550 N.E.2d 410 (N.Y. 1989)
A law firm partnership agreement which conditions payment of earned but uncollected partnership revenues upon a withdrawing partner’s obligation to refrain from the practice of law in competition with the former law firm restricts the practice of law in violation of Disciplinary Rule 2-108 (A) of the New York Code of Professional Responsibility and is unenforceable in these circumstances as against public policy.
For almost 20 years plaintiff Cohen was a partner in the defendant law firm, Lord, Day & Lord (LD&L) where, prior to his departure, he served as head of the firm’s tax department. In 1985, Cohen withdrew from the defendant firm to become a partner in another New York City law firm.
The LD&L partnership agreement included a provision protecting against automatic dissolution and recognized that withdrawing partners were entitled to a share of the firm profits representing unpaid fees, and fees for services performed but not yet billed, at the time of departure. In order to avoid the expense and bookkeeping complication of a detailed accounting, the agreement provided for departure payment, based on a formula, to be paid over a three-year period.
When Cohen requested his departure compensation, LD&L refused to pay, stating that Cohen had forfeited the money by electing to continue to practice law in competition with the firm. In support of its position, the defendant firm relied on the forfeiture-for-competition clause of the partnership agreement: "Notwithstanding anything in this Article * * * to the contrary, if a Partner withdraws from the Partnership and without the prior written consent of the Executive Committee continues to practice law in any state or other jurisdiction in which the Partnership maintains an office or any contiguous jurisdiction, either as a lawyer in private practice or as a counsel employed by a business firm, he shall have no further interest in and there shall be paid to him no proportion of the net profits of the Partnership collected thereafter, whether for services rendered before or after his withdrawal. There shall be paid to him only his withdrawable credit balance on the books of the Partnership at the date of his withdrawal, together with the amount of his capital account, and the Partnership shall have no further obligation to him.” (Emphasis added.)
Cohen sued and his former firm interposed the forfeiture-for-competition clause as a defense, noting that upon his departure he continued to practice law with a New York City law firm in direct competition with his former partners. The firm also complained that plaintiff took several LD&L clients and an associate attorney with him to his new firm. On LD&L’s motion to dismiss and on Cohen’s cross motion for summary judgment, the trial court ruled for Cohen that the clause was unenforceable as violative of Disciplinary Rule 2-108 (A). The Appellate Division reversed and dismissed, stating that the clause was valid as an "financial disincentive” to competition and did not "prevent plaintiff from practicing law in New York or in any other jurisdiction” (144 AD2d 277, 279). We granted leave to appeal to plaintiff and now reverse.
We hold that while the provision in question does not expressly or completely prohibit a withdrawing partner from engaging in the practice of law, the significant monetary penalty it exacts, if the withdrawing partner practices competitively with the former firm, constitutes an impermissible restriction on the practice of law. The forfeiture-for-competition provision would functionally and realistically discourage and foreclose a withdrawing partner from serving clients who might wish to continue to be represented by the withdrawing lawyer and would thus interfere with the client’s choice of counsel.
DR 2-108 (A) of the New York Code of Professional Responsibility, entitled "Agreements Restricting the Practice of a Lawyer”, provides: 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. The purpose of the rule is to ensure that the public has the choice of counsel. In ABA Formal Opinions on Professional Ethics, No. 300 (1961), the Ethics Committee concluded it was unethical for an attorney to insert a restrictive covenant in a contract of employment with another attorney despite the absence of an express prohibition in the Canons of Ethics. The Committee began its analysis by citing Opinion 109 of the New York County Lawyers’ Association issued in 1943, which stated: "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”. The Committee then added that: "It appears to this Committee that a restrictive covenant * * * would be an attempt to 'barter in clients’. In this connection, we call attention to that part of Canon 7, reading as follows: 'Efforts, direct or indirect, in any way to encroach upon the business of another lawyer, are unworthy of those who should be brethren at the Bar’. * * * Canon 27 prohibits every form of solicitation of employment. A former employee of a lawyer or a law firm would be bound by these canons to refrain from any effort to secure the work of clients of his former employer. Furthermore, he would be bound, under Canons 6 and 37 to preserve the confidences and not divulge the secrets, of any clients of his former employer * * * Obviously, no restrictive covenant in an employment contract is needed to enforce these provisions of the Canons of Professional Ethics”.
When the Code of Professional Responsibility was adopted, DR 2-108 (A) codified the ruling, and the rationale of Opinion No. 300 has been applied to bar restrictive covenants among law firm partners (ABA Inf Opn No. 1072 [1968]) and to prohibit agreements forbidding arrangements for lawyer associates to accompany a withdrawing partner (ABA Inf Opn No. 1417 [1978]).
LD&L argues that DR 2-108 (A) and the ABA opinions construing it condemn only blanket prohibitions on a lawyer’s practice of law in a community, and that something denominated an economic disincentive, like its forfeiture-for-competition clause, does not prevent Cohen from practicing law. The argument does not withstand scrutiny in these circumstances.
In Gray v Martin (63 Ore App 173, 663 P2d 1285), the Oregon Court of Appeals invalidated a partnership agreement which required a forfeiture of financial benefits if the withdrawing attorney practiced in a designated three-county area. The law firm argued, as defendant argues here, that the covenant did not "restrict” the withdrawing lawyer’s right to practice because that lawyer could still practice somewhere else or practice locally by accepting the consequences of the forfeiture penalty. The court rejected this argument and held that the clause violated DR 2-108 (A): "Paragraph 25 fits squarely within the prohibition contained in DR2-108(A). It affects defendant’s right to practice law * * * by requiring that if he does so he loses the benefits that would otherwise be his. This is certainly a restriction on his right to practice” (63 Ore App, at 182, 663 P2d, at 1290; see also, Hagen v O’Connell, Goyak & Ball, 68 Ore App 700, 683 P2d 563 [invalidating a provision of a shareholder agreement of a legal professional corporation which provided that the corporation would buy back a withdrawing attorney’s stock for full value if the attorney agreed not to practice law in competition with firm; if the attorney did not agree, the buy-back price was reduced 40%]).
In the only New York case on the subject, Matter of Silverberg (Schwartz) (75 AD2d 817 [Hopkins, J.], appeal dismissed 53 NY2d 704), the Appellate Division held unenforceable an agreement which provided that upon termination of the partnership, neither partner was to represent clients of the other for an 18-month period unless the client directed otherwise in writing. If a partner were to represent a client of the other, 80% of the gross fees recovered were to be turned over to the client’s original attorney. The court, stating that "[l]awyers should not traffic in clients”, concluded that the agreement "amounts to a covenant restricting the practice of a lawyer” in violation of DR 2-108 (A) (75 AD2d, at 819).
Defendant’s argument that the disciplinary rule does not prohibit financial disincentives is also refuted by the plain portion of the rule exempting agreements among partners dealing with retirement benefits. The general principle of statutory construction that meaning and effect should be given to all language of a statute or rule is apt here. Words are not to be rejected as superfluous where it is practicable to give each a distinct and separate meaning (Matter of Bliss v Bliss, 66 NY2d 382; McKinney’s Cons Laws of NY, Book 1, Statutes § 231). Presumably, if financial penalties were not "restraints” within the meaning of the rule, there would be no need to exempt the specific category of financial arrangements dealing with retirement.
Equally unpersuasive in this respect is defendant’s argument that the "retirement exception” actually authorizes the forfeiture of previously earned but uncollected departure compensation. Retirement benefits are set forth in a mutually exclusive section of the LD&L agreement itself (see, art 9) — it expressly excludes withdrawing partners and refers them back to the forfeiture-for-competition provision. Moreover, unlike retirement benefits, which extend to the death of the retiring partner and then may even continue to the partner’s surviving spouse, departure compensation is temporally limited — all payments are to be made and conclude three years following withdrawal. Finally, to treat departure compensation as a retirement benefit would invert the exception into the general rule, thus significantly undermining the prohibition against restraints on lawyers practicing law.
For all these reasons, we disagree with the independent grounds advanced by Chief Judge Wachtler’s dissent urging enforcement of the forfeiture facet of the contested clause based on the retirement exception of DR 2-108 (A).
Defendant also urges in a policy argument that forfeiture of departure compensation is justified because of the economic hardship suffered by a firm when a partner leaves to join a competitor firm. Defendant cites the risk that withdrawing partners are likely to hurt the firm’s future profits by taking with them clients previously tied to the firm. While a law firm has a legitimate interest in its own survival and economic well-being and in maintaining its clients, it cannot protect those interests by contracting for the forfeiture of earned revenues during the withdrawing partner’s active tenure and participation and by, in effect, restricting the choices of the clients to retain and continue the withdrawing member as counsel (see, Post v Merrill Lynch, Pierce, Fenner & Smith, 48 NY2d 84, 89).
We are taught somewhat elementally that, unless there is an agreement to the contrary, withdrawal of a partner constitutes dissolution of the law partnership (Partnership Law § 60; Matter of Vann v Kreindler, Relkin & Goldberg, 54 NY2d 936). When there is an agreement to avoid automatic dissolution of the firm, however, the withdrawing partner may forego the ordinary and full accounting for the amount owed had there been a formal dissolution and liquidation (Partnership Law § 69). Each party benefits and takes on obligations from this arrangement. Thus, while it is generally true that parties to a partnership agreement can include " 'any agreement they wish’ ” (dissenting opn of Hancock, Jr., J., at 103), the terms of the agreement, including arrangements by which the mutual and important interests of a continuing law firm and a withdrawing partner can be protected, must not conflict with public policy as reflected in DR 2-108 (A) (see, Gelder Med. Group v Webber, 41 NY2d 680, 684). As to such arrangements and agreements, we imply no prejudgment or disapproval. But the one at issue here does clash with the rule and thus cannot be enforced.
The assertion in Judge Hancock’s dissent that the LD&L clause need not be rendered unenforceable "[e]ven assuming” it violates DR 2-108 (A) (see, dissenting opn of Hancock, Jr., J., at 108) sidesteps the resolution of this contract dispute between these parties based on a policy which is and should be dispositive. One searches in vain to find any suggestion as to what civil remedy might exist between contracting lawyer parties with respect to a determined violation of a disciplinary rule. Apparently, that dissent would recognize none.
Our holding, it must be appreciated, is premised on a careful assessment of the true issue and effect of the contested clause — entitlement to earned uncollected fees during the tenure of the partner as a working member of the firm, not to "future distributions”, a characterization advanced by Judge Hancock’s dissent apparently designed to attribute some windfall effect to our decision. There is none of that either. What would occur, were we to hold as the dissents would, is a forfeiture of earned income.
Finally, Judge Hancock’s dissent should not want to transform our narrow holding into something broader than it is. We address only the contested clause in the context of this litigation and this professional relationship, and we expressly caution against a categorical interpretation or application.
Accordingly, the order of the Appellate Division should be reversed, with costs, and defendant’s motion for summary judgment dismissing the first cause of action should be denied, plaintiff’s cross motion for summary judgment on the first cause of action should be granted, and the case should be remitted to Supreme Court for determination of the amount due plaintiff.
The majority’s invalidation of article tenth (B) (d) of the agreement is without precedent in New York and, in my view, constitutes an entirely unwarranted interference with the right of members of a partnership to establish reasonable contractual terms covering the withdrawal of a partner. The valuation provision is not contrary to public policy. Nor does it contravene the letter, the underlying intent or the purpose of Disciplinary Rule 2-108 (A). There is, in my opinion, no legal justification and no basis in fairness or logic for permitting plaintiff — who has accepted and operated under the agreement for 20 years — now to disaffirm it. I, therefore, respectfully dissent.
It is a general rule of this State’s public policy that "competent contracting parties [are held] to bargains made by them with their eyes open” (Simons v Fried, 302 NY 323, 324 [Loughran, Ch. J.]; see, Lewis v Vladeck, Elias, Vladeck, Zimny & Engelhard, 57 NY2d 975; see generally, Cobble Hill Nursing Home v Henry & Warren Corp., 74 NY2d 475). Specifically, with respect to partnership agreements, absent "prohibitory provisions of the statutes or of rules of the common law relating to partnerships, or considerations of public policy, the partners may include in the partnership articles any agreement they wish concerning the sharing of profits and losses, priorities of distribution on winding up of the partnership affairs and other matters. If complete, as between the partners, the agreement so made controls” (Lanier v Bowdoin, 282 NY 32, 38, rearg denied 282 NY 611). Thus, this court has noted that partners may include in the partnership articles practically "any agreement they wish” (see, Riviera Congress Assocs. v Yassky, 18 NY2d 540, 548).
Here, the partners of defendant law firm have agreed among themselves upon the amount to be distributed in the event of the withdrawal of a partner. Instead of dissolving the partnership and conducting an accounting (see, Partnership Law §§ 60, 69, 71), the parties have stipulated that the value of a withdrawing partner’s share in the partnership shall be determined by a formula. Basically, the agreement provides that the amount due equals the partner’s "withdrawable credit balance upon the Partnership’s books at the time of his withdrawal, together with the amount of his capital account”. In addition, a partner who doesn’t "continue to practice law in any state or other jurisdiction in which the Partnership maintains an office” is entitled to receive a percentage of the firm’s distributed profits for three years.1 A withdrawing partner is entirely free to engage in the practice of law anywhere including areas where the law firm has offices and to serve any clients including clients of the firm irrespective of whether the departing partner was responsible for adding the client to the firm’s business. Simply stated, the partners have agreed that a withdrawing partner may practice in direct competition with the remaining partners. If the withdrawing partner elects to do so, however, the agreement provides that the partner must forego participation in the future distribution of profits of his or her former partners.
It is plaintiffs entitlement to share in the partnership’s distribution of profits after his withdrawal that is in dispute. Although he is practicing law as a partner in a major New York City law firm in direct competition with his former partners, he, nevertheless, claims the right (and under the majority decision is given the right) to share in their profits.
Plaintiff, the head of defendant law firm’s tax department and a party to the agreement for over 20 years, does not and surely cannot in good conscience claim that the agreement is unfair. Indeed, during plaintiff’s time with the firm other partners have withdrawn. As a remaining partner, he accepted the benefits of the very withdrawal provision he now attacks.
In any event, there appears to be no basis for a claim that the clause is unreasonable. It cannot be questioned that the remaining partners may sustain a substantial financial loss from the withdrawal of a partner — particularly a partner of senior status, like plaintiff, whose prestige, expertise and following are of great value to the firm. The agreement merely gives effect to the wholly unexceptional proposition that a withdrawing partner who practices law in full competition with his former firm should not expect to share in the firm’s future distributions. Nor can plaintiff contend that he did not enter the agreement willingly or that he was unaware of its terms. On the contrary, he apparently participated in drafting it.
Finally, the agreement is not contrary to the generally applicable rules which sanction the "employee choice” doctrine where withdrawing partners must elect between future financial benefits and engaging in competition with former associates (see, Kristt v Whelan, 4 AD2d 195, affd without opn 5 NY2d 807 [citing Simons v Fried, 302 NY 323]; Sarnoff v American Home Prods. Corp., 798 F2d 1075, 1083-1084 [7th Cir 1986], upon remand 666 F Supp 137 [ND Ill 1987]; Murphy v Gutfreund, 583 F Supp 957, 963-965 [SD NY 1984]; Diakoff v American Re-Insurance Co., 492 F Supp 1115, 1121-1123 [SD NY 1980]; Kerpen v First Investors Corp., 45 Misc 2d 793, affd 26 AD2d 620; cf., Post v Merrill Lynch, Pierce, Fenner & Smith, 48 NY2d 84, 86-89, rearg denied 48 NY2d 975 [distinguishing involuntary termination cases from "employee choice” doctrine enunciated in Kristt]).
The sole basis for plaintiff’s position and the majority’s holding that plaintiff may abrogate his agreement is an interpretation of DR 2-108 (A), a disciplinary rule enacted by the Appellate Division, First Department. For reasons which follow I do not believe this rule can justify the majority’s decision.
The majority’s conclusion that the agreement violates DR 2-108 (A) is based on an interpretation of the disciplinary rule which is in conflict with its evident meaning and inconsistent with its underlying purpose. Moreover, even if it be assumed that the withdrawal clause somehow conflicts with DR 2-108 (A), the conflict is not one that calls for invalidation of the agreement as contrary to any New York public policy.
DR 2-108 (A) is not a statute. Nor is it a rule which our court has approved. It is a disciplinary rule (see, Rules of App Div, 1st Dept. 22 NYCRR 603.2, see also, 691.2 [Rules of App Div, 2d Dept], 806.2 [Rules of App Div, 3d Dept], 1022.17 [Rules of App Div, 4th Dept]) adopted in identical form by the four departments of the Appellate Division, the courts charged under Judiciary Law § 90 (2) with the responsibility of disciplining attorneys (see, NY Const, art VI, § 4 [k]). The Appellate Division, First Department’s statement, concerning the purpose of its rule and why it does not apply to this clause is as follows:
"[W]e find that article tenth (B) (d) is not a restrictive covenant. It does not prevent plaintiff from practicing law in New York or in any other jurisdiction in competition with defendant. * * * [It] defines the economic rights and obligations of voluntarily withdrawing partners. The formula attempts to compensate the departing partner for profits earned but not received while a partner, and avoids the necessity for a complete accounting with each entering and exiting partner. Article tenth (B) (d) prevents departing partners who are likely to cause potential economic injury to the firm from either reaping the above-mentioned windfalls or from eating into what could be shrinking profits due to loss of business.” (144 AD2d, at 279-280.)
And further:
"[T]he principle underlying DR 2-108 (A) is the protection of the right of members of the public to select and repose confidence in lawyers of their choice without restriction by providing full availability of legal counsel. (See, Matter of Silverberg [Schwartz], 75 AD2d 817 [2d Dept 1980], appeal dismissed 53 NY2d 704; Dwyer v Jung, 133 NJ Super 343, 336 A2d 498 [1975], affd 137 NJ Super 135, 348 A2d 208 [1975]; Model Code of Professional Responsibility EC 2-1, 2-26, 2-31.) The intent of DR 2-108 (A) is that clients have the widest possible choice of attorneys. (See, Dwyer v Jung, supra, at 346-347, 500, citing NY County Lawyers’ Assn Comm on Professional Ethics response to Question No. 6221 [73-9].) Consequently, provisions of partnership agreement which prohibit a partner’s representation of the firm’s clients upon withdrawal or totally prohibit the practice of law within a geographical area have been invalidated as contrary to public policy. (See, Matter of Silverberg [Schwartz], supra; cf., Dwyer v Jung, supra; see also, ABA Comm on Ethics and Professional Responsibility Inf Opn 1417.)” (144 AD2d, at 280-281 [emphasis added].)
I cannot agree with the majority’s rejection of the purpose of DR 2-108 (A) as stated by the Appellate Division — i.e., to forbid only those agreements which "totally prohibit the practice of law”. I find it remarkable that the majority accepts, instead, the all-inclusive interpretation of an Oregon intermediate appeals court which would invalidate any sort of financial preference given to withdrawing partners who do not compete with their former associates.2
Moreover, the majority’s categorically broad construction of DR 2-108 (A) is contrary to the history of the rule’s enactment which shows that DR 2-108 (A) was aimed at covenants preventing a lawyer from practicing in a given geographical area or from representing particular clients — i.e., restrictive covenants. The genesis of DR 2-108 (A) is ABA Formal Opinions on Professional Ethics, No. 300 (1961), which was ultimately used as the basis for ABA Model Rule 5.6.3 ABA Formal Opinion No. 300 holds that a restrictive covenant "prohibiting the employee from practicing law in the city and county in which [the employing lawyer] practices for a period of two years after termination of the employment” is unethical. The concept underlying Formal Opinion No. 300 is that lawyers have no proprietary interests in their clients — i.e., " '[c]lients are not merchandise’ ” (id.). It is the client’s right to retain and to discharge the lawyer. Thus, any agreement in which a practicing lawyer is prohibited from representing certain clients or from practicing law in a given area is proscribed as an " 'attempt to barter in clients * * * inconsistent with the best concepts of [the lawyer’s] professional status’ ” (id.). Such agreements are contrary to what has been termed "the better rationale” for rule 5.6 and DR 2-108 (A)— i.e., that they "impinge upon the right of future clients to free choice of counsel” (1 Hazard and Hodes, Lawyering, at 486; Wolfram, Modern Legal Ethics § 16.2.3, at 885, & n 45 [Prac ed 1986]).
Both the Appellate Division, First Department, in this case and the Appellate Division, Second Department, in Matter of Silverberg (Schwartz) (75 AD2d 817) construe DR 2-108 (A) consistently with the cardinal purpose underlying rule 5.6 and DR 2-108 (A): preventing agreements which interfere with the freedom of clients to retain and discharge attorneys. In Matter of Silverberg (Schwartz) (supra), the parties stipulated " that, upon the termination of this firm, each party shall continue to represent all his own clients and such new clients as each of them was responsible in obtaining for the new firm [and that] [u]nless a client directs otherwise in writing, neither party will represent the clients of the other for a period of at least eighteen (18) months after termination of the firm’ ” (75 AD2d, at 818). In deciding that the agreement contravened DR 2-108 (A), the Appellate Division quoted the basic principle in Formal Opinion No. 300, that "[l]awyers should not traffic in clients”; the court held that "[Respondent cannot restrict petitioner’s practice by precluding him from representing former clients of the partnership that were originally obtained by respondent” (id., at 819).
In sum, the concern at the root of DR 2-108 (A) (as well as Formal Opn No. 300 and rule 5.6) is for the client (i.e., the public) — not concern for the lawyer’s financial well-being. Restrictions which somehow interfere with or restrict the freedom of present or future clients to hire and fire lawyers are what the rule aims to prohibit. Nothing in the wording of DR 2-108 (A) or its history suggests that the rule should be read to condemn agreements providing that lawyers who compete with their former firm will not share in its future distributions.
Even assuming for the sake of argument that the Lord, Day & Lord agreement in some way conflicts with DR 2-108 (A), what effect should this violation have in a civil action? The majority gives DR 2-108 (A) the force of a statute and apparently adopts the rule that any violation of DR 2-108 (A), without more, requires invalidation of the agreement. Again, I must disagree.
We have emphasized that the code is "not to be elevated to the status of decisional or statutory law” (Matter of Weinstock, 40 NY2d 1, 6). Indeed, the code, itself, makes clear that it does not "undertake to define standards for civil liability of lawyers for professional conduct” (Code of Professional Responsibility, Preliminary Statement, McKinney’s Cons Laws of NY, Book 29, at 356 [emphasis added]). Rather, the code4 "is designed to be adopted by appropriate agencies both as an inspirational guide to the members of the profession and as a basis for disciplinary action when the conduct of a lawyer falls below the required minimum standards stated in the Disciplinary Rules” (id., at 355). It has been said that the purpose of lawyer discipline " 'is not by way of punishment; but the court on such cases, exercises [its] discretion, whether a man whom [it has] formerly admitted, is a proper person to be continued on the roll or not’ ” (Wolfram, Modern Legal Ethics § 3.1, at 80-81 [Prac ed 1986] [quoting Ex Parte Brounsall, 2 Cowp 829, 98 Eng Rep 1385 [1778] [Lord Mansfield]). The code does not "attempt to prescribe either disciplinary procedures or penalties for violation of a Disciplinary Rule” (Code of Professional Responsibility, Preliminary Statement, op. cit., at 356). It specifies that the "severity of judgment against one found guilty of violating a disciplinary rule should be determined by the character of the offense and the attendant circumstances” (id., at 356).
In this case, the conduct of defendant law firm (and also of plaintiff, a former partner), in agreeing on article tenth (B) (d) of the partnership agreement — if it is deemed to contravene DR 2-108 (A) — is not the sort of conduct that would ordinarily give rise to disciplinary proceedings. There is no suggestion that the conduct was in any way deceitful, immoral or inconsistent with high professional standards. In this respect, the litigation here differs from other cases where the rights of attorneys in civil matters have turned on violations of the disciplinary rules (see, e.g., Hofreiter v Leigh, 124 Ill App 3d 1052, 465 NE2d 110, 111-113; Fleming v Campbell, 537 SW2d 118 [Tex Civ App 1976] [fee-splitting agreements are void as contrary to public policy]; see generally, Wolfram, Modern Legal Ethics § 2.6.1, at 52-53).
The conduct of defendant law firm does not warrant a sanction that is punitive in nature. Any justification for the imposition of a sanction on defendant must be found rather in some aspect of the conduct which is injurious to the public— i.e., some conduct that offends a public policy of such importance that it merits invalidation of the agreement. The public interest that is said to be served by DR 2-108 (A) is prohibiting "covenants [which] impinge upon the right of future clients to free choice of counsel” (1 Hazard and Hodes, op. cit., at 486). Can it be said that a clause like the one in question so seriously "impinges” on a client’s freedom of choice that it must be annulled on the grounds of public policy?
It is certainly questionable how much, if any, "impingement” can result from a financial disincentive provision like the one here, particularly as applied to partners of major metropolitan law firms. The clause has assuredly not operated to "impinge” upon the rights of any clients — past or future— to retain plaintiff. As the Appellate Division noted, "upon withdrawing from the defendant law firm, plaintiff promptly joined a competing firm, where he began to service several of the same clients with whom he worked during his tenure at Lord, Day & Lord, without defendant seeking any injunctive or monetary relief against him.” (144 AD2d, at 279.)
In this case, the partners, including plaintiff, agreed upon a clause covering the value of a partner’s share upon withdrawal which provides — as fair recompense for the potential loss, of goodwill and clientele resulting when a withdrawing partner goes to a competing firm — that the remaining partners should not have to pay him or her a share of their profits. The agreement seems altogether reasonable and fair and, indeed, no one contends otherwise. If the agreement pertained to any other business or profession, there would be no question that the parties would be held to their bargain (see, Riviera Congress Assocs. v Yassky, 18 NY2d 540, 548, supra).5
The "employee choice” doctrine would apply (see, supra, at 104).
The majority holds, however, that despite the reasonableness of the clause, it runs afoul of DR 2-108 (A) and, therefore, must be struck. In so doing, it rejects the interpretation that the Appellate Division of the First and Second Departments have given the rule and adopts instead the opinion of an intermediate Oregon appeals court (Gray v Martin, 63 Ore App 173, 663 P2d 1285). I believe that this interpretation is misguided and that, in any event, the claimed violation is not one that justifies striking the clause and, thus, imposing a sanction solely on defendant while plaintiff, who also violated the rule, is permitted to reap a substantial reward.6
I join Judge Hancock in dissent and concur with his reasoning. I would but add these additional reasons for my conclusion that the provision in issue does not violate public policy.
DR 2-108 (A) provides that "[a] lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts [his] right * * * to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits.” (Emphasis added.) The plain import of the highlighted language is that the payment of retirement benefits can be conditioned on a restriction of the lawyer’s right to practice law after termination of the partnership relationship.
I regard article tenth (B) (d) of the agreement between these parties as falling squarely within the "retirement benefits” exception. The majority answers that article tenth (B) (d) concerns "departure compensation”, and that such compensation cannot be considered retirement benefits within the meaning of DR 2-108 (A) for three reasons: (1) retirement benefits, so-denominated, are governed by a separate section of the partnership agreement; (2) under the agreement, departure compensation is paid over three years, while retirement benefits are paid over the lifetime of the retiring partner; and (3) equating departure compensation with retirement benefits would broaden the exception to such an extent that the rule would be negated (majority opn, at 100).
As to the first two considerations, while they may be relevant in determining whether the benefits in issue are retirement benefits within the meaning of the agreement, they have no bearing on whether they are retirement benefits within the meaning of DR 2-108 (A). It makes little sense to think that the drafters of the disciplinary rule would have the validity of such an agreement turn on the placement of the clause or the duration of the benefit. If those are the only obstacles to enforcement of this agreement, they are so easily circumvented by simple changes in drafting that they cannot possibly be based on public policy considerations.
For example, the majority’s reasoning in this regard suggests that the agreement would be enforceable if the benefits in issue were denominated retirement benefits or if the payments were spread out over a greater length of time, or both. It also suggests that a retirement benefit could not be made contingent on actual retirement if it were payable as a lump sum instead of over the lifetime of the beneficiary.
Nowhere in this analysis are the public policy roots of such distinctions made apparent. It is not clear to me how clients will be better served by having the validity of agreements like this governed by such distinctions.
The majority would also exclude departure compensation from the scope of retirement benefits on the ground that the exception would be too broad otherwise. But this is true only if it is assumed that restrictive agreements concerning the payment of financial benefits are prohibited by the disciplinary rule. That premise cannot be assumed; it is the core issue in this case.
In my view, the "retirement benefits” exception to DR 2-108 (A) means simply that laywers can agree to make the payment of financial benefits, otherwise payable upon termination of the partnership relationship, contingent upon retirement. Thus understood, retirement benefits are, quite simply, those payable only upon retirement. That plaintiff is not retiring from the practice of law does not mean that the benefits he claims cannot be considered retirement benefits; it means instead that, under the agreement, he is not entitled to the benefits. If the exception for retirement benefits could not be invoked in any case where a withdrawing partner does not wish to retire, then it can never be invoked. The only purpose the exception can possibly serve is to allow a firm to withhold benefits from a withdrawing partner who intends to continue the practice of law.
It is true that article tenth (B) (d) is not contingent on total retirement, but rather on retirement from practice in certain jurisdictions. But the fact that it is less restrictive than permitted should not be a reason for its invalidity.
Finally, this interpretation of the exception would not swallow the rule. It simply means that the rule does not invalidate an agreement to forego departure compensation. The rule would still apply to prohibit enforcement of a restrictive covenant that proscribed the practice of law or representation of particular clients, for example.
For these reasons and those stated by Judge Hancock, I dissent.
Order reversed, etc.