United States: Post-Employment Restrictions In The Professions, The Financial Services Industry, And The New Economy

Rule 5.6 of the Rules of Professional Conduct prohibits post-employment restrictions on a lawyer’s right to practice, except in the case of an agreement concerning benefits upon the lawyer’s retirement. See The Hyman Companies v. Brozost, 964 F. Supp. 168 (E.D. Pa. 1997).

Cases under Rule 5.6 rarely deal with absolute prohibitions on competition, because such prohibitions would so clearly violate the Rule. Instead, Rule 5.6 cases usually deal with forfeitures (e.g., of retirement benefits and accumulated profits) imposed on the departing attorney. No Pennsylvania appellate case has addressed Rule 5.6. By contrast, New Jersey appellate courts have repeatedly invalidated forfeiture provisions in attorneys’ partnership or shareholder agreements, most recently in Apfel v. Budd Larner Gross Rosenbaum Greenberg & Sade, 324 N.J. Super. 133, 734 A.2d 808 (1999). The Apfel case contains a discussion of other key New Jersey appellate decisions.

Three Pennsylvania decisions have dealt with Rule 5.6, with very different results, as follows:

1. In Miller v. McNees, Wallace and Nurick, 118 Dauphin Co. L.R. 1 (1997), the Court of Common Pleas of Dauphin County invalidated a restrictive covenant which had no geographic limit, and which forfeited pension rights of lawyers who competed after forced retirement at age 70. The Court equated forced retirement to termination, and held that the covenant effectively prohibited the lawyer from practicing law and was unreasonable and against public policy, although the covenant complied with Rule 5.6.
2. In Thomas Lowry, P.C. v. Vaughan, 34 Pa. D. & C.4^th 164 (Montg. Co. 1997), rev’d w/o reported opinion, Lowry v. Vaughan, 726 A.2d 420 (Pa. Super. 1998), appeal denied, 558 Pa. 620, 737 A.2d 343 (1999), the Court of Common Pleas of Montgomery County enforced a 12-month restriction against soliciting or accepting work from specified clients against a departing lawyer. The Court of Common Pleas held that the agreement did not restrict the attorney’s right to practice law, and therefore did not violate Rule 5.6. The Pennsylvania Superior Court reversed because of an arbitration/ mediation clause.
3. In In re LaBrum & Doak, 227 B.R. 391, 415 (Bankr. E.D. Pa. 1998), the United States Bankruptcy Court for the Eastern District of Pennsylvania held that recovery of hourly fees generated before a law firm’s dissolution did not violate Rule 5.6. The Court decided the case under the Pennsylvania Uniform Partnership Act, since the former firm’s partnership agreement did not address the issue.

NOTE: Clients’ interest in continuing service with a lawyer does not necessarily lead courts to invalidate a restrictive covenant. Compare Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 18, 607 A.2d 142 (1992) (invalidating the restriction because of interference with the client’s wishes) and Thomas Lowry, P.C. v. Vaughan, supra (in which the Court of Common Pleas reached the opposite result).

1. In The Hyman Companies, Inc. v. Brozost, 964 F. Supp. 168 (E.D. Pa. 1997), the United States District Court for the Eastern District of Pennsylvania enjoined an in-house corporate real estate lawyer from using confidential business information acquired while serving as general counsel to a former employer in the same highly competitive costume jewelry business.
2. The lawyer was not subject to a restrictive covenant and the Court did not prohibit the lawyer from working for the new employer or using his general knowledge of the industry. 964 F. Supp. at 174.
3. The Court held that the lawyer’s activity in pursuing the same shopping center leases as the former employer violated Rule 1.9(a), which provides that

"A lawyer who has formerly represented a client in a matter shall not thereafter: (a) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client…."

964 F. Supp. at 172.

4. The District Court preliminarily enjoined the lawyer from handling any lease negotiations on which the lawyer worked for his previous employer; from handling any negotiation for any retail space that the past and present employers were competing for; and from disclosing any information regarding his former employer’s retail leases. 964 F. Supp. at 175. In granting a permanent injunction, the Court expanded the relief to prohibit the lawyer from handling lease negotiations for retail space within a mall or other area where the former employer occupied space and wanted to continue occupying the space. The Hyman Companies, Inc. v. Brozost, ___ F. Supp.2d _____, 2000 WL 1693674 (E.D. Pa. 2000).

2. Trade secrets

The Court in Hyman accorded trade secret protection to the employer’s business plans and profit and loss figures for particular stores. The Court held that the an attorney-client relationship provided the necessary confidentiality to establish trade secret protection, even for items that might lie within the public’s knowledge. The Hyman Companies, Inc. v. Brozost, 964 F. Supp. at 174.

3. Contact with clients

The surreptitious removal of files from a law firm by a group of breakway lawyers and the breakaway lawyers’ solicitation of the firm’s clients by telephone and in writing, including the use of scurrilous and misleading statements, constituted intentional interference with the law firm’s contractual relations with its clients, warranting both injunctive relief and damages. Joseph D. Shein, P.C. v. Myers, 394 Pa. Super. 549, 576 A.2d 985 (1990), appeal denied, 533 Pa. 600, 617 A.2d 1274 (1991).

Pennsylvania courts are willing to uphold restrictive covenants in the medical profession, unless enforcement will restrict the public’s access to medical professionals, since public policy favors access to doctors. In deciding whether or not to enforce a restrictive covenant, courts will consider whether the area covered by the covenant has a shortage or a surplus of doctors. See, e.g., New Castle Orthopedic Associates v. Burns, 481 Pa. 460, 392 A.2d 1383, 1387 (1978). A complicating factor is that many restrictive employment covenants in the medical profession also arise from sale of a medical practice as a business. Restrictive covenants in the sale of a business are subject to less stringent scrutiny than restrictive employment covenants. See Geisinger Clinic v. DiCuccio, 414 Pa. Super. 85, 606 A.2d 509, 518 (1992).

1. a five-year restrictive covenant, keyed to prior practice sites, against an oncologist/hematologist; employment agreement entered into as part of sale of practice (West Penn Specialty MSO, Inc. v. Nolan, 737 A.2d 295 (Pa. Super. 1999)). The Superior Court looked to the availability of medical care in the affected area, citing New Castle

Orthopedic Associates v. Burns, supra, and found an adequate supply of oncologists in the relevant service area. The Court rejected the doctor’s argument that the public interest encompassed a particular patient’s interest in continued care with a particular physician. The Court found significant harm in the fact that 125 patients had followed the defendant to the defendant’s new employer. Because patient attrition could not be measured with certainty, the Court found that the plaintiff had suffered irreparable harm. 737 A.2d at 299.

2. a two-year, fifty-mile restrictive covenant; employment agreement entered into as part of sale of practice (Geisinger Clinic v. DiCuccio, 414 Pa. Super. 85, 606 A.2d 509 (1992)). The courts enforced a liquidated damage clause triggered by the breach of the restrictive covenant.

1. a county-wide, two-year ban on practice by an orthopedic surgeon (New Castle Orthopedic Associates v. Burns, 481 Pa. 460, 392 A.2d 1383, (1978)). The Supreme Court noted that the plaintiff’s practice had not suffered irreparable harm from the competition, because there was no showing that the defendant had stolen patients, taken patient lists, or that plaintiff had lost patients or income. 392 A.2d at 1386-87. In fact, there was a shortage of orthopedic specialists in the area. "This is quite unlike the normal commercial situation in which there are only a limited number of prospective clients and the alleged breach significantly affects the share of the former employer. Here, the potential pool of clients far exceeds the [plaintiff's] ability to serve them." New Castle Orthopedic Associates v. Burns, 392 A.2d at 1387.
2. a three-year, fifteen-mile restriction for a radiologist (Herman v. Dixon, 393 Pa. 33, 141 A.2d 576 (1958)).
3. a two-year, hospital-specific restrictive covenant for an ear/nose/throat specialist (Philadelphia Ear, Nose and Throat Surgical Associates, P.C. v. Roth, 44 Pa. D. & C.4^th 427 (C.C.P. Philadelphia Co. 2000)).

1. A dental firm’s patient list was given trade secret protection in In re Phoenix Dental Systems, Inc., 144 B.R. 22 (Bankr. W.D. Pa. 1992). The Court held that the patients’ names were not ascertainable from an outside service; were the firm’s most valuable asset; and were developed through efforts of the firm at the firm’s place of business and with the firm’s equipment. The Court allowed the dentist to retain personal friends and relatives as patients but prevented the dentist from access to any other patients (even those generated by his own contacts and efforts) because the patients came to the dentist as a result of the firm’s facilities and services.
2. In In re Allegheny Health, Education and Research Foundation, ____B.R. ____, 1999 WL 1051211, *8 (Bankr. E. D. Pa. 1999) the Bankruptcy Court held that the hospital had no protectible interest in a list of Jehovah’s Witness patients desiring bloodless surgery, where the hospital knew of the customer list and failed to protect list.

In West Penn Specialty MSO, Inc. v. Nolan, 737 A.2d 295 (Pa. Super. 1999), the Court of Common Pleas enjoined the individual doctor from servicing patients who wished to treat with her, but allowed other members of her practice group to treat these patients.

In a trade secret case, with no restrictive covenant, the courts refused to enjoin a former accountant for a trucking brokerage business from setting up a competitive truck brokerage business. The Superior Court said that the accountant’s expertise in setting up books, compiling reports, dealing with banks, and using publicly available information, did not constitute a betrayal of confidences proscribed by the CPA Law. (See 63 P.S. § 9.11; see Agra Enterprises, Inc. v. Bruozzi, 302 Pa. Super. 166, 448 A.2d 579 (1987).

1. In Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Napolitano, 85 F. Supp.2d 491 (E.D. Pa. 2000), the District Court enforced a one-year non-solicitation covenant against a stockbroker who left Merrill, Lynch to join a rival brokerage firm. The Court’s order encompassed not only the brokerage firm’s customers, but the broker’s own customers brought from a previous employer, which the broker had assigned to Merrill, Lynch. The Court noted that the broker had consented to injunctive relief. The broker claimed that he had not solicited accounts by announcing his new affiliation and stating to his customers that they were "free to do what they want with their accounts." The Court dismissed this argument as "disingenuous." Merrill, Lynch v. Napolitano, 85 F. Supp.2d at 496.
2. Courts within the Third Circuit have granted preliminary injunctive relief to stock brokerage firms pending New York Stock Exchange or NASD arbitration despite the absence of any authorization for injunctive relief in the restrictive covenant. See, e.g., Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Rodger, 75 F. Supp.2d 375 (M.D. Pa. 1999); see also Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Moose, 365 Pa. Super. 40, 528 A.2d 1351 (1987).
3. Interest of clients

i. In Frank Russell Co. v. Wellington Management Co., LLP, 154 F.3d 97 (3d Cir. 1998), former clients of an investment management firm who wished to move their accounts to a departing investment advisor sought an injunction against enforcement of a non-compete between the management firm and the advisor. The Third Circuit reversed the lower court’s grant of an injunction, rejecting claims that the enforcement of the non-compete violated the Employee Retirement Income Security Act and the Investment Advisors Act. The Third Circuit also held that the management firm had no obligation to disclose the individual manager’s non-compete to the client.

ii. In Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Napolitano, 85 F. Supp.2d 491, 498-499 (E.D. Pa. 2000) and Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Rodger, 75 F. Supp.2d 375, 383 (M.D. Pa. 1999), the courts held that the clients’ interests in preserving a relationship with a broker did not outweigh the public interest in enforcement of contracts (Merrill, Lynch v. Napolitano, supra) or the firm’s interest in its business investments and confidential customer information (Merrill, Lynch v. Rodger, supra).

d. "Unclean hands"

In Salomon, Smith, Barney, Inc. v. Vockel, 2000 WL 558580 (E.D. Pa. 2000), the United States District Court for the Eastern District of Pennsylvania refused to enforce a restrictive covenant against a departing stockbroker because of the brokerage firm’s own "unclean hands" in having earlier obtained many customers from the broker’s previous employer. The Court found that the plaintiff brokerage firm had once encouraged the stockbroker to engage in the same kind of unconscionable conduct that the brokerage firm now sought to restrain.

1. Customer information, including customer data, charges, and renewal dates, may constitute trade secret information (See A. M. Skier Agency, Inc. v. Gold, 747 A.2d 936 (Pa. Super. 2000)).
2. An employee who brings customers to a business from a firm that the employee owned may have the freedom to later leave the business with those same customers. See, e.g., Fidelity Fund, Inc. v. DiSanto, 347 Pa. Super. 112, 500 A.2d 431 (1985); but see Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Napolitano, 85 F. Supp.2d 491 (employee may contractually "give up" customers); and A. M. Skier Agency, Inc. v. Gold, 747 A.2d 936 (Pa. Super. 2000) (employee cannot bring new customers to a business if the employee was subject to an employee non-compete with earlier firm).

1. In Earthweb, Inc. v. Schlack, 71 F. Supp.2d 299 (S.D. N.Y. 1999), the United States District Court refused to enforce a one-year restrictive covenant against work for on-line reference services or on-line stores distributing third party software or products. The Court held that the employee had not violated the restrictive covenant, noting that the plaintiff and the defendant’s new employer produced different products. The plaintiff provided online products and services of third parties to business professionals in the information technology industry, and the defendant’s new employer published online publications containing news, product information and opinion. The Court also held that the one-year duration of the restriction was too long "given the dynamic nature of this industry, its lack of geographical borders, and the daily changes in content on the Internet." 71 F. Supp.2d 299, 312. The Second Circuit reversed the District Court’s holding and remanded on only one issue – the failure to address the confidentiality clause in the employment agreement. Earthweb, Inc. v. Schlack, 205 F.3d 1322, 2000 WL 232057 (2d Cir. 2000). The District Court then found no breach of the confidentiality provisions, and the Second Circuit affirmed. Earthweb, Inc. v. Schlack, 2000 WL 1093320 (2d Cir. 2000)

In Earthweb, Inc. v. Schlack, supra, 71 F. Supp.2d 299, 308-312, the United States District Court also refused to apply the doctrine of inevitable disclosure to prevent an employee from new employment with an internet company.

2. A one-year restriction was upheld for an internet sales manager in National Business Services, Inc. v. Wright, 2 F. Supp.2d 701 (E.D. Pa. 1998).

Nationwide restrictions were upheld against a salesperson for a fiber-optic technology company in Ciena Corp. v. Jarrard, 203 F.3d 312 (4^th Cir. 2000).