NJ Upholds Non-Competition Agreement

As previously reported in LFPBR, several states have upheld the forfeiture of non-qualified retirement benefits otherwise payable to a partner choosing to compete with the firm. See, eg, Sheldon I. Banoff, “Illinois Developments Are Good News for Multi-State Law Firms Across the Country,” LFPBR (Nov. 2002), pg. 5. In Borteck v. Riker, Danzig, Scherer, Hyland, and Perretti, LLP (A-31-03) (April 5, 2004), the New Jersey Supreme Court unanimously concluded that the retirement provisions of a law firm's partnership agreement did not violate N.J. Rules of Professional Conduct (RPC) 5.6, and held the competing partner to lose his retirement benefits. The case provides further guidance for firms in designing, drafting and defending enforceable forfeiture-for-competition agreements.

At age 53, Borteck (an 11-year partner at Riker) withdrew to join another New Jersey law firm. At the time of his departure, he was subject to a partnership agreement (the Riker Agreement) that set forth a withdrawing or retiring partner's entitlement to certain payments, as well as a notice provision governing the departure.

Under the Riker Agreement, “retirement” means the permanent retirement from the practice of law. The partner must be a capital partner, at least 55 years old. Continuation with the firm in an of counsel status after retirement is not inconsistent with eligibility for retirement benefits. In recognizing the importance of public service, a Riker partner is deemed to have retired from law practice even if he or she is appointed to the bench, enters government service, or assumes a position in academia. Entitlement to continuation of retirement benefits is conditioned on the former partner remaining in retirement status.

Under Section 17(c) of the Riker Agreement, a capital partner with Riker for at least 10 consecutive years and who, throughout the subsequent 5-year early-retirement-benefit-payment period following retirement from the firm, continuously remains in retirement status, receives early-retirement-benefit payments based on a percentage of the partner's average annual earnings. The payments are made over a 4-year period, starting 1 year after retirement.

Borteck withdrew with little or no formal notice to the firm and began soliciting many of his former clients. Riker refused to pay Borteck retirement benefits on the ground that Borteck had not “retired.” Borteck sued Riker for $275,090 allegedly due under Section 17(c) of the Riker Agreement. Riker answered, asserting certain counterclaims and damages.

The N.J. trial court and Appellate Division awarded Borteck the retirement benefits. The courts concluded that if retirement benefits are not paid to Borteck, the Riker Agreement would have anti-competition effects prohibited by RPC 5.6.

New Jersey's RPC 5.6 (based on the Model Rules of Professional Conduct Rule 5.6) states that a “lawyer shall not participate in offering or making … a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except in agreements concerning benefits upon retirement.” The Rule contains no definition of “retirement,” and has been the subject of litigation in several states.

The New Jersey Supreme Court reversed the lower courts, holding that the Riker Agreement sufficiently operates as a retirement plan with the contemplation of RPC 5.6 and, as such, does not offend the public policies underlying the Rule. Therefore, the agreement's eligibility requirements, including the age threshold and conditions concerning the private practice of law, were held to be enforceable against Borteck.

The Supreme Court's Borteck opinion is of importance in several regards:

1. Despite the lack of a definition of “retirement” in RPC 5.6, the Court recognized that the retirement exception acts as a safe harbor, permitting restrictions on the practice of law not otherwise tolerated under the Rule. The court stated the case required a determination of whether defendant's retirement requirements fall sensibly within that safe-harbor provision or whether they are so unreasonable that they must be deemed as against public policy. Therefore, the Court evaluated the agreement to determine whether it contains sufficient indicia of a bona fide retirement arrangement to fit reasonably within the Rule's exception.

2. Borteck may be the first case involving Model Rule 5.6 in which an outside consultant persuasively testified as to the status of the plan as a retirement plan. In reaching the conclusion that the agreement's eligibility requirements, including the age threshold and conditions concerning the private practice of law, are enforceable against Borteck, the Court was persuaded in part by the certification submitted by the firm's actuary and employee benefits consultant, who expressed the view that the firm's agreement “includes all of the normal indicia one would expect to see in a legitimate retirement plan,” including the minimum age requirements, benefit calculation formulas, a defined term for benefit payouts, benefits that increase as years of service to the firm increase and are payable to a deceased retiree's estate.

3. The Court applied three criteria espoused by a noted commentator (Robert W. Hillman, “Hillman on Lawyer Mobility” Sec. 2.3.5) as being useful for defining a retirement plan. The first and most important factor is the existence of minimum age and service requirements. Riker's plan satisfied the age (55) criterion and service criterion (being a partner of the firm for at least 10 consecutive years).

The second factor is the existence of provisions dealing independently with withdrawal for purposes of retirement and withdrawal for other reasons. The Court held it sufficient that Section 17 of the Riker Agreement contained separate subdivisions which separately governed the two forms of departure (retirements and non-retirement withdrawals).

The third factor focuses on the time period over which benefits are to be paid. Payment of benefits over an extended period indicates that such are in fact for the purpose of funding a retirement. The Court held Riker's payout is an extended period (ie, a 5-or-10 year period from the departure date of which the last 4 to 9 years are retirement benefits).

4. The Court indicated that at least a portion (but not necessarily all or most) of the retirement benefits should be payable from future revenues of the firm. A relevant consideration is that the benefits established under Riker's plan “are funded at least in part from revenues” that post-date withdrawal of the partner (citing Hoff v. Mayer Brown & Platt, 772 N.E. 2d 263, 268 (Ill. App. Ct.), appeal denied, 786 N.E. 2d 183 (Ill. 2002)). It noted that requiring eligible retirees to refrain from private practice rather than compete with defendant for business, or to remain of counsel with the firm, is reasonable. Upholding the sound public policies underlying RPC 5.6 (ie, restrictions on agreements preventing lawyers from competing) does not mean that firms must accept utterly irrational or unfair results.

5. To provide greater future guidance, the Supreme Court directed its Professional Responsibility Rules Committee to review the safe-harbor language of RPC 5.6 to determine whether the Rule should define “retirement” and, if so, to propose such a definition or related criteria. No other court is known to have directed review of the Rule for possible clarification or amendment as to what constitutes a “retirement agreement”.

6. Borteck claimed that the Riker Agreement's advance notice of withdrawal provision in Section 14 (requiring a specified advance notification) is an improper restraint in violation of RPC 5.6. Since Borteck left his firm after providing it little or no formal notice, and he received his full share of payments to which he was entitled (other than the retirement plan benefits), the court concluded on these facts that Section 14 does not bar enforcement of an otherwise valid retirement agreement. It noted that notice provisions are not unenforceable per se. However, it also requested its Rules Committee to consider whether an express Rule or more explicit guidance in respect of an agreement's notice-of-departure provisions is necessary ' another first.

As previously reported in LFPBR, several states have upheld the forfeiture of non-qualified retirement benefits otherwise payable to a partner choosing to compete with the firm. See, eg, Sheldon I. Banoff, “Illinois Developments Are Good News for Multi-State Law Firms Across the Country,” LFPBR (Nov. 2002), pg. 5. In Borteck v. Riker, Danzig, Scherer, Hyland, and Perretti, LLP (A-31-03) (April 5, 2004), the New Jersey Supreme Court unanimously concluded that the retirement provisions of a law firm's partnership agreement did not violate N.J. Rules of Professional Conduct (RPC) 5.6, and held the competing partner to lose his retirement benefits. The case provides further guidance for firms in designing, drafting and defending enforceable forfeiture-for-competition agreements.

At age 53, Borteck (an 11-year partner at Riker) withdrew to join another New Jersey law firm. At the time of his departure, he was subject to a partnership agreement (the Riker Agreement) that set forth a withdrawing or retiring partner's entitlement to certain payments, as well as a notice provision governing the departure.

Under the Riker Agreement, “retirement” means the permanent retirement from the practice of law. The partner must be a capital partner, at least 55 years old. Continuation with the firm in an of counsel status after retirement is not inconsistent with eligibility for retirement benefits. In recognizing the importance of public service, a Riker partner is deemed to have retired from law practice even if he or she is appointed to the bench, enters government service, or assumes a position in academia. Entitlement to continuation of retirement benefits is conditioned on the former partner remaining in retirement status.

Under Section 17(c) of the Riker Agreement, a capital partner with Riker for at least 10 consecutive years and who, throughout the subsequent 5-year early-retirement-benefit-payment period following retirement from the firm, continuously remains in retirement status, receives early-retirement-benefit payments based on a percentage of the partner's average annual earnings. The payments are made over a 4-year period, starting 1 year after retirement.

Borteck withdrew with little or no formal notice to the firm and began soliciting many of his former clients. Riker refused to pay Borteck retirement benefits on the ground that Borteck had not “retired.” Borteck sued Riker for $275,090 allegedly due under Section 17(c) of the Riker Agreement. Riker answered, asserting certain counterclaims and damages.

The N.J. trial court and Appellate Division awarded Borteck the retirement benefits. The courts concluded that if retirement benefits are not paid to Borteck, the Riker Agreement would have anti-competition effects prohibited by RPC 5.6.

New Jersey's RPC 5.6 (based on the Model Rules of Professional Conduct Rule 5.6) states that a “lawyer shall not participate in offering or making … a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except in agreements concerning benefits upon retirement.” The Rule contains no definition of “retirement,” and has been the subject of litigation in several states.

The New Jersey Supreme Court reversed the lower courts, holding that the Riker Agreement sufficiently operates as a retirement plan with the contemplation of RPC 5.6 and, as such, does not offend the public policies underlying the Rule. Therefore, the agreement's eligibility requirements, including the age threshold and conditions concerning the private practice of law, were held to be enforceable against Borteck.

The Supreme Court's Borteck opinion is of importance in several regards:

1. Despite the lack of a definition of “retirement” in RPC 5.6, the Court recognized that the retirement exception acts as a safe harbor, permitting restrictions on the practice of law not otherwise tolerated under the Rule. The court stated the case required a determination of whether defendant's retirement requirements fall sensibly within that safe-harbor provision or whether they are so unreasonable that they must be deemed as against public policy. Therefore, the Court evaluated the agreement to determine whether it contains sufficient indicia of a bona fide retirement arrangement to fit reasonably within the Rule's exception.

2. Borteck may be the first case involving Model Rule 5.6 in which an outside consultant persuasively testified as to the status of the plan as a retirement plan. In reaching the conclusion that the agreement's eligibility requirements, including the age threshold and conditions concerning the private practice of law, are enforceable against Borteck, the Court was persuaded in part by the certification submitted by the firm's actuary and employee benefits consultant, who expressed the view that the firm's agreement “includes all of the normal indicia one would expect to see in a legitimate retirement plan,” including the minimum age requirements, benefit calculation formulas, a defined term for benefit payouts, benefits that increase as years of service to the firm increase and are payable to a deceased retiree's estate.

3. The Court applied three criteria espoused by a noted commentator (Robert W. Hillman, “Hillman on Lawyer Mobility” Sec. 2.3.5) as being useful for defining a retirement plan. The first and most important factor is the existence of minimum age and service requirements. Riker's plan satisfied the age (55) criterion and service criterion (being a partner of the firm for at least 10 consecutive years).

The second factor is the existence of provisions dealing independently with withdrawal for purposes of retirement and withdrawal for other reasons. The Court held it sufficient that Section 17 of the Riker Agreement contained separate subdivisions which separately governed the two forms of departure (retirements and non-retirement withdrawals).

The third factor focuses on the time period over which benefits are to be paid. Payment of benefits over an extended period indicates that such are in fact for the purpose of funding a retirement. The Court held Riker's payout is an extended period (ie, a 5-or-10 year period from the departure date of which the last 4 to 9 years are retirement benefits).

4. The Court indicated that at least a portion (but not necessarily all or most) of the retirement benefits should be payable from future revenues of the firm. A relevant consideration is that the benefits established under Riker's plan “are funded at least in part from revenues” that post-date withdrawal of the partner (citing Hoff v. Mayer Brown & Platt , 772 N.E. 2d 263, 268 (Ill. App. Ct.), appeal denied , 786 N.E. 2d 183 (Ill. 2002)). It noted that requiring eligible retirees to refrain from private practice rather than compete with defendant for business, or to remain of counsel with the firm, is reasonable. Upholding the sound public policies underlying RPC 5.6 (ie, restrictions on agreements preventing lawyers from competing) does not mean that firms must accept utterly irrational or unfair results.

5. To provide greater future guidance, the Supreme Court directed its Professional Responsibility Rules Committee to review the safe-harbor language of RPC 5.6 to determine whether the Rule should define “retirement” and, if so, to propose such a definition or related criteria. No other court is known to have directed review of the Rule for possible clarification or amendment as to what constitutes a “retirement agreement”.

6. Borteck claimed that the Riker Agreement's advance notice of withdrawal provision in Section 14 (requiring a specified advance notification) is an improper restraint in violation of RPC 5.6. Since Borteck left his firm after providing it little or no formal notice, and he received his full share of payments to which he was entitled (other than the retirement plan benefits), the court concluded on these facts that Section 14 does not bar enforcement of an otherwise valid retirement agreement. It noted that notice provisions are not unenforceable per se. However, it also requested its Rules Committee to consider whether an express Rule or more explicit guidance in respect of an agreement's notice-of-departure provisions is necessary ' another first.