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Borteck v. Riker, Danzig, Scherer, Hyland & Perretti LLP

362 N.J. Super. 284, 827 A.2d 1121 (App. Div. 2003)

PARTNERSHIPS; ATTORNEYS—Retirement provisions in law firm partnership agreements must not be drafted in a way that is not impermissibly anti-competitive.

A lawyer and former capital partner of a law firm withdrew from the partnership after 11 years and joined another law firm. In accordance with the old law firm’s partnership agreement, he received his share of the capital account. “When the firm refused to pay him early retirement benefits, he filed an action seeking specific performance of the partnership agreement.” The old law firm counterclaimed under a number of theories including that the resigned partner failed to provide the required notice of his intention to resign from the firm as called for in the partnership agreement. The lower court held for the partner, ruling that in light of the Rules of Professional Conduct and interpretive caselaw, “the early retirement plan established by [the old law firm], including the ninety-day notice provision, was anti-competitive in effect and unenforceable.”

Under the law firm’s retirement plan, a retiring capital partner with at least ten consecutive years of service who remains retired for five years received a specified percentage of his or her prior average annual earnings. “Retirement” meant permanent retirement from the private practice of law, whether or not due to disability. There were exceptions for disabled partners over a particular age, for continuation with the old law firm in an Of Counsel capacity, and for the pursuance of public service, such as to become a judge, assume a teaching position, or become a public advocate, a public defender, or legal services attorney.

The partnership agreement required three months’ prior notice of any intention to retire or withdraw. Notwithstanding that provision, the partner withdrew suddenly without prior notice of his intention to do so. He immediately joined his new law firm and began soliciting many of his former clients. He also successfully recruited two former colleagues to join him at the new firm.

Section 5.6 of the Rules of Professional Conduct (RPC) has been declared “to ensure the freedom of clients to select counsel of their choice and is designed to preclude commercial arrangements that interfere with that purpose.” According to case law, the RPCs “govern the practice of law based on ethical principles rather than commercial standards of reasonableness.” On that basis, prior cases have invalidated partnership agreement provisions and withheld compensation from withdrawing attorneys who subsequently appeared at their old law firm. It didn’t matter to the earlier courts that the withdrawing law partner was free to pursue any occupation other than the practice of law. According to case law, the “inescapable inference” of this type of provision is that its dominant purpose is to dissuade partners from competing with their old firm after withdrawal.

Here, the Court believed that the provisions of this particular law firm’s partnership agreement were, “in substance, simply a variation on the theme played out, with the same result, in the line of cases” holding that it was improper to use a “financial-disincentive, to restrict a withdrawing law partner from competing with his or her old law firm.” It rejected the old law firm’s attempt to distinguish their partnership agreement from those cited in prior cases, holding that compliance with RPC 5.6 “turns on the effect of a provision not its formulation or verbalization.” It was clear to the Court that the partnership agreement in question defined “retirement in terms which assure[d] that the withdrawing partner [would] not compete with the firm.” The Court did not suggest “that a retirement plan may not condition receipt of benefits on curtailment of the private practice of law” because RPC 5.6 “expressly excepts from its prohibition ‘an agreement concerning benefits upon retirement,’” and several other jurisdictions have previously held that tying retirement benefits to a restriction on the private practice of law was not contrary to the public policy embodied in RPC 5.6. Nonetheless, under the Court’s analysis, this particular partnership agreement was, in effect, impermissibly anti-competitive.

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