Arthur Ciampi ()
Springtime is often the time of year when partners leave their firms for greener pastures. Making “the move” is frequently a difficult process fraught with twists, turns and surprises that sometimes hinder and unnecessarily complicate the departure. Among the difficulties is that many partnership agreements contain a “notice provision” which requires a partner to remain at the firm until the specified notice period expires.
The enforceability and propriety of a notice provision frequently become a point of contention between a partner and his soon-to-be former firm. In this month’s column, we analyze notice provisions in law firm partnership agreements and discuss their enforceability.
Typical Notice Provisions
Most law firm agreements contain a notice provision which sets forth: (i) the manner in which notice of a partner’s departure must be given; (ii) the length of time a partner must remain at the firm before departing; and (iii) the ability of the law firm, in its discretion, to waive or shorten the notice period. A typical simple provision is as follows:
Any Partner may voluntarily withdraw from the Firm on a Termination Date which is the last day of any calendar month at least thirty (30) days after the date the Partner gives written notice of withdrawal to the Executive Committee of their intention to withdraw. The Termination Date, however, may be an earlier date with the prior written approval of the Executive Committee.
Partners challenging notice provisions often claim that they are unenforceable because they impede a partner’s mobility and constitute an unethical restraint of trade that interferes with a client’s choice of counsel.
Challenges to notice provisions are typically made pursuant to Rule 5.6 of the Rules of Professional Conduct. Rule 5.6 states in pertinent part:
A lawyer shall not participate in offering or making: (1) a partnership, shareholder, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship except an agreement concerning benefits upon retirement.…
Partners frequently argue that a notice provision “restricts” an attorney from practicing law, in violation of Rule 5.6. They argue that they should be released from the notice provision because to do otherwise limits their practice of law to their current firm when they wish to practice law at their new firm.
Firms dispute that notice provisions improperly impede lawyer mobility. They claim, to the contrary, that such provisions are necessary to ensure a smooth transition of client matters. They additionally contend that the stipulated time period enables clients to thoughtfully exercise their right to counsel of their choice. In addition, firms argue that their ability to exercise their discretion and shorten the time period further ensures that each situation can be addressed equitably.
Firms also argue that Rule 5.6 is inapplicable to notice provisions. Firms contend that the literal prohibition of Rule 5.6 is that such prohibited restriction must not occur until “after termination of the relationship.” Accordingly, they argue, that, since a notice provision applies while the partner remains at the firm and not “after termination of the relationship,” Rule 5.6 is inapplicable.
While firms likely have the better argument, the determination is nonetheless fact-based. For example, a long notice provision could conceivably run afoul of Rule 5.6 if determined to be a disguised restriction on the practice of law. An extreme example would be a one-year notice period. This would cause partners to remain at a firm for at least an additional year and could conceivably be viewed as an unethical restriction on the practice of law despite the label as a notice provision. In addition, if a partner who challenges the provision can demonstrate that its intent—as written or applied—is to restrict competition and not to provide a reasonable transition period, that fact could also undermine its viability.
Courts and commentators have opined that reasonable notice of departure is required when law firm partners leave a firm.1 Thus, a provision in a law firm agreement that merely embodies this duty should sustain scrutiny.
At the same time, however, the sole court to address the enforceability of a notice provision in a law firm partnership agreement has maintained that, to be enforceable, such provisions should not unreasonably delay a partner’s departure to another law firm. In Borteck v. Riker, Danzig, Scherer, Hyland & Perretti,2 the departing partner, Robert Borteck, resigned from his firm after providing “little or no formal notice” despite that the law firm agreement included a 90-day written notice provision. Borteck sued his former firm for declaratory relief, seeking to enforce the early retirement payment provision in the law firm agreement. The firm counterclaimed for, among other things, breach of the firm’s 90-day notice provision. Borteck claimed, in part, that the 90-day notice provision violated Rule 5.6.
While most of the decision addressed whether the retirement provision was bona fide, the Supreme Court also stated that the state’s Disciplinary Committee should review and clarify the treatment of notice provisions and cautioned that “firms must guard against provisions that unreasonably delay an attorney’s orderly transition from one firm to another.”3
In light of this admonition, firms seeking to enforce notice provisions should document why the notice provision is reasonable and does not “unreasonably delay an attorney’s orderly transition from one firm to another.” Prior to the implementation of such a provision, a firm should prepare a memorandum that sets forth the reasons that the selected notice provision is appropriate. For example, a 30-day notice period may have been selected to ensure enough time for a departing partner to inform the remaining partners of the status of their matters and to coordinate with a firm’s billing cycle.
Furthermore, if a notice provision gives the firm discretion to shorten the notice period, as set forth in the sample provision above, the firm should also document the reasons that each period was shortened. While this discretion can ensure that there is no “unreasonable delay,” the shortening of the notice period can also provide a basis for challenging it. This is the case because a partner challenging a notice provision would likely compare the discretionary periods previously determined by the firm with the period being applied in their departure to discern whether they were treated in the same manner. Such a partner may argue that the firm’s fiduciary duties bar arbitrary treatment or that permitting one partner to leave on short notice while another on longer notice is, depending on the circumstances, indicative of an impermissible restriction on competition. In short, the exercise of the discretionary notice aspect must be carefully considered and compared to past practices to avoid such arguments and must also be applied so as not to penalize a partner who departs to compete with the firm.
A partner contemplating leaving his firm should thoroughly review his firm’s partnership agreement prior to departure to discern his rights and obligations, including whether there is a notice provision and its duration. Such a review will enable the partner to predict potential pitfalls and will also assist him in informing his new firm of the likely timing of his departure.
Firms should also periodically review all of the provisions of their partnership agreements concerning the rights and obligations of the firm and its departing partners. Firms with notice provisions should evaluate whether the provision in place is necessary and whether it is reasonable or in need of amendment because it “unreasonably delay[s] an attorney’s orderly transition from one firm to another.” In this process, firms should further discern how they have addressed the notice issue with prior departing partners and whether the firm shortened the time period and if so for what reason.
Arthur J. Ciampi is the coauthor of the treatise ‘Law Firm Partnership Agreements’ and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to the firm, assisted in the preparation of this article.
1. In Graubard Mollen Dannet & Horowitz v. Moskovitz, 86 N.Y.2d 112 (1995), New York’s highest court stated that a departing partner’s departure on “short notice” could constitute a breach of that partner’s fiduciary duty. See also Dowd & Dowd v. Gleason, 181 Ill. 2d 460 (1998) (by implication and in dictum approved of such provisions by not striking a 90-day notice provision in a law firm partnership agreement). Professor Robert Hillman, in his treatise titled Lawyer Mobility, states: “Generally, a partner should provide reasonable notice of intent to withdraw from a firm.” Hillman, Lawyer Mobility, §4.8.2.
2. 179 N.J. 246 (2004).
3. Id. at 260-61 (citing Robert W. Hillman, “Loyalty in The Firm: A Statement of General Principles on the Duties of Partners Withdrawing From Law Firms,” 55 Wash. & Lee L. Rev. 997, 1004–05 (1998)).