State Bar of Arizona Ethics Opinions
95-04: Confidentiality; In-House Counsel; Departing Lawyers; Restrictive Covenants in Employment Contracts
Provisions in an attorney's severance agreement that impose confidentiality restrictions on the departing in-house counsel do not impermissibly restrict the attorney's ability to practice law in the future as long as the provisions merely reaffirm the requirements imposed by ER 1.6 on disclosure of confidential information. [ER 1.6, 5.6]
The inquiring attorney was employed at a corporation in a mixed legal and non-legal capacity. Upon severance of the employment relationship, the inquiring lawyer was presented with an Agreement and General Release (the "Agreement") that would impose confidentiality provisions in exchange for the payment of certain cash and non-cash severance benefits. The confidentiality provisions are as follows:
11. [Counsel] acknowledges that during the course of his employment with the Company, he acquired and had access to confidential information about the Company. That confidential information was disclosed to [Counsel] in confidence and solely for use by or on behalf of the Company. [Counsel] has no right or interest in that confidential and proprietary information. [Counsel] agrees that he will keep that information confidential at all times, that he will not discuss it with or disclose it to anyone, and that he will not make any use of the confidential information on his own behalf or on behalf of any other person or entity. Any failure by [Counsel] to comply with this provision shall constitute a material breach of this Agreement and shall entitle the Company to recover the special pay and benefits [Counsel] received pursuant to this Agreement, and to any other damages and relief to which the Company may be entitled.
12. [Counsel] acknowledges that he is familiar with the Company's Policy ... Interests concerning the prohibition against disclosure of confidential Company information. He agrees to comply with this policy and acknowledges that he will not use or disclose confidential Company information for his personal profit or for the advantage of anyone else. Any failure by [Counsel] to comply with this provision shall constitute a material breach of this Agreement and shall entitle the Company to recover the special pay and benefits [Counsel] received pursuant to this Agreement, and to any other damages and relief to which the Company may be entitled.
13. [Counsel] acknowledges that an attorney-client relationship existed between the Company and him during his employment. During the course of this attorney-client relationship, [Counsel] acquired confidential information from the Company. [Counsel] acknowledges that the attorney-client privilege and work product doctrine applies to the information he acquired during his employment and agrees that he will not disclose any confidential attorney-client communications or work product material without the express written consent of the General Counsel of the Company. Any failure by [Counsel] to comply with this provision shall constitute a material breach of this Agreement and shall entitle the Company to recover the special pay and benefits [Counsel] received pursuant to this Agreement, and to any other damages and relief to which the Company may be entitled.
The inquiring lawyer recognizes that the Agreement does not, on its face, restrict him from practicing law in the future. Nevertheless, the lawyer is concerned that the terms of the agreement may be used, as a practical matter, to restrict his ability to so practice. The Committee thus has been requested to provide guidance as to whether the proposed agreement, as written or enforceable, violates any ethical rules.
Do the provisions in a severance agreement that impose confidentiality obligations upon counsel impermissibly restrict counsel's ability to practice law after termination of his in-house employment relationship?
Relevant Ethical Rules
E.R. 1.6 Confidentiality of Information
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation . . .
E.R. 5.6 Restriction on Right to Practice
A lawyer shall not participate in offering or making:
(a) a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or
(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a controversy between private parties.
A. Ethical Rule 5.6
The restrictions contained in E.R. 5.6 are rooted in the concern that restrictive covenants among lawyers will diminish the public's ability to employ counsel of choice, which interest outweighs a lawyer's interest in the potential unfair competition for existing clients. Disputes regarding the application of E.R. 5.6 and its predecessor in the Code of Professional Responsibility, D.R. 2-108(A), often have arisen in the context of agreements among lawyers, especially in the context of law firm partnership agreements. See, e.g., Jacob v. Norris, McLaughlin & Marcus, 607 A.2d 142 (N.J. 1991) (law firm's termination agreement's provisions barring compensation to departing members of law firm if they rendered services to clients of firm within one year after departure and prohibiting contact with firm's professional and paraprofessional staff violated public policy and E.R. 5.6); Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 550 N.E.2d 410, 551 N.Y.S.2d 157 (App. 1989) (law firm partnership agreement that conditioned payment of earned but uncollected partnership revenues upon withdrawing partner's obligation to refrain from competing with former firm restricted practice of law and thus was unenforceable as against public policy and D.R. 2-108(A)); Gray v. Martin, 63 Or. App. 173, 663 P.2d 1285, rev. denied, 63 Or. App. 173, 669 P.2d 384 (1983) (partner's right to payment upon withdrawal from firm may not be made contingent on the partner's covenant not to compete within the geographical area). As a general rule, the cases have held that financial disincentives linked to restrictive covenants on the practice of law are void as against public policy. See, e.g., cases cited above.
At least one ABA ethics opinion addressed D.R. 2-108(A) in the context of a restriction on the future practice of an in-house lawyer. In ABA Informal Opinion 1301 (1975) (hereinafter "ABA Informal Op. 1301"), a corporation sought ethical guidance on the propriety of a proposed employment agreement that would have prohibited an in-house lawyer from accepting employment with a competitor for a period of two years after termination from the corporation. The avowed purpose of the agreement was to protect the corporation's confidential information and trade secrets.
Although the proposed agreement at issue in ABA Informal Op. 1301 would have been executed between a lawyer and a client, rather than among or between lawyers, the ABA concluded that the underlying ethical considerations implicated were the same, regardless of the role of the parties entering into the agreement.
[T]he right to practice law is granted by the State and so long as a lawyer holds his license to practice, this right should not be restricted by an agreement restricting future employment. An attorney at law should remain free to practice his profession at all times. A restrictive covenant between attorney and client is not favored under the Code.
ABA Informal Op. 1301.
The ABA then determined that the strict requirements of the ethical prohibitions against a lawyer disclosing confidential information were such that
the avowed purpose of the restrictive covenant under consideration -- protection of confidences and secrets -- is already assured, given expected adherence to the Code of Professional Responsibility, and therefore the covenant appears superfluous. To further limit the lawyer's future employment, by contract, cannot be reconciled with his professional standing and position.
ABA Informal Op. 1301.
Somewhat curiously, however, the ABA held, without further explanation, that the subject restriction did not violate D.R. 2-108(A), although the restrictive language was deemed to be "undesirable surplusage because from an ethical standpoint adequate protection of confidences already exists." Id.
1. Although the Agreement is to be Executed Between a Lawyer and a Client Rather than Among Lawyers, Analysis Under ER 5.6 is Appropriate
Although the Agreement is proposed to be entered into between a lawyer and a client rather than among lawyers, the Committee agrees with the analysis presented in ABA Informal Opinion 1301 on that issue and therefore is willing to review the Agreement within the context of E.R. 5.6.
2. The Proposed Agreement Does Not, on its Face, Violate ER 5.6
i. ER 5.6(a)
The Agreement is not, on its face, a "partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship..." within the scope of E.R. 5.6. That is, it is neither a partnership nor employment agreement. Even if E.R. 5.6 were read more broadly to cover any agreement, the Agreement does not, on its face, purport to restrict the lawyer's ability to practice law in the future. On its face, therefore, the Agreement does not fall within the scope of E.R. 5.6(a).
ii. ER 5.6(b)
The Committee views E.R. 5.6(b) as prohibiting a party to a private dispute from requiring, as a condition of settlement, that a lawyer or firm involved in the representation in a dispute be restricted from future representation of others as a condition of settlement. See, e.g. Comment, E.R. 5.6 ("Paragraph (b) prohibits a lawyer from agreeing not to represent other persons in connection with settling a claim on behalf of a client.") See also, e.g., ABA Informal Opinion 1039 (1968) (unethical to accompany settlements in private antitrust litigation with covenants not to sue or aid anyone in suit against settling defendants); D.C. Bar, Legal Ethics Comm., Op. 35 (1977) (a settlement agreement may not contain provisions stating that the lawyer agrees never again to represent anyone who has a claim against the defendant in the matter being settled and that the lawyer will not refer to another lawyer a potential client who has a claim against the defendant in the matter being settled); Or. State Bar, Legal Ethics Comm., Op. 258 (1974) (settlement agreement may not include provisions restricting an attorney from accepting a case against one of the parties).
Since the inquiring attorney has not been representing a party in a dispute with the corporation and has not been asked to forego representation of other clients in future disputes with the corporation with regard to any particular matter, the Committee believes that the controlling facts here are not within the intended scope of E.R. 5.6(b).
2. The Agreement is Consistent Eith ER 1.6
E.R. 1.6 prohibits lawyers from revealing information "relating to representation of a client unless the client consents after consultation." Clearly, any lawyer -- including the inquiring lawyer -- has an ethical obligation not to divulge, among other things, confidential communications, information and secrets imparted to him by his client or otherwise obtained in the course of the representation of the client. That obligation outlasts the term of the attorney-client relationship.
The obligations imposed by the proposed Agreement are not in conflict with obligations imposed on the inquiring lawyer by E.R. 1.6. Indeed, the confidentiality provisions, on their face, appear to be consistent with the requirements of E.R. 1.6.
Here, it appears that the employer seeks to impose the confidentiality obligations through contract in order to provide it with a contractual remedy (including the return of the severance benefits) in the event of a violation. Although a violation of E.R. 1.6 might give the employer cause for seeking discipline against counsel or for filing a bar complaint, E.R. 1.6 in itself would not provide the employer with a contractual remedy in the event the inquiring lawyer were to disclose or divulge client confidences.
Even if the inquiring lawyer were to decline to execute the Agreement, he still would be bound by the prohibitions of E.R. 1.6. The Committee sees no ethical violation in tying the provision of severance benefits to a lawyer to contractual confidentiality obligations when the Agreement does not directly restrict the lawyer's right or ability to practice. The Agreement merely provides the employer with contractual remedies in the event the lawyer were to divulge confidential information or secrets.
3. The Agreement Does Not Appear to Violate the Spirit of ER 5.6
The Committee is aware of the inquiring lawyer's concerns that the employer may seek to enforce the confidentiality terms of the Agreement in an unreasonably restrictive manner by using the provisions to prohibit the lawyer, as a practical matter, from practicing law. The Committee cannot foresee every possible attempted application of the terms of the Agreement, however, and is not in a position to serve as an arbiter or enforcer of its terms, especially under potential circumstances that have not yet arisen and might not arise.
Moreover, the Committee cannot, as a policy matter, rule that a contractual provision that is otherwise reasonable on its face should be considered unethical because one party to the Agreement might attempt, in the future, to enforce the provision in an unreasonable manner. If the Committee were to so analyze an agreement, any proposed contract would fail under a host of "what if" scenarios.
The Committee only can review the Agreement as written and presume that the parties will act reasonably in adhering to their private agreement. The Agreement as written does not define confidential information, and the Committee is not in a position to define that term for the parties.
For purposes of this analysis, the Committee presumes that the term as used in the Agreement would impose no more severe restrictions upon counsel than would be imposed pursuant to his ethical obligations. Under those circumstances, the Committee does not find the agreement to be violative of any ethical prohibitions. Whether a particular alleged disclosure will be deemed to have violated the provisions of the Agreement will be a matter for the parties to determine themselves in the sound exercise of their professional judgment.
For the foregoing reasons, the Committee concludes that the Agreement does not impose ethically impermissible provisions upon counsel.