The opening brief has been filed in a Fourth Circuit appeal that’s sure to be closely watched by the 100,000 members of the D.C. bar, as well as others. A key issue in Moskowitz v. Jacobson Holman PLLC is whether a law firm partnership agreement can reduce a partner’s equity payout if the partner walks out the door with clients. The district court said that the provision violates ethics rules, and is therefore unenforceable as against public policy.
Forfeiture and right to practice
Many law firms attempt to protect their interests with partnership or operating agreement provisions that penalize equity holders who take clients with them when they depart the firm. The validity of such provisions has been litigated elsewhere, with the same result as the district court’s ruling in Moskowitz. A notable example is Cohen v. Lord Day & Lord, the decision that also contributed to the New York Court of Appeals’ rejection of the “unfinished business” rule in 2014.
Lord Day and its progeny have been generally decided under state versions of Model Rule 5.6 (and its predecessor, DR 2-108), which prohibits lawyers from making or offering an “operating … agreement that restricts the right of a lawyer to practice after termination of the relationship,” except for retirement provisions.
In opinions similar to Lord Day and the district court’s ruling in Moskowitz, courts have refused to enforce agreements that require forfeiture of earned compensation when a departing lawyer competes with the lawyer’s former firm. (There are many factual permutations to those holdings, however, and a number of jurisdictions reject any bright line approach.)
In Moskowitz, an amendment to the Jacobson firm’s operating agreement provided that a member who “withdraws from the Company … and takes client(s) of the Company” would forfeit 50 percent of the member’s equity interest that would otherwise be payable.
When Moskowitz left the firm in 2013, he apparently took the business of almost 50 prior clients (who paid more than $1 million in fees over the next two years). He sued the Jacobson firm in 2015, asserting that Rule 5.6(a) of the D.C. Rules of Professional Conduct barred enforcement of the amendment, a position that the trial court accepted.
Firm argues for “non-substantial” exception
On appeal to the Fourth Circuit, the Jacobson firm is advancing an interesting argument in favor of reversal.
Reducing the payout of an equity interest, it says, is not by itself sufficient to violate Rule 5.6. While the rule proscribes an agreement if it “restricts the rights of a lawyer to practice after termination of the relationship,” the firm says that comments to D.C. Rule 5.6 recognize that a financial penalty may not be prohibited if it is not “substantial.” In evaluating the substantiality of a forfeiture, it argues, the amount of the penalty should be compared to the lawyer’s post-withdrawal practice income at his or her new firm.
Using that measure, the firm says, Moskowitz’s penalty for competing against his former firm (about $63,000) is a small fraction of his annual earnings as a highly-compensated lawyer before and after he left Jacobson.
Firms in D.C. and elsewhere will be interested to see if the Fourth Circuit buys this approach.