Can a law firm cut a departing shareholder's deferred compensation by 75% if the lawyer practices law within 50 miles of the firm?

Plain-English summary

A firm proposed an employment agreement under which a departing shareholder's "Deferred Credit" would be reduced by 75% if the lawyer engaged in "competitive activity," defined as the private practice of law within a 50-mile radius of the firm's principal offices for two years after termination. The committee was asked whether the provision complies with the Revised Rules of Professional Conduct, and answered no.

The opinion applies Rule 5.6(a), which prohibits a lawyer from participating in a partnership or employment agreement that restricts the right of a lawyer to practice after the relationship ends, except as a condition to payment of retirement benefits. The opinion grounds the rule in Comment [1], which explains its purpose as encouraging professional autonomy and protecting clients' freedom to choose their lawyer.

Drawing on Ethics Decision 2000-6, the committee restates that an employment agreement must not create a financial disincentive that discourages or prevents a departing lawyer from representing a former-firm client who chooses to follow the lawyer. The opinion concludes that the proposed 75% reduction plainly creates that kind of disincentive in the same community where clients would likely want to continue with the departing lawyer, and so violates Rule 5.6(a) and is prohibited.

In practice

The opinion holds that, under the North Carolina rule as it stood at the time, a deferred-compensation clause that strips a large share of a departing lawyer's pay for competing within a defined radius operates as an impermissible restriction on the right to practice. The committee treats the 75% reduction as a financial disincentive of the kind Ethics Decision 2000-6 condemned, not as a permitted condition on retirement benefits.

The opinion's reasoning turns on effect rather than form: a clause framed as compensation forfeiture still violates Rule 5.6(a) if it discourages the departing lawyer from continuing to represent former-firm clients who want to follow the lawyer.

Common questions

Q: Can a law firm enforce a non-compete against a departing lawyer in North Carolina?

A: The opinion concludes that an agreement restricting a lawyer's right to practice after leaving violates Rule 5.6(a), except as a condition to payment of retirement benefits. A geographic-radius restriction on practice falls outside that exception.

Q: Does it matter that the penalty is a compensation reduction rather than an outright bar?

A: No. The opinion treats a 75% reduction in deferred compensation as a financial disincentive that discourages competition, which it finds violates Rule 5.6(a) just as a direct prohibition would.

Q: What is the purpose of Rule 5.6(a)?

A: Per Comment [1] as cited in the opinion, the rule encourages the professional autonomy of lawyers and protects clients' freedom to choose their own lawyer.

Q: Are any practice restrictions on departing lawyers allowed?

A: The opinion notes the rule's single exception: a restriction tied to the payment of retirement benefits. The proposed provision was not a retirement-benefits condition, so the exception did not apply.

Background and rules framework

The opinion interprets North Carolina Rule 5.6(a) of the Revised Rules of Professional Conduct, the analogue to Model Rule 5.6, which prohibits agreements restricting a lawyer's right to practice after the relationship ends, subject to a retirement-benefits exception. It relies on Comment [1] to that rule for the rule's purpose and on the bar's prior Ethics Decision 2000-6, which held that a law firm agreement may not create a financial disincentive discouraging a departing lawyer from representing former-firm clients.

Citations and references

Rules of Professional Conduct:

• MR 5.6 (restrictions on right to practice) / NC Rule 5.6(a) and Comment [1]

Other opinions cited:

• NC Ethics Decision 2000-6: a firm agreement may not create a financial disincentive discouraging a departing lawyer from representing former-firm clients

See also

• ABA Formal Op. 06-444: Retirement Restrictive Covenants
• ABA Formal Op. 94-381: Restrictions on Right to Practice
• DC Ethics Op. 241: Penalty on Departing Lawyer
• CBA Formal Op. 92: Practice Limits in Settlements

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2001-formal-ethics-opinion-10/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Law Firm would like to enter into employment agreements with the principals of the firm. It is proposed that the employment agreement contain a provision dealing with deferred compensation. The provision reduces the amount of deferred compensation payable to a shareholder if the shareholder decides to leave the firm. Deferred compensation is reduced by 75% if the departing shareholder engages in "competitive activity" within a 50-mile radius of Law Firm's offices. Stated in its entirety, the provision provides as follows:

If Employee's employment is terminated by Employee under Section 2.2(e) hereof, and Employee, following such termination of employment, engages in a competitive activity as hereinafter defined, the Deferred Credit, as above determined, shall be reduced by 75%. This reduction of the Deferred Credit is necessitated because of the loss of goodwill and earnings capacity of the Corporation caused by the employee's action. As used herein "competitive activity" means the employee's engaging in the private practice of law other than in employment of the Corporation within a 50-mile radius of the principal offices of Corporation within a two-year period following termination of employment."

Does this provision comply with the Revised Rules of Professional Conduct?

Opinion:

No. Rule 5.6(a) of the Revised Rules of Professional Conduct prohibits a lawyer from participating in a partnership or employment agreement with another lawyer or law firm that restricts the right of a lawyer to practice after the termination of the relationship created by the agreement except as a condition to payment of retirement benefits. The purpose of the rule, as explained in Comment [1], is to encourage professional autonomy of lawyers and to facilitate the freedom of clients to choose a lawyer. In Ethics Decision 2000-6, the Ethics Committee held that a provision of a law firm employment agreement that made the payment of a client's account with a law firm a condition precedent to a departing lawyer's receipt of compensation from the client after leaving the firm is a violation of Rule 5.6(a). In the same ethics decision, the Ethics Committee held that an employment agreement with a law firm "must not create a financial disincentive that discourages or prevents a departing lawyer from representing a client from the former firm if the client chooses to follow the lawyer." The Ethics Committee also found that a provision of the same employment agreement that limited the departing lawyer's financial compensation for representation in contingency cases to a specified hourly rate for work done for a client after the lawyer left the firm was a violation of Rule 5.6.

The proposed provision set forth in the inquiry above clearly creates a specific financial disincentive for a lawyer to engage in the private practice of law in the same community in which there are likely to be clients who will want to continue to be represented by the lawyer after departing Law Firm. This will inhibit the right of clients to be represented by their chosen lawyer. This disincentive is a violation of Rule 5.6(a) and is prohibited.