I love reading about cases involving partnerships and employment law. It’s the best of both worlds; commercial law and employment law. What happens when one partner leaves the partnership and takes some – maybe a lot – of the partnership’s clients? A fight, that’s what happens.
And we had a good one in a recent Connecticut Appellate Court opinion. Judge William Bright, one of the newer appellate judges, wrote this one, and did a fine job. Judge Bright litigated a lot of these types of cases and it shows.
In DeLeo, the name of the case which you can read here, one partner left the accounting partnership because his relationship with a female staff accountant made the other partners a little uneasy.
Did they have a written partnership agreement. Yes. Good. Well, maybe.
Did the agreement address what happens when the departing partner takes his own book of business with him? Yes. Again, good. Maybe.
The problem was the five year non-compete clause in the partnership agreement. A five year non-compete in connection with a sale of a business has a pretty good chance of being enforced. But for employees, five years is really a stretch and probably not enforceable. The court didn’t have to touch that issue though.
The agreement said it’s fine if a partner leaves and takes business. The partner just has to pay the partnership some money.
A lot of money. In fact, 1.5X what the partnership had billed those same clients in the two years before the partner left. That price was too high, and unreasonable said the Court, therefore it wouldn’t enforce it.
Judge Bright said it’s an indirect restraint of trade, just like a non-compete (you see the non-compete didn’t say the departing partner couldn’t compete, only that if he did, he needed to pay). If you’d like to read up on non-compete clauses, click here.
Anytime a court sees contract language imposing a forfeiture or financial disincentive to competing, the court will look at its reasonableness to see if it is an improper restraint of trade. Who would take clients if you’ve got to pay 150% of what they generated the past two years?
Another interesting part of this case was the partner that had left had actually sued his former partners trying to get his capital back; his partners did not sue him to enforce the non-compete until after they got sued.
The departing partner thought that his former partner had waived the “non-compete” by saying things like ‘‘we are not gonna try to stop any client of the firm from leaving with you. We’ve only gotta discuss how it’s gonna work in [the] confines [of] the partnership agreement.’’
Maybe in this case a reasonable non-solicit would have worked, with a lesser percentage of fees for firm clients, and an even lesser amount for clients that the departing partner had brought to the firm.
It seems a lot of thought went into the non-compete contained in the partnership agreement. Even that didn’t avoid litigation and legal bills. Imagine what could happen if your business simply pulls a non-compete off of the internet somewhere? Or, you use your friend’s because, well, he’s pretty smart right?
Non-competes, contracts, and sales agreements, for example, are not commodities you can just pull off a shelf. But we understand companies are concerned about the cost of having one drafted. A law firm that applies Six Sigma methodologies to its practice and uses technology can produce quality legal work at lower cost. That’s what we do, and we love doing it for our clients.