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A Bad, Dumb, Unfair Law Courts Keep Enforcing. . .

January 19, 2022 by in "Two Minute Takeaway"

“Wait. . . attorneys aren’t covered by restrictive covenants??”

A prominent federal judge recently excoriated New York’s law that exempts attorneys from enforcement of restrictive covenants in their employment agreements.  Nevertheless, the judge dutifully applied the law and allowed an attorney to join a direct competitor despite the otherwise reasonable paid non-compete provision in his employment agreement.   

Attorneys Are Exempt from Restrictive Covenants

That’s right, under New York law attorneys are uniquely exempt from the oppressive contractual non-solicitation and non-competition provisions that bedevil doctors, scientists, bankers, accountants, and critical employees in every other segment of the economy.  Why?  Well, naturally, because attorneys themselves concluded that their services are vital and that restricting access to attorney services through enforcement of restrictive covenants might cause irreparable harm to society.  Got it?

Federal Judge Criticizes New York’s Law

Judge Jesse Furman of the Southern District of New York recently issued an entertaining decision arguing that New York should jettison its anachronistic law exempting attorneys from the anti-competitive agreements governing everybody else.  See here.  Rarely will you read a decision in which a court is so contemptuous of the law it is charged to enforce.  Nevertheless, Judge Furman chose to follow precedent over pro-activism and relieved another lucky lawyer from the terms of the agreement he freely negotiated, and which agreement would be enforceable against any non-attorney.  It’s almost enough to make a cynic believe that the legal system run by lawyers unfairly protects . . . lawyers.

              Ipsos-Insight, LLC v. Gessel

In Ipsos-Insight, LLC v. Gessel, Judge Furman addressed a question of first impression under New York law:  Does New York common law invalidating covenants restricting the practice of law apply equally to in-house counsel?  Judge Furman made clear he believes that the current self-serving exemption protecting lawyers from enforcement of restrictive covenants is absurd and he discussed that absurdity at length.  See Ipsos at 8-15.  Here is a brief summary of his reasoning. 

Judge Furman flatly rejected the premise for the rule, that attorney services are uniquely indispensable.  Some medical, scientific, accounting, finance and other specialized services are extraordinary valuable, and existing law allows courts to consider the public interest in enforcing non-competes. “It is difficult to discern a principled policy basis to treat lawyers differently from these other learned professionals.”  Id. at 10.  Rather than required by sound policy, the lawyer exemption appears to be purely the product of undue influence by lawyers over the legal system.   

The lawyer-exemption, moreover, has relatively little legal pedigree.  It was only first recognized in a 1961 ABA opinion interpreting the prevailing disciplinary rule that prohibits lawyers from engaging in activities restraining the practice of law.  The rule does not state that restrictive covenants are unenforceable, but the ABA opinion concluded that non-enforcement of restrictive covenants was the rule’s implicit intent.  See Rule 5.6(a) of the NY Rules of Professional Responsibility (the “Rule”).  The stilted rhetoric in the opinion, however, seems entirely out-dated when applied to today’s highly commercialized practice of law: “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.”  In any event, it wasn’t until the 1989 New York Court of Appeals decision in Cohen v. Lord, Day & Lord, that New York adopted the ABA’s interpretation that the Rule should be enforced via invalidation of agreements rather than, say, a disciplinary sanction against an infringing attorney.  Id. at 14.  Viewed against the long history over which courts have grappled with the laws of restrictive covenants, the attorney-exemption is a new and poorly supported development in the law.

Judge Furman further noted that in other contexts, courts enforce agreements that arguably run afoul of the attorney disciplinary rules.  Improper fee-sharing agreements, for example, are enforced “on the ground that neither lawyers nor their clients should be able to use a lawyer’s ethical violation to avoid their contractual obligations.”  Why should restrictive covenants be uniquely unenforceable?  Judge Furman further found it to be inequitable to allow the defendant attorney in Ipsos to walk away from an agreement that he had negotiated and freely entered.  Id. at 11-12.

Finally, the primary concern justifying the attorney-exemption — that an attorney serving a client may be prevented from continuing to serve the client because of a restrictive covenant — is not present in the in-house counsel situation.  In-house attorneys typically have exclusively represented Company A for years and have no current or recent lawyer-client relationship with prospective employer Company B.  Id. at 15.  These are just the highlights; Judge Furman’s thorough opinion makes other arguments and marshals extensive legal and academic research supporting his argument that the lawyer-exemption from restrictive covenants is a self-serving legal anomaly that has passed its due date.  

Judge Furman Extends Bad Law

Despite his contempt for New York’s law, Judge Furman dutifully follows New York precedent and extends the rule exempting attorneys from restrictive covenants to in-house counsel.  The Ipsos decision therefore shows the glacial pace at which the common law sometimes evolves.  Judge Furman is a well-respected and perhaps brilliant judge.  He graduated from Harvard College and Yale Law School, clerked for Supreme Court Justice David Souter, and has himself been mentioned as a potential Supreme Court nominee.  Few would fault him for putting his own well-reasoned gloss on an out-of-date doctrine crying out to be re-visited.  Yet, he followed the more common path among contemporary federal judges, put his own concerns about a dubious law aside, and followed precedent with which he obviously disagreed.  Consequently, the unsatisfactory law in this area will remain static for the foreseeable future.