hire you, but by the way we will somehow narrow your choices if you decide to leave us.’” He concludes: “In this day and age of the so-called war for talent, is this the way you want to approach it? You want to make the job exciting and challenging so they don’t want to leave. To me it’s approaching the whole thing the wrong way around.”

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