In Jacobson Holman PLLC v. Gentner, 244 A.3d 690 (D.C. 2021), the District of Columbia Court of Appeals addressed for the first time “the affirmative reach” of Rule 5.6(a) of the District of Columbia Rules of Professional Conduct’s prohibition on “restrictions” on “the rights of a lawyer to practice” after terminating an employment relationship. In Gentner, the Court of Appeals examined a law firm operating agreement that forced a departing attorney to forfeit half of her equity interest if she takes any client from the law firm.  See id.  According to the Court of Appeals, such a provision constitutes “an implied, partial restriction on the practice of law, in the form of imposing a substantial financial penalty for representing clients previously represented by the firm[.]” Id. at 702. As such, it violates Rule 5.6(a), which mandates that “[a] lawyer shall not participate in offering or making . . . [a] partnership, shareholders, operating, employment, or other similar type of agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement . . . .” Id. at 700-01 (quoting D.C. Rules of Prof’l Conduct R. 5.6(a) (1991)).

Marsha Gentner, a former equity partner at Jacobson Holman, PLLC (“the Firm”), brought suit after her former partners informed her that by taking clients from the Firm she had forfeited 50% of accrued equity interest at the time of her departure. A 1989 Partnership Agreement, to which Marsha Gentner was a party, provided that a withdrawing partner’s payment would be based on the partner’s “adjusted Accrual Basis Account.” Id. at 692-93. Additionally, the adjusted Accrual Basis Account would “be equal to the Accrual Basis Account of such Partner as of the end of the fiscal year immediately preceding the effective date of withdrawal, and then adjusted for Net Profits (and Losses) and Accrual Basis Profits (or Losses) allocable to such Partner up to [the] date of withdrawal.” Id. at 693.

The 1989 agreement listed two methods for calculating the adjustment. Either “the withdrawing partner and the remaining partners would agree on the adjustment, or it would be calculated by applying the allocation percentage for the withdrawing Partner of Net Profits determined based on the average allocation percentage to such Partner of Net Profits for the last two fiscal year-ends immediately preceding such withdrawal.” Id.  The 1989 Partnership Agreement also provided that the Partner’s adjusted Accrual Basis Account at the date of withdrawal would be established by accountants regularly employed by the Partnership “as soon as practicable” after withdrawal. Id. Such a determination would be conclusive and binding upon all Partners and “include a reduction for doubtful accounts, based upon prior experience of the Partnership.” Id.

In 1996 the Firm converted to a professional limited liability company pursuant to an Operating Agreement. Id. The 1996 Operating Agreement expressly incorporated provisions of the 1989 Partnership Agreement concerning the withdrawal or retirement of equity members, provided such provisions did not conflict with the D.C. Limited Liability Act of 1994, the Articles of Organization, or the Operating Agreement. Id. An amendment to the 1996 Operating Agreement included new provisions regarding a departing equity member’s payout (“the 1997 Amendment”). Id. Paragraph 1 to the 1997 Amendment provided:

In the event an Equity Member withdraws from the Company at any time after the date of this Amendment and takes client(s) of the Company, and the Company does not dissolve within three months of the Equity Member withdrawal date, then the withdrawing Equity Member will forfeit and give up to the Company fifty percent (50%) of his/her Accrual Basis Account . . . .

Id. Paragraph 3 of the 1997 Amendment set forth a two-step process for calculating the adjusted Accrual Basis Account:

 

[T]he adjusted Accrual Basis Account (including the respective amounts attributed to accrual capital and cash capital) of an Equity Member who shall have withdrawn from the Company shall be that amount set forth in the last annual financial statement for the Company prepared by the Company’s accountant, or the last monthly financial statement for the Company prepared by the Company’s regularly employed bookkeeper, whichever is later, prior to the date of the withdrawing Equity Member’s notice of withdrawal, with adjustments to the withdrawal date[2] solely for events occurring in the period between the closing date of such last financial statement and the withdrawal date . . . .

Id.

The Superior Court granted Gentner’s Motion for Summary Judgment on breach of contract without written opinion.  Id. at 692, n.1. The Court of Appeals in turn explained that, to run afoul of Rule 5.6(a), a restriction on the right to practice law need not be absolute. Id. at 701. In Gentner, the offending provision penalized an attorney for her departure from her law firm because she took at least one of the firm’s clients with her. Such a provision, according to the Court of Appeals, “not only limits [a lawyer’s] professional autonomy but also limits the freedom of clients to choose a lawyer.” Id. (quoting D.C. Rules of Prof’l Conduct R. 5.6(a), cmt. [1]). The Court of Appeals explained that limitations on a lawyer’s practice, other than those inherent to the Rules of Professional Conduct, “are bad for lawyers and clients alike, since a smaller pool of available attorneys necessarily limits clients’ choice of counsel.” Id.  Comment 2 to Rule 5.6(a) addresses the competition between a lawyer and his or her former law firm. It states that “[r]estrictions….that impose a substantial financial penalty on a lawyer who competes after leaving the firm may violate paragraph (a).” Id. (quoting D.C. Rules of Prof’l Conduct R. 5.6(a) cmt. [2]).

The Court of Appeals affirmed the Superior Court. The Court of Appeals concluded that Paragraph 1 of the 1997 Amendment, which imposes a fifty percent forfeiture of a departing member’s earned equity for taking even one client from the Firm, constitutes a “substantial penalty.” Consequently, the Court of Appeals determined that Rule 5.6(a) of the District of Columbia of the Rules of Professional Conduct rendered Paragraph 1 of the 1997 Amendment unenforceable as against public policy. The Court of Appeals reasoned that “given that this court interprets and enforces the Rules of Professional Conduct, it would be incongruous for us to recognize on the one hand that Paragraph 1 violates Rule 5.6(a), but simultaneously conclude that it is still enforceable in a civil action.”  Id. at 703.  Looking forward, this decision likely invites enhanced scrutiny on provisions in law firm operating and partnership agreements that implicitly restrict a departing member’s or partner’s practice of law. We would caution attorneys to be careful about including provisions in partnership agreements that might restrict a client’s choice of counsel.

If you or your firm have concerns about provisions in your partnership agreement that might affect a client’s right to choice of counsel or would like advice on crafting a partnership agreement that complies with the Rules of Professional Conduct, please call the attorneys at Eccleston & Wolf.

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