Howard v. Babcock

KENNARD, J., Dissenting.

Should an attorney who leaves a law firm be free to compete with that firm? In this state, as in many others, attorneys are bound by a rule of ethics that prohibits them from entering into agreements that “restrict” their right to practice law after leaving a firm. (Rules Prof. Conduct of State Bar, rule 1-500.) The rule serves to eliminate unnecessary and artificial restrictions on clients’ ability to select their attorneys. Yet, the majority, contrary to the unambiguous language of the rule, holds that this rule does not bar law firms from entering into noncompetition agreements with their attorneys if such agreements are “reasonable.” I disagree.

In the majority’s view, whether a noncompetition agreement is “reasonable” depends not upon its effect on the rights of clients, but upon whether it serves to protect and preserve the financial stability of existing law firms. (Maj. opn., ante, at pp. 419, 423.) The majority insists that “a revolution in the practice of law has occurred requiring economic interests of the law firm to be protected as they are in other business enterprises.” (Id. at p. 420.) The majority says that changes in the economics of law practice “make the assertion that the practice of law is not comparable to a business unpersuasive and unreflective of reality.” (Id. at p. 423.) I do not accept the majority’s *427 conclusion that “a new reality in the practice of law” (id. at p. 420.) justifies its erosion of legal ethical standards.

Although the law is a business in the sense that an attorney in a law firm earns a living by practicing law, it is also and foremost a profession, with all the responsibilities that word implies. The ethical rule that this court is called upon to interpret exists to enforce the traditional and sound view that service to clients, including protection of the clients’ ability to employ the attorneys they have come to trust, is more important than safeguarding the economic interests of established attorneys and law firms. I would enforce the rule according to the ordinary meaning of its terms to bar all agreements by which established firms seek to protect themselves against competition from attorneys who leave the firm.

I cannot accept that the practice of law has been so altered that it is now irretrievably profit-centered rather than client-centered. If ethical rules for attorneys must accommodate the “realities” of practicing law, then those realities ought to include this court’s insistence that attorneys serve more than their own interests and accomplish more than amassing fees. Protection of the public and preservation of public respect for the law require no less.

I.

Before January 1987, plaintiffs were partners in the law firm of Parker, Stanbury, McGee, Babcock & Combs (the Parker firm). The partnership agreement contained a covenant not to compete. The covenant restricted a partner who withdrew from the firm before age 65 from engaging in liability insurance defense work within the Los Angeles or Orange County court systems for one year following the partner’s withdrawal from the firm. If a partner violated the restrictive covenant, then, “at the sole discretion of the remaining non-withdrawing partners,” all rights to withdrawal benefits other than capital would be subject to forfeiture.

In December 1986, plaintiffs notified the Parker firm that they were terminating their relationship with the firm and would begin competing with the Parker firm in January 1987. Defendants, the remaining members of the Parker firm, informed plaintiffs that they would withhold part of the withdrawal benefits because of plaintiffs’ violation of the covenant not to compete.

In January 1987, plaintiffs began handling liability insurance defense matters for clients in the new law firm of Howard, Moss, Loveder & Strickroth (the Howard firm). Clients in approximately 200 cases chose to be represented by the Howard firm instead of the Parker firm.

*428 Defendants offered to pay plaintiffs their share of the capital of the Parker firm, but refused to pay plaintiffs for their share of work in progress (work completed but not yet billed) and accounts receivable (work billed but payment not yet received). Defendants also refused to acknowledge that plaintiffs had any interest in the unfinished business of the firm, that is, cases that required additional work to be done.

Plaintiffs then brought this action for, among other things, an accounting of the Parker firm’s assets and liabilities and for a declaration that the covenant not to compete was unenforceable. Defendants answered and cross-complained. The issue of the enforceability of the covenant not to compete was, by stipulation, tried first.

The trial court, sitting without a jury, ruled that the covenant not to compete was valid and enforceable. In an interlocutory judgment, the court ordered plaintiffs to account for the net profits attributable to work performed after plaintiffs left the Parker firm on cases commenced before plaintiffs left the firm. Defendants were ordered to account for plaintiffs’ share of the Parker firm’s unpaid profits for the year 1986.

The trial court subsequently entered a final judgment ordering plaintiffs to pay the Parker firm 82.5 percent of the net profits received for work plaintiffs performed for former Parker firm clients after plaintiffs had left the Parker firm. The court found that defendants did not owe plaintiffs anything.

II.

Rule 1-500 of the Rules of Professional Conduct of the State Bar of California (hereafter rule 1-500) prohibits agreements that restrict an attorney’s right to practice law following the termination of a professional relationship among attorneys. “The Rules of Professional Conduct are intended not only to establish ethical standards for members of the bar [citation], but are also designed to protect the public.” (Ames v. State Bar (1973) 8 Cal.3d 910, 917 [ 106 Cal.Rptr. 489 , 506 P.2d 625 ].) The prohibition against restrictive covenants contained in rule 1-500 has been part of our Rules of Professional Conduct since 1975, and was most recently approved by this court (Bus. & Prof. Code, § 6077) on August 13, 1992.

Rule 1-500 unambiguously states: “(A) A member shall not be a party to or participate in offering or making an agreement, whether in connection with the settlement of a lawsuit or otherwise, if the agreement restricts the right of a member to practice law, except that this rule shall not prohibit such an agreement which: [¶] (1) Is a part of an employment, shareholders’, or *429 partnership agreement among members provided the restrictive agreement does not survive the termination of the employment, shareholder, or partnership relationship . . . .” (Italics added.)

The Rules of Professional Conduct are followed by discussions that “provide guidance for interpreting the rules and practicing in compliance with them.” (Rules Prof. Conduct, rule 1-100(C).) The discussion accompanying rule 1-500 says: “Paragraph (A) permits a restrictive covenant in a law corporation, partnership, or employment agreement. The law corporation shareholder, partner, or associate may agree not to have a separate practice during the existence of the relationship; however, upon termination of the relationship (whether voluntary or involuntary), the member is free to practice law without any contractual restriction . . . .” (Italics added.)

Courts in a number of other states that have interpreted rules of professional conduct identical or substantially similar to rule 1-500 have recognized that a covenant not to compete violates the pertinent rule of ethics because it “restricts” the departing lawyer’s practice of law. (E.g., Jacob v. Norris, McLaughlin & Marcus (1992) 128 N.J. 10 [ 607 A.2d 142 ]; White v. Medical Review Consultants, Inc. (Mo.Ct.App.1992) 831 S.W.2d 662 ; Spiegel v. Thomas, Mann & Smith, P.C. (Tenn. 1991) 811 S.W.2d 528 ; Anderson v. Aspelmeier, Fisch, Power, Warner & Engberg (Iowa 1990) 461 N.W.2d 598 ; Miller v. Foulston, Siefkin, Powers & Eberhardt (1990) 246 Kan. 450 [ 790 P.2d 404 ]; Cohen v. Lord, Day, & Lord (1989) 75 N.Y.2d 95 [ 551 N.Y.S.2d 157 , 550 N.E.2d 410 ]; Meehan v. Shaughnessy (1989) 404 Mass. 419 [ 535 N.E.2d 1255 ]; Kelly v. Smith (Ind.Ct.App. 1992) 588 N.E.2d 1306 ; Ohio Urology, Inc. v. Poll (1991) 72 Ohio.App.3d 446 [ 594 N.E.2d 1027 ]; Williams & Montgomery, Ltd. v. Stellato (1990) 195 Ill.App.3d 544 [ 142 Ill.Dec. 359 , 552 N.E.2d 1100 ]; and Gray v. Martin (1983) 63 Ore.App. 173 [ 663 P.2d 1285 ].) Various legal commentators agree. (E.g., 2 Hazard & Hodes (1992 Supp.) The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct, § 5.6:101, p. 822; Terry, Ethical Pitfalls and Malpractice Consequences of Law Firm Breakups (1988) 61 Temple L.Rev. 1055, 1071-1078.)

Here, the judgment of the trial court, which upheld the restrictive covenant, directed plaintiffs, the former partners, to pay the law firm 82.5 percent of the profits derived from work plaintiffs performed after the termination of the partnership. To order an attorney to surrender 82.5 percent of the income obtained from representing clients is to restrict the attorney’s practice of law in any meaningful sense of the word. The economic disincentives flowing from such an order may encourage the lawyer to give up the clients, “thereby interfering with the lawyer-client relationship and, more importantly, with *430 clients’ free choice of counsel.” (Jacob v. Norris, McLaughlin & Marcus, supra, 128 N.J. at p. 22 [ 607 A.2d at p. 148 ].)

According to the majority, however, covenants not to compete do not restrict the practice of law if they assess a “reasonable cost against a partner who chooses to compete with his or her former partners . . . .” (Maj. opn., ante, at p. 419.) I disagree.

As I pointed out earlier, the majority’s conclusion is at odds with the great weight of authority. Also, in determining reasonableness based on the relationship between or among attorneys, the majority gives little regard to the relationship between the attorney and the client. Moreover, the majority fails to recognize that restrictive covenants are intended to and do restrict the practice of law. Rule 1-500 proscribes agreements that “restrict” the practice of law, not just those that prohibit “altogether” the practice of law. (Contra, Haight, Brown & Bonesteel v. Superior Court (1991) 234 Cal.App.3d 963, 969 [ 285 Cal.Rptr. 845 ] [rule 1-500 “simply provides that an attorney may not enter into an agreement to refrain altogether from the practice of law”].) To “restrict” means to restrain, to confine within bounds. (Webster’s New Collegiate Diet. (9th ed. 1988) p. 1006.) To “prohibit” means to prevent, to forbid. (Id. at p. 940.) The terms are not synonymous.

Covenants not to compete restrict the practice of law. Unable to show otherwise, the majority refuses to honor the plain meaning of rule 1-500, which expressly prohibits attorneys from entering into agreements that “restrict” their right to practice law after leaving a law firm. But the majority does not stop there. It proceeds to make the practice of law less of a profession by devaluing the rights of clients in favor of the economic interests of law firms, as I shall discuss below.

III.

A profession has ideals and objectives beyond economic success. As Dean Roscoe Pound observed: “It would be idle to assert that there is nothing of selfishness in the pursuit of a profession. But its ideal is not one of individual success in competitive acquisitive activity. And because ideals operate powerfully to shape action, professional activity, even at its worst, is restrained and guided by something better than the desire for money rewards.” (Pound, What is a Profession? The Rise of the Legal Profession in Antiquity (1944) 19 Notre Dame L.Rev. 203, 205.)

One of the objectives beyond economic success that defines the law as a profession is the recognition that the attorney-client relationship requires the *431 acceptance, within the bounds of ethical propriety, of the principle that the client’s fundamental rights are superior to the interests of the attorney.

The attorney-client relationship involves more than monetary considerations. An attorney is a fiduciary of the “very highest character.” (1 Witkin, Cal. Procedure (3d ed. 1985), Attorneys, § 95, p. 113, quoting Cox v. Delmas (1893) 99 Cal. 104, 123 [ 33 P. 836 ].) By the very nature of the relationship, an attorney owes the client a duty to act with the highest good faith. (Rader v. Thrasher (1962) 57 Cal.2d 244, 250 [ 18 Cal.Rptr. 736 , 368 P.2d 360 ].) Consistent with the fiduciary nature of the relationship, the duty of the attorney includes placing the interest of the client above his or her own interest. Attorneys must, for example, “maintain inviolate the confidence, and at every peril to himself or herself preserve the secrets, of his or her client.” (Bus. & Prof. Code, § 6068, subd. (e).) And, consistent with the unique relationship between attorney and client, the client’s right to retain counsel of his or her choice is superior to the interest of the attorney. (.Fracasse v. Brent (1972) 6 Cal.3d 784, 790 [ 100 Cal.Rptr. 385 , 494 P.2d 9 ]; Estate of Cazaurang (1934) 1 Cal.2d 712, 714 [ 36 P.2d 1069 ].)

To enforce covenants not to compete is to exalt the economic interest of established law firms while necessarily disfavoring the rights of clients, especially the right to the attorney of one’s choice. The majority’s “confidence” that its decision will have no effect on the right of a client to the attorney of the client’s choice (maj. opn., ante, at pp. 420, 426 is unrealistic. As the New Jersey Supreme Court observed recently: “By forcing lawyers to choose between compensation and continued service to their clients, financial-disincentive provisions may encourage lawyers to give up their clients, thereby interfering with the lawyer-client relationship and, more importantly, with clients’ free choice of counsel. Those provisions thus cause indirectly the same objectionable restraints on the free practice of law as more direct restrictive covenants. . . . Because the client’s freedom of choice is the paramount interest to be served by the [rules of professional conduct], a disincentive provision is as detrimental to the public interest as an outright prohibition.” (Jacob v. Norris, McLaughlin & Marcus, supra, 128 N.J. at p. 22 [607 A.2d at pp. 148-149].)

The majority nevertheless diminishes the rights of clients by treating them as no more important than “the interest of law firms in a stable business environment.” (Maj. opn., ante, at p. 425.) The majority justifies its erosion of clients’ rights, the integrity of the attorney-client relationship, and the fiduciary role of attorneys by announcing that the clients’ right to select their own attorneys is “theoretical” and inconsistent with “reality.” (Id. at p. 422.)

The majority lists a number of factors that it believes demonstrate that the rights of clients are “theoretical” and that concern with their protection is out *432 of touch with “reality.” The majority views clients’ rights as theoretical, not real, because an attorney (1) does not have a right to be a partner in a law firm, (2) may be forced out of a law firm by the remaining partners, (3) does not have to accept representation of any client, (4) may in some circumstances withdraw from the attorney-client relationship, and (5) may be required to decline representation because of a conflict of interest. (Maj. opn., ante, at pp. 422, 423.) In addition, the majority states that a client has no right to an attorney unless the client can afford the attorney’s services. (Id. at p. 424.)

The majority’s list reflects rationalization, not reasoning. The fact that an attorney does not have a right to be a partner in a law firm or has been forced out of a law firm has no bearing on the issue in this case. Nor does the possibility that an attorney may be unwilling or unable to represent a client address the question we face here, which is whether a law firm can prevent a willing attorney from representing a willing client.

The majority’s justifications for diminishing the rights of clients and undermining the special relationship between the attorney and the client do not support its holding. Equally unpersuasive are the majority’s further justifications based on its view of the realities and equities of the practice of law.

IV.

The majority maintains that its interpretation of ethical standards is justified because an economic “revolution” has occurred in the practice of law. It asserts that its holding is warranted because law firms, including those that are large and prestigious, are adversely affected by withdrawing partners “grabbing” clients, law firms are intentionally ignoring the rules of ethics in any event, law firms have a financial interest in their clients, the law firm’s capital financed the development of the clientele, law firms may be economically injured by the loss of clients, and other businesses and professions are permitted to have anticompetition agreements. 1 (Maj. opn., ante, at pp. 419-420.)

I have no quarrel with the majority’s assertions that former partners sometimes “take” clients from law firms, that law firms have a financial *433 interest in their clientele, or that law firms may be economically injured by the loss of clients.

But the purpose of rules of professional ethics is to restrain and guide the conduct of attorneys and to protect the public, not to protect the financial interests of law firms. (Ames v. State Bar, supra, 8 Cal.3d at p. 917 .) Accordingly, I cannot accept the majority’s view that the protection of law firms justifies devaluing the rights of clients. There is no reason to assume that the controlling partners of established law firms have a moral entitlement to protection from competition.

Indeed, a withdrawing partner’s decision to leave a firm may be fully justified. For example, the withdrawal may be the result of unwillingness by nonproductive partners to fairly share income with productive partners, associates, and other personnel in the law firm. In other words, there is as much reason to assume that the withdrawal is caused by the remaining partners’ undue emphasis on maximizing profits as there is to assume that fault lies with the withdrawing attorney. 2

Nor can I share the majority’s view that noncompetition agreements are justified because “[t]he firm’s capital finances the development of a clientele and the support services and training necessary to satisfactorily represent the clientele.” (Maj. opn., ante, at p. 420.) Clients remain loyal to a firm for many reasons that have no connection to existing partners’ capital. The labor and efforts of attorneys and other employees of law firms contribute much more to the recruitment, retention, and development of clients than the capital of a law firm. Indeed, if a client chooses to be represented by a departing attorney rather than the law firm, that choice is generally based on the client’s trust and confidence in the withdrawing attorney.

The majority’s remaining arguments—that other businesses are permitted to have covenants not to compete and that law firms are already consciously engaged in violating the ethical rules—merit only brief mention.

Although other businesses and professions permit noncompetition agreements, the rules applicable to other professions do not necessarily .provide guidance for the legal profession. The nature, ideals, and practices of the various professions are different. Moreover, ethics is not a subject in which the objective is to achieve consensus at the level of the lowest common denominator. In my view, attorneys should strive to, and should be required to, meet the highest ethical standards.

*434 The majority’s assertion that law firms have knowingly defied the ethical rules by promulgating covenants not to compete likewise does not support its holding. The assertion, if true, demonstrates only the need for resolute action by this court to protect the legal profession from the insidious effects of an overzealous pursuit of economic gain.

As Chief Justice Rehnquist of the United States Supreme Court has observed: “It is only natural, I suppose, that as the practice of law in large firms has become organized on more and more of a business basis, geared to the maximization of income, this practice should on occasion push towards the margins of ethical propriety. Ethical considerations, after all, are factors which counsel against maximization of income in the best Adam Smith tradition, and the stronger the pressure to maximize income the more difficult it is to avoid the ethical margins.” (Rehnquist, The Legal Profession Today (1986) 62 Ind. L.J. 151 , 154, italics in original.) In my view, the increasing pressures to weaken the rules of professional ethics generated by the emphasis on maximizing income require more, not less, vigilance by this court to preserve the practice of law as a profession and to protect the public.

V.

If the practice of law is to remain a profession and retain public confidence and respect, it must be guided by something better than the objective of accumulating wealth. Here, in refusing to enforce a rule of ethics that prohibits attorneys from entering into agreements that restrict their right to practice law after leaving a firm, the majority diminishes the rights of clients in favor of the financial interest of law firms based on its one-sided view of the realities and equities of the practice of law.

I would affirm the judgment of the Court of Appeal.

Appellants’ petition for a rehearing was denied February 3, 1994. Kennard, J., was of the opinion that the petition should be granted.

The majority goes to great lengths to interpret and comment on Business and Professions Code section 16602, which allows general business partners to agree, “upon or in anticipation of a dissolution of the partnership," that they will not compete in specified counties or cities. (Maj. opn., ante, at pp. 416-418.) The majority then recognizes, however, that this statute does not control this case because it is the responsibility of this court to prescribe the rules of ethics for the practice of law. (Id. at p. 418.)

The majority has made no effort to show that because of the economic “revolution” in the practice of law it asserts has taken place, law firms in jurisdictions that do not allow restrictive covenants have suffered greatly. I am doubtful such evidence exists.