United States: "A Very Tortured Argument"—Lawyer Cannot Use Bar Membership To Skirt A Bargained-For Restrictive Covenant In The Sale Of A Non-Legal Business

Last Updated: June 28 2019
Article by Erik W. Weibust and Anne V. Dunne

While it is well-settled law that an attorney cannot be bound by an agreement restricting the right to practice law, that does not insulate attorneys from all restrictive covenants. As we have previously discussed, there are exceptions to this rule, as a Massachusetts attorney recently learned the hard way. 

In 1994, Victor Arruda founded the Social Security Law Group ("SSLG") to assist clients with applying for and obtaining Social Security Disability Income benefits. Attorneys from SSLG also represented clients in appeals in the United States District Court. SSLG obtained at least a portion of its client base through a referral relationship with long term disability insurers. SSLG's referral agreements were nonexclusive, and SSLG was not required to represent referrals.

In 2010, Arruda and his partner spun off the portion of SSLG that could be conducted without a lawyer. The new entity provided services to claimants through non-attorney advocates, and referred cases to SSLG if and when attorney intervention was necessary. The new entity was called Social Security Advocates for the Disabled ("SSAD"). SSAD was successful and expanded to over 100 employees. In 2012, Arruda and his partner sold 65% of SSAD to a third party. In 2015, the third party announced its intent to sell SSAD for $32 million. As part of the transaction, Arruda was required to execute restrictive covenants governing competition and solicitation in the equity purchase agreement. As part of the sale, Arruda agreed to not compete with the purchaser, including not soliciting SSAD referral sources for five years. Arruda did ensure there was a carve out, which allowed him to practice law. Once the sale was complete, Arruda informed his contacts in the industry that he was stepping back from the industry as he could not compete with the purchaser of SSAD per the terms of the agreement.

In 2017, however, Arruda hired two new attorneys to join him at SSLG. Arruda and his new hires attended industry conferences and networked with long term disability carriers. After the conference, he conducted in-person meetings and sent marketing materials to potential referral sources, including long term disability carriers.

In 2018, the buyers sued Arruda for violating his restrictive covenant. Arruda moved for summary judgment on the grounds that Rule 5.6 of the Massachusetts Rules of Professional Conduct and public policy prohibit restrictive covenants that restrain attorneys from practicing law. In his moving papers, Arruda argued that practicing law includes seeking referrals from the insurance carriers with whom SSAD had referral relationships.

The court rejected this argument, on the grounds that the agreement does not restrain Arruda from practicing law, only from "recreating the high volume referral network that made SSAD a valuable operating, non-law business." The Court noted that Rule 5.6 functions to protect clients, not lawyers. Arruda never entered into an attorney/client relationship or represented the referring carriers; he only entered into a referral relationship, which is a business relationship. Moreover, there is an exception to Rule 5.6 for the same of a law practice, another "oddity in Arruda's argument" that the Court ruled "cannot be overlooked." The court held that where Arruda had entered into a $32 million Equity Purchase Agreement to sell the non-legal portion of his business, he was bound by the restrictive covenants contained within the agreement, and that his argument to the contrary is:

a very tortured argument that is actually directly inconsistent with the policies expressed in the Rules of Professional Conduct. This interpretation is not intended to protect the interests of any client. Rather, it is a means of avoiding a material term of the [sale agreement] and thereby providing [the buyer] of an important benefit of the contract pursuant to which it paid $32 million for [SSAD]

This decision is of note because it examines the contours of the prohibition on restrictive covenants for lawyers, which is not complete (for example, agreements restricting an in-house attorney's ability to take a non-legal role with a competitor are generally enforceable). The takeaway from this opinion is that restrictive covenants that are part of an agreement governing the sale of a non-legal business, which is operated as ancillary to a law practice, are enforceable against lawyers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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