82 N.Y.2d 375 (1993)

A law firm partnership agreement that imposes significant financial disincentives on departing partners who compete with the firm is unenforceable as against public policy because it interferes with a client’s choice of counsel.

Summary

Denburg, a former partner at Parker Chapin Flattau & Klimpl, sued the firm, arguing that a provision in their partnership agreement requiring withdrawing partners to pay certain sums if they practiced law privately before July 1988 was an unenforceable restriction on his right to practice law. The New York Court of Appeals held that the provision was indeed an improper forfeiture-for-competition clause, akin to that in Cohen v. Lord, Day & Lord, and thus unenforceable. However, the court also found that there was a factual dispute regarding a potential settlement agreement between Denburg and the firm concerning his capital account, requiring a remit for further proceedings on that issue.

Facts

In 1983, the partners at Parker Chapin executed an amended partnership agreement that included subparagraph 18(a). This clause mandated that withdrawing partners practicing privately before July 1988 pay the firm the greater of 12.5% of their allocated firm profits from the prior two years, or 12.5% of billings to former Parker Chapin clients made by the partner’s new firm over the following two years. There was an exception for partners with profit allocations less than $85,000, but only if their new firm did no work for Parker Chapin clients. In early 1984, Denburg left Parker Chapin for a New Jersey firm, allegedly serving some former Parker Chapin clients. In 1986, a Parker Chapin member requested billing information from Denburg, and Rosenzweig claimed Denburg suggested Parker Chapin keep his capital account balance in satisfaction of any obligation, a claim Denburg disputed.

Procedural History

In 1990, Denburg sued Parker Chapin, seeking a declaration that subparagraph 18(a) was void. The Supreme Court initially upheld the clause as a potential recoupment of partnership liabilities, but the Appellate Division reversed, declaring it an invalid forfeiture-for-competition provision. The Appellate Division also ruled that even if Denburg had agreed to the set-off, it was repetitive of the original unenforceable clause. The Court of Appeals affirmed the unenforceability of the clause but remitted for further proceedings concerning the purported settlement agreement.

Issue(s)

1. Whether subparagraph 18(a) of the Parker Chapin partnership agreement constitutes an unenforceable restriction on the practice of law.
2. Whether a purported settlement agreement between a withdrawing partner and the firm, concerning obligations arising under an unenforceable forfeiture-for-competition clause, is itself enforceable.

Holding

1. Yes, because the effect of the clause is to improperly deter competition and impinge upon clients’ choice of counsel.
2. The court did not reach a final holding on the settlement agreement, but indicated that such agreements are not per se unenforceable merely because they relate to a potentially void agreement. Remand needed to determine whether a valid settlement was reached.

Court’s Reasoning

The Court of Appeals reasoned that subparagraph 18(a)’s effect was to deter competition, contravening public policy as articulated in Cohen v. Lord, Day & Lord. The Court emphasized that the focus should be on the *effect* of the clause, not merely the intent behind it. Several factors indicated that the clause was anticompetitive: it applied only to lawyers continuing in private practice, the computation of payment was based on billings to former clients, and the clause exempted lower-earning partners only if no Parker Chapin clients were served. The Court stated that a clause that is facially invalid cannot be saved merely because some partners chose to absorb the penalty imposed.

Regarding the settlement agreement, the Court disagreed with the Appellate Division’s characterization that it was merely repetitive of the set-off provision. The Court noted that the agreement was not measured by the balance in the capital account, but rather a computation. The Court emphasized the importance of enforcing settlements, stating that settlement agreements avoid potentially costly litigation and preserve scarce judicial resources. It remanded the case to resolve factual disputes concerning the settlement, including whether the capital account was actually adjusted, and whether Denburg intended to conclude the matter without reserving a challenge to the clause’s validity. The Court held that settling a dispute involving a forfeiture-for-competition provision may be enforced, even though the clause itself is unenforceable stating that agreements involving financial disincentives are not per se illegal but depend on the particular terms and circumstances.