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No Room for Non-Compete Provision in Law Employment Agreement

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By William Peacock, Esq. on December 01, 2014 11:50 AM

The appeal of a non-compete agreement to a small firm is obvious: you're going to spend a whole lot of time training some new attorney on the tricks and tools of the trade and you really don't want them walking out six months later with a third of your clients, then sharking off more of your future business.

Appealing, no doubt. But apparently, at least under Indiana's rules of professional conduct, non-competes are unethical. J. Frank Hanley II, a Social Security Disability attorney in Indianapolis, just learned that the hard way, after he was publicly reprimanded by the Indiana Supreme Court for including such a provision in an employment agreement with an associate. (H/T to the Legal Profession Blog).

You're Fired! Oh Yeah? You're Unethical!

As you may have surmised, the unethical employment agreement came to light after the employment relationship soured. The reprimand order says that the associate was hired in 2006, fired in 2013, and afterwards, took off with a couple of Hanley II's clients. Hanley messaged all of his clients with a notice that the associate had left the firm and that he would be taking over their representation. He included forms for changing counsel.

There was no attempt to enforce the non-compete, but there may have been some disagreement about turning over files -- the reprimand order notes that "after the disciplinary grievances were filed against him, Respondent provided Associate with the files for Associate's clients."

The reprimand was the product of the parties' agreement that Hanley II violated two rules: Rule 1.4(b) ("Failure to explain a matter to the extent reasonably necessary to permit a client to make informed decisions regarding the representation.") and Rule 5.6(a) (the non-compete, see below).

Where Else Are Non-Competes Unethical?

Indiana's Rule 5.6 echoes ABA Model Rule 5.6, which states:

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; or

(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a client controversy.

So, in other words: this is the rule in a whole lot of places. The ABA has a list of all of the states that have adopted the Model Rules and many other states have adopted pieces or drafted their own rules based on the ABA template.

Non-competes are attractive, yes, but they're also unethical.

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