Covenants Not To Compete: For Everyone At The Firm Except Attorneys?

A covenant not to compete is an increasingly popular device employers use to bind employees not to work for, or as, a direct competitor. The restriction is usually limited in time and to a particular geographical area. Such covenants are most often found in employment contracts, but they can also be a separate document, signed by the employee at hiring, during employment, or upon leaving. However, in many states, a covenant not to compete cannot stand alone as a binding agreement, but must be ancillary to an employment or other type of contract that provides some benefit to the employee. See, eg, Hopper v. All Pet Animal Clinic, 861 P.2d 531 (Wyo. 1996). Covenants not to compete in contracts for the sale of a business are more readily enforced than those in employment agreements because of the relative absence of public policy concerns, detailed below. While covenants not to compete may be used by employers in certain court-delineated circumstances, ethical rules specifically bar the application of such restrictive covenants to attorneys.

Employers favor covenants not to compete as a means of guarding trade secrets and other proprietary business information that employees obtain on the job, and also as a way to protect their market share by barring former employees from entering into a competitive business. The primary rationale against the enforcement of such covenants is the judiciary's disinclination to impede employees from earning a living in their chosen field. Covenants not to compete limit an employee's ability to obtain work and also restrain competition and trade in general. As such, covenants not to compete are disfavored by courts and narrowly construed. See, eg, Duneland Emergency Physician's Medical Group v. Brunk, 723 N.E.2d 963 (Ind. Ct. App. 2000). Although courts can be reluctant to enforce covenants not to compete, employers may at times bank on the legal fees attendant to defending against such claims to deter employees from competitive activity. See, eg, Eve Tahmincioglu, “Compete with Caution against Past Employer: Legal Challenges May Face the Unwary,” N.Y. Times, Thursday, March 31, 2005, at C7.

The Standard for Non-Attorneys

In most states, covenants not to compete will be enforced only so long as the court deems them reasonable. The prevailing common law rule is that a covenant not to compete in an employment agreement is reasonable only if it: 1) is no greater than is required for the protection of the legitimate interest of the employer; 2) does not impose undue hardship on the employee; and 3) is not injurious to the public. BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999). Also, in most jurisdictions, a covenant not to compete must be in writing.

An employer's legitimate interest must be something more than a desire to inhibit ordinary competition. Under New York authority, which is typical of the common law view, legitimate employer interests include: 1) preventing an employee's solicitation or disclosure of trade secrets; 2) preventing an employee's release of confidential information; or 3) precluding an employee whose services to the employer are deemed special or unique from working for a competitor. Jay's Custom Stringing, Inc. v. Yu, No. 01 Civ. 1690 (WHP), 2001 WL 761067 (S.D.N.Y. July 6, 2001). An employer does not have a protectible interest in preventing an employee's use of ordinary business knowledge normally acquired during the course of employment, or preventing an employee's use of business information that can be garnered from publicly available sources. Coskey's Television & Radio Sales & Service, Inc. v. Foti, 602 A.2d 789 (N.J. Super. Ct. App. Div. 1992). The covenant not to compete must be no broader than reasonably necessary to protect the legitimate business interest. Decker, Berta & Co., Ltd v. Berta, 587 N.E.2d 72 (Ill. App. Ct. 1992). This precept has led nearly all jurisdictions to require that the covenant's operation be limited to a reasonable amount of time and territory.

To determine whether the agreement imposes an undue hardship on the employee, courts look at whether it seriously limits the employee's employment opportunities without providing any legitimate benefit to the employer. Technical Aid Corp. v. Allen, 134 N.H. 1, 591 A.2d 262 (1991). As detailed above, if a legitimate employer interest is absent, the court will not enforce the covenant. Some jurisdictions consider the individual circumstances of the employee, such as his family situation, finances, disabilities, ability to relocate, or educational level, to determine whether the covenant imposes undue hardship. See, Empiregas, Inc. of Kosciusko v. Bain, 599 So. 2d 971 (Miss. 1991); Dryvit System, Inc. v. Rushing, 477 N.E.2d 35 (Ill. App. Ct. 1985); Edin v. Josten's, Inc., 343 N.W.2d 691 (Minn. App. 1984).

To determine injury to the public, courts look at whether the enforcement of the covenant will deprive the public of valuable or necessary services. A covenant not to compete may be unenforceable as contrary to the public interest if its enforcement would limit the public's right to choose providers or the services of an unusually skilled employee. American General Life & Acc Ins. Co. v. Fisher, 430 S.E.2d 166 (Ga. App. 1993). Covenants that would tend to create a monopoly in favor of the employer, or that would make an employee unemployable and cause him to become a public charge may be deemed adverse to the public interest. Chuck Wagon Catering, Inc. v. Raduege, 88 Wis. 2d 740, 277 N.W.2d 787 (1979).

A few states, such as California, have enacted statutes barring almost entirely covenants not to compete in employment agreements. Cal. Bus. & Prof. Code '16600 (2005); see, Bosley Med. Group v. Abramson, 161 Cal. App. 3d 284, 207 Cal. Rptr. 477 (Cal. Ct. App. 1984). The California statute has very narrowly drawn exceptions for covenants not to compete pursuant to the sale of a business, the sale of shareholder stock, or the dissolution of a partnership. Cal. Bus. & Prof. Code '16601-16602 (2005). Otherwise, agreements barring an employee from working for a competitor after termination of employment will be enforced only where the employer can show a very strong interest that must be protected. Loyal Corp. v. Moyes, 174 Cal. App. 3d 268, 219 Cal. Rptr. 836 (Cal. Ct. App. 1985). On the other end of the enforcement spectrum is Florida, which rejects the undue hardship factor of the common law reasonableness test. Under Florida caselaw, if time and territory restrictions are reasonable, and the employer has not breached other provisions of the employment agreement, the court enforces the covenant even where enforcement would have a burdensome effect upon the employee. Florida Pest Control and Chemical Co. v. Thomas, 520 So. 2d 669 (Fla. Dist. Ct. App. 1988). Such mechanical enforcement of covenants not to compete in employment agreements is practiced in few states.

The Standard for Attorneys

While coveted by employers, covenants not to compete have not enjoyed popularity in attorneys' employment contracts because virtually all state bar association professional conduct rules prohibit restricting lawyers in this manner. For instance, the New York Code of Professional Responsibility Disciplinary Rule 2-108(A) states: “A lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits.” Every state court system, with the exception of Maine, has adopted a version of either Disciplinary Rule 2-108(A) or the American Bar Association Model Rule of Professional Conduct 5.6, which states essentially the same thing, “A lawyer shall not participate in offering or making: (a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement[.]” Under this ethical rule, a firm that attempts to bind its employee-attorney in this way will usually be thwarted by the courts. A small minority of jurisdictions, despite having adopted a rule identical to Rule 5.6 or DR 2-108(A), disregard the rule and allow covenants not to compete in attorney employment contracts.

The chief rationale for prohibiting covenants not to compete for attorneys is that such covenants limit clients' ability to choose a lawyer and consequently work against the public interest. In addition to serving “the greater social purpose of providing clients with a free choice of counsel,” the rule is also justified as in keeping with the ethical aspirations of the profession of law. Graubard, Mollen, Horowitz, Pomeranz & Shapiro v. Moskovitz, 149 Misc.2d 481, 565 N.Y.2d 672 (N.Y. Sup. Ct. 1990). The New York Court of Appeals recited the reasoning of a 1943 Opinion of the New York Country Lawyer's Association on the problem with binding attorneys by covenants not to compete: “Clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. An attempt, therefore, to barter in clients, would appear to be inconsistent with the best concepts of our professional status.” Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 98, 550 N.E.2d 410, 411 (1989).

The vast majority of jurisdictions view covenants not to compete in attorney employment contracts as per se unenforceable. See, Weiss v. Carpenter, Bennett & Morrissey, 275 N.J. Super. 393, 646 A.2d 473, aff'd, 143 N.J. 420, 672 A.2d 1132 (1996). In these jurisdictions, courts routinely void employer attempts to restrain employee-attorneys through these clauses.

Contract provisions that do not prohibit competition, but impose a financial penalty on an attorney for competing after departure from the firm are tantamount to covenants not to compete and are not enforceable. The New York Court of Appeals has ruled that even if a provision does not expressly or completely prohibit a withdrawing attorney from engaging in the practice of law, if the provision exacts a significant monetary penalty for the withdrawing attorney's competitive practice with his former firm, this constitutes an impermissible restriction on the practice of law in violation of DR 2-108(A). Cohen, 75 N.Y.2d at 98. In Cohen, a clause in the law firm's partnership agreement conditioned the payment of a withdrawing partner's earned but uncollected partnership revenues upon his commitment to refrain from the practice of law in competition with the firm. The court rejected the firm's arguments that financial penalties were not “restraints” within the meaning of the rule because the attorney could either accept the penalty and practice locally or practice elsewhere. The court reasoned that if financial penalties were not restraints of competition, there would be no specific need for the ethical rule to exempt retirement benefits as described below.

Similarly, a New Jersey court ruled that a provision in a law firm's termination agreement barring compensation to departing members if they serviced clients of the firm within one year of their departure violated public policy. The court held that “indirect restrictions on the practice of law, such as the financial disincentives at issue in this case, likewise violate both the language and spirit of [Rule 5.6].” Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 607 A.2d 142 (1992). Other jurisdictions have also concluded that any financial disincentive imposed upon a departing lawyer is an invalid restriction on the right to practice law in violation of the ethical rules. See, Dowd & Dowd, Ltd. v. Gleason, 181 Ill. 2d 460, 693 N.E.2d 358 (1998); Anderson v. Aspelmeier, Fisch, Power, Warner & Engberg, 461 N.W.2d 698 (Iowa 1990).

There is an exception in both Rule 5.6 and DR 2-108(A) that allows covenants not to compete in the case of retirement benefits. This exception is a response to the problem that would be presented to an organization that desired to pay benefits on the condition that an attorney genuinely retire. Courts construe this exception narrowly. In Judge v. Barlett, Pontiff, Stewart & Rhodes P.C., 197 A.D.2d 148, 610 N.Y.S.2d 412 (3d Dep't 1994), the court rejected a law firm's argument that an attorney's “Termination Pay” was actually a retirement payment and so fit the rule's retirement exception. The Termination Pay was equivalent to a portion of a death benefit that the employee would have been entitled to if he had died on the date employment terminated. A clause in the employment agreement conditioned the lawyer's “Termination Pay” on his not practicing law within a 30-mile radius of any office of the law firm for a period of five years. The court ruled that this clause was tantamount to a covenant not to compete and was therefore void under DR 2-108(A). The court stated that “restrictions . . . are objectionable primarily because they can interfere with the client's choice of counsel.” The court noted that it was irrelevant that the attorney actually did represent many of the firm's former clients.

A New York ruling that authorized the conduct under the retirement exception involved an attorney who joined another law firm in his second year of receiving retirement benefits. The retirement agreement stipulated that during a 5-year period in which the partner was to receive retirement benefits, he was obligated to offer all client opportunities to his former firm in the first instance and was also obligated not to do anything to impair the firm's relationship with its existing clients. The court interpreted that agreement to read that during the 5-year retirement benefits period, the partner's options were not to practice at all, or to practice subject to the two aforementioned restraints. The court found that a third option was for the attorney to forgo the benefits and resume practice. In other words, the court found that an attorney who is bound by a non-compete clause because he is receiving retirement benefits does not have to “stay retired” if he gives up the retirement benefits. Graubard, Mollen, Horowitz, Pomeranz & Shapiro v. Moskovitz, 149 Misc. 2d 481, 565 N.Y.2d 672 (N.Y. Sup. Ct. 1990).

While the great majority of courts view a financial penalty for competition as a restriction on the right of a departing attorney to practice and contrary to the ethical rule, a few courts follow another view. The minority view that covenants not to compete are permissible for attorneys rejects the directive of Rule 5.6 or DR 2-108(A) in favor of an argument that the modern law firm should be treated like any other business or profession. The first case to depart from the ethical rule was Howard v. Babcock, 6 Cal. 4th 409, 25 Cal. Rptr.2d 80, 863 P.2d 150 (1993), in which the Supreme Court of California found enforceable an agreement imposing a reasonable cost on departing partners who compete with their former firm in a limited area. The court recognized that Rule 1-500 of the Rules of Professional Conduct of the State Bar of California was very similar to the rules of professional conduct adopted in states adhering to the majority view, and listed a number of decisions from jurisdictions holding that this rule prohibits all agreements restricting competition among lawyers, including those merely assessing a cost for competition. However, the California court declined to follow the majority and held that the changes in the legal profession warranted treating lawyers like other professionals and businesspeople.

In Capozzi v. Latsha & Capozzi, P.C., 797 A.2d 314 (Pa. Super. Ct. 2001), Pennsylvania followed California's view. The court relied on the reasoning in Howard v. Babcock and observed that under Pennsylvania law, the rules of professional conduct do not provide substantive rights, in contrast to the majority-view jurisdictions that based their decisions on ethical considerations, specifically Rule 5.6 or DR 2-108(A). In Capozzi, an attorney-shareholder sued for the actual value of his stock, and the law firm maintained there was an oral agreement that if a shareholder left the firm, and competed with the firm, that shareholder's stock would be valued at the amount of his capital contribution, not the higher actual value on the date of termination. The court analyzed this agreement under the standards of an ordinary covenant not to compete in an employment contract and found it was unenforceable because it was not reasonably limited in time and territory.

As the law stands now, a court will void a covenant not to compete in an attorney employment agreement unless it fits the exception for retirement benefits or the court is in a jurisdiction adhering to the minority view. For jurisdictions adhering to the minority view, or in the case of a non-attorney employee, courts will enforce a covenant that meets the narrow standard of reasonableness.

A covenant not to compete is an increasingly popular device employers use to bind employees not to work for, or as, a direct competitor. The restriction is usually limited in time and to a particular geographical area. Such covenants are most often found in employment contracts, but they can also be a separate document, signed by the employee at hiring, during employment, or upon leaving. However, in many states, a covenant not to compete cannot stand alone as a binding agreement, but must be ancillary to an employment or other type of contract that provides some benefit to the employee. See , eg , Hopper v. All Pet Animal Clinic , 861 P.2d 531 (Wyo. 1996). Covenants not to compete in contracts for the sale of a business are more readily enforced than those in employment agreements because of the relative absence of public policy concerns, detailed below. While covenants not to compete may be used by employers in certain court-delineated circumstances, ethical rules specifically bar the application of such restrictive covenants to attorneys.

Employers favor covenants not to compete as a means of guarding trade secrets and other proprietary business information that employees obtain on the job, and also as a way to protect their market share by barring former employees from entering into a competitive business. The primary rationale against the enforcement of such covenants is the judiciary's disinclination to impede employees from earning a living in their chosen field. Covenants not to compete limit an employee's ability to obtain work and also restrain competition and trade in general. As such, covenants not to compete are disfavored by courts and narrowly construed. See , eg , Duneland Emergency Physician's Medical Group v. Brunk , 723 N.E.2d 963 (Ind. Ct. App. 2000). Although courts can be reluctant to enforce covenants not to compete, employers may at times bank on the legal fees attendant to defending against such claims to deter employees from competitive activity. See, eg, Eve Tahmincioglu, “Compete with Caution against Past Employer: Legal Challenges May Face the Unwary,” N.Y. Times, Thursday, March 31, 2005, at C7.

The Standard for Non-Attorneys

In most states, covenants not to compete will be enforced only so long as the court deems them reasonable. The prevailing common law rule is that a covenant not to compete in an employment agreement is reasonable only if it: 1) is no greater than is required for the protection of the legitimate interest of the employer; 2) does not impose undue hardship on the employee; and 3) is not injurious to the public. BDO Seidman v. Hirshberg , 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999). Also, in most jurisdictions, a covenant not to compete must be in writing.

An employer's legitimate interest must be something more than a desire to inhibit ordinary competition. Under New York authority, which is typical of the common law view, legitimate employer interests include: 1) preventing an employee's solicitation or disclosure of trade secrets; 2) preventing an employee's release of confidential information; or 3) precluding an employee whose services to the employer are deemed special or unique from working for a competitor. Jay's Custom Stringing, Inc. v. Yu, No. 01 Civ. 1690 (WHP), 2001 WL 761067 (S.D.N.Y. July 6, 2001). An employer does not have a protectible interest in preventing an employee's use of ordinary business knowledge normally acquired during the course of employment, or preventing an employee's use of business information that can be garnered from publicly available sources. Coskey's Television & Radio Sales & Service, Inc. v. Foti , 602 A.2d 789 (N.J. Super. Ct. App. Div. 1992). The covenant not to compete must be no broader than reasonably necessary to protect the legitimate business interest. Decker, Berta & Co., Ltd v. Berta , 587 N.E.2d 72 (Ill. App. Ct. 1992). This precept has led nearly all jurisdictions to require that the covenant's operation be limited to a reasonable amount of time and territory.

To determine whether the agreement imposes an undue hardship on the employee, courts look at whether it seriously limits the employee's employment opportunities without providing any legitimate benefit to the employer. Technical Aid Corp. v. Allen , 134 N.H. 1, 591 A.2d 262 (1991). As detailed above, if a legitimate employer interest is absent, the court will not enforce the covenant. Some jurisdictions consider the individual circumstances of the employee, such as his family situation, finances, disabilities, ability to relocate, or educational level, to determine whether the covenant imposes undue hardship. See , Empiregas, Inc. of Kosciusko v. Bain , 599 So. 2d 971 (Miss. 1991); Dryvit System, Inc. v. Rushing , 477 N.E.2d 35 (Ill. App. Ct. 1985); Edin v. Josten's, Inc. , 343 N.W.2d 691 (Minn. App. 1984).

To determine injury to the public, courts look at whether the enforcement of the covenant will deprive the public of valuable or necessary services. A covenant not to compete may be unenforceable as contrary to the public interest if its enforcement would limit the public's right to choose providers or the services of an unusually skilled employee. American General Life & Acc Ins. Co. v. Fisher , 430 S.E.2d 166 (Ga. App. 1993). Covenants that would tend to create a monopoly in favor of the employer, or that would make an employee unemployable and cause him to become a public charge may be deemed adverse to the public interest. Chuck Wagon Catering, Inc. v. Raduege , 88 Wis. 2d 740, 277 N.W.2d 787 (1979).

A few states, such as California, have enacted statutes barring almost entirely covenants not to compete in employment agreements. Cal. Bus. & Prof. Code '16600 (2005); see , Bosley Med. Group v. Abramson , 161 Cal. App. 3d 284, 207 Cal. Rptr. 477 (Cal. Ct. App. 1984). The California statute has very narrowly drawn exceptions for covenants not to compete pursuant to the sale of a business, the sale of shareholder stock, or the dissolution of a partnership. Cal. Bus. & Prof. Code '16601-16602 (2005). Otherwise, agreements barring an employee from working for a competitor after termination of employment will be enforced only where the employer can show a very strong interest that must be protected. Loyal Corp. v. Moyes , 174 Cal. App. 3d 268, 219 Cal. Rptr. 836 (Cal. Ct. App. 1985). On the other end of the enforcement spectrum is Florida, which rejects the undue hardship factor of the common law reasonableness test. Under Florida caselaw, if time and territory restrictions are reasonable, and the employer has not breached other provisions of the employment agreement, the court enforces the covenant even where enforcement would have a burdensome effect upon the employee. Florida Pest Control and Chemical Co. v. Thomas , 520 So. 2d 669 (Fla. Dist. Ct. App. 1988). Such mechanical enforcement of covenants not to compete in employment agreements is practiced in few states.

The Standard for Attorneys

While coveted by employers, covenants not to compete have not enjoyed popularity in attorneys' employment contracts because virtually all state bar association professional conduct rules prohibit restricting lawyers in this manner. For instance, the New York Code of Professional Responsibility Disciplinary Rule 2-108(A) states: “A lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits.” Every state court system, with the exception of Maine, has adopted a version of either Disciplinary Rule 2-108(A) or the American Bar Association Model Rule of Professional Conduct 5.6, which states essentially the same thing, “A lawyer shall not participate in offering or making: (a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement[.]” Under this ethical rule, a firm that attempts to bind its employee-attorney in this way will usually be thwarted by the courts. A small minority of jurisdictions, despite having adopted a rule identical to Rule 5.6 or DR 2-108(A), disregard the rule and allow covenants not to compete in attorney employment contracts.

The chief rationale for prohibiting covenants not to compete for attorneys is that such covenants limit clients' ability to choose a lawyer and consequently work against the public interest. In addition to serving “the greater social purpose of providing clients with a free choice of counsel,” the rule is also justified as in keeping with the ethical aspirations of the profession of law. Graubard, Mollen, Horowitz, Pomeranz & Shapiro v. Moskovitz , 149 Misc.2d 481, 565 N.Y.2d 672 (N.Y. Sup. Ct. 1990). The New York Court of Appeals recited the reasoning of a 1943 Opinion of the New York Country Lawyer's Association on the problem with binding attorneys by covenants not to compete: “Clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. An attempt, therefore, to barter in clients, would appear to be inconsistent with the best concepts of our professional status.” Cohen v. Lord, Day & Lord , 75 N.Y.2d 95, 98, 550 N.E.2d 410, 411 (1989).

The vast majority of jurisdictions view covenants not to compete in attorney employment contracts as per se unenforceable. See , Weiss v. Carpenter, Bennett & Morrissey , 275 N.J. Super. 393, 646 A.2d 473, aff'd , 143 N.J. 420, 672 A.2d 1132 (1996). In these jurisdictions, courts routinely void employer attempts to restrain employee-attorneys through these clauses.

Contract provisions that do not prohibit competition, but impose a financial penalty on an attorney for competing after departure from the firm are tantamount to covenants not to compete and are not enforceable. The New York Court of Appeals has ruled that even if a provision does not expressly or completely prohibit a withdrawing attorney from engaging in the practice of law, if the provision exacts a significant monetary penalty for the withdrawing attorney's competitive practice with his former firm, this constitutes an impermissible restriction on the practice of law in violation of DR 2-108(A). Cohen, 75 N.Y.2d at 98. In Cohen, a clause in the law firm's partnership agreement conditioned the payment of a withdrawing partner's earned but uncollected partnership revenues upon his commitment to refrain from the practice of law in competition with the firm. The court rejected the firm's arguments that financial penalties were not “restraints” within the meaning of the rule because the attorney could either accept the penalty and practice locally or practice elsewhere. The court reasoned that if financial penalties were not restraints of competition, there would be no specific need for the ethical rule to exempt retirement benefits as described below.

Similarly, a New Jersey court ruled that a provision in a law firm's termination agreement barring compensation to departing members if they serviced clients of the firm within one year of their departure violated public policy. The court held that “indirect restrictions on the practice of law, such as the financial disincentives at issue in this case, likewise violate both the language and spirit of [Rule 5.6].” Jacob v. Norris, McLaughlin & Marcus , 128 N.J. 10, 607 A.2d 142 (1992). Other jurisdictions have also concluded that any financial disincentive imposed upon a departing lawyer is an invalid restriction on the right to practice law in violation of the ethical rules. See , Dowd & Dowd, Ltd. v. Gleason , 181 Ill. 2d 460, 693 N.E.2d 358 (1998); Anderson v. Aspelmeier, Fisch, Power, Warner & Engberg , 461 N.W.2d 698 (Iowa 1990).

There is an exception in both Rule 5.6 and DR 2-108(A) that allows covenants not to compete in the case of retirement benefits. This exception is a response to the problem that would be presented to an organization that desired to pay benefits on the condition that an attorney genuinely retire. Courts construe this exception narrowly. In Judge v. Barlett, Pontiff, Stewart & Rhodes P.C. , 197 A.D.2d 148, 610 N.Y.S.2d 412 (3d Dep't 1994), the court rejected a law firm's argument that an attorney's “Termination Pay” was actually a retirement payment and so fit the rule's retirement exception. The Termination Pay was equivalent to a portion of a death benefit that the employee would have been entitled to if he had died on the date employment terminated. A clause in the employment agreement conditioned the lawyer's “Termination Pay” on his not practicing law within a 30-mile radius of any office of the law firm for a period of five years. The court ruled that this clause was tantamount to a covenant not to compete and was therefore void under DR 2-108(A). The court stated that “restrictions . . . are objectionable primarily because they can interfere with the client's choice of counsel.” The court noted that it was irrelevant that the attorney actually did represent many of the firm's former clients.

A New York ruling that authorized the conduct under the retirement exception involved an attorney who joined another law firm in his second year of receiving retirement benefits. The retirement agreement stipulated that during a 5-year period in which the partner was to receive retirement benefits, he was obligated to offer all client opportunities to his former firm in the first instance and was also obligated not to do anything to impair the firm's relationship with its existing clients. The court interpreted that agreement to read that during the 5-year retirement benefits period, the partner's options were not to practice at all, or to practice subject to the two aforementioned restraints. The court found that a third option was for the attorney to forgo the benefits and resume practice. In other words, the court found that an attorney who is bound by a non-compete clause because he is receiving retirement benefits does not have to “stay retired” if he gives up the retirement benefits. Graubard, Mollen, Horowitz, Pomeranz & Shapiro v. Moskovitz , 149 Misc. 2d 481, 565 N.Y.2d 672 (N.Y. Sup. Ct. 1990).

While the great majority of courts view a financial penalty for competition as a restriction on the right of a departing attorney to practice and contrary to the ethical rule, a few courts follow another view. The minority view that covenants not to compete are permissible for attorneys rejects the directive of Rule 5.6 or DR 2-108(A) in favor of an argument that the modern law firm should be treated like any other business or profession. The first case to depart from the ethical rule was Howard v. Babcock , 6 Cal. 4th 409, 25 Cal. Rptr.2d 80, 863 P.2d 150 (1993), in which the Supreme Court of California found enforceable an agreement imposing a reasonable cost on departing partners who compete with their former firm in a limited area. The court recognized that Rule 1-500 of the Rules of Professional Conduct of the State Bar of California was very similar to the rules of professional conduct adopted in states adhering to the majority view, and listed a number of decisions from jurisdictions holding that this rule prohibits all agreements restricting competition among lawyers, including those merely assessing a cost for competition. However, the California court declined to follow the majority and held that the changes in the legal profession warranted treating lawyers like other professionals and businesspeople.

In Capozzi v. Latsha & Capozzi, P.C. , 797 A.2d 314 (Pa. Super. Ct. 2001), Pennsylvania followed California's view. The court relied on the reasoning in Howard v. Babcock and observed that under Pennsylvania law, the rules of professional conduct do not provide substantive rights, in contrast to the majority-view jurisdictions that based their decisions on ethical considerations, specifically Rule 5.6 or DR 2-108(A). In Capozzi, an attorney-shareholder sued for the actual value of his stock, and the law firm maintained there was an oral agreement that if a shareholder left the firm, and competed with the firm, that shareholder's stock would be valued at the amount of his capital contribution, not the higher actual value on the date of termination. The court analyzed this agreement under the standards of an ordinary covenant not to compete in an employment contract and found it was unenforceable because it was not reasonably limited in time and territory.

As the law stands now, a court will void a covenant not to compete in an attorney employment agreement unless it fits the exception for retirement benefits or the court is in a jurisdiction adhering to the minority view. For jurisdictions adhering to the minority view, or in the case of a non-attorney employee, courts will enforce a covenant that meets the narrow standard of reasonableness.