in most states, including New Jersey.But no state Supreme Court has

ruled on the rule’s applicability to in-house counsel, says David Stryker,general counsel of chemical giantBASF Corp.

Stryker should know. The NewJersey Supreme Court’s AdvisoryCommittee on Professional Ethics gotinto the issue two weeks ago, when anunidentified lawyer at BASF’sFlorham Park office asked for a rulingthat RPC 5.6 barred the company fromrequiring staff lawyers to sign a newcompanywide non-compete covenantpromulgated in November.

Stryker said in an interview onThursday that his research, before thecovenant was written, suggested therewas no bar to making lawyers sign it.Now, pending the committee’s review,the agreement as it applies to the 30-member legal department is on hold.

Stryker said that when committee

secretary Samuel Conti told him theissue would be on the panel’s Januaryagenda, “I told him great, I would loveto participate in the process and in themeantime we won’t be requiringlawyers to sign.” A final decisioncould take months and require hear-ings.

While it came to a head at BASF,the issue affects thousands of compa-nies around the country that requirelawyers to sign non-compete con-tracts, or that are thinking of doing so.

Corporate lawyers are sure toargue that if the plain language of RPC5.6 does indeed make such covenantsfor corporate counsel void, an excep-tion should be tailored.

“It is actually a relatively newdevelopment that corporate counselthink about whether they can dorestrictive covenants and, if so, how,for in-house lawyers,” says MichaelLampert, of Princeton’s Saul Ewing,

who advises corporations on non-com-pete clauses and lectures on the subjectto members of the American CorporateCounsel Association.

The relevant section of RPC 5.6says, “A lawyer shall not participate inoffering or making: (a) a partnershipor employment agreement thatrestricts the rights of a lawyer to prac-tice after termination of the relation-ship, except an agreement concerningbenefits upon retirement.”

Lawyers and Other Professionals

RPC 5.6 is based on the publicpolicy that restrictions on lawyers’ability to practice could deprive clientsof choice of counsel. That policy wasthe rationale for Jacob v. Norris,McLaughlin & Marcus, 128 N.J. 10(1992), a New Jersey Supreme Courtdecision that courts around the countryhave cited in finding non-compete

VOL. CLXXXII – NO. 11 – INDEX 1001 DECEMBER 12, 2005

This article is reprinted with permission from the DECEMBER 12, 2005 issue of the New Jersey Law Journal. ©2005 ALM Properties, Inc. Further duplication without permission is prohibited. All rights reserved.

SS TT AA TT EE WW II DD EE LL EE GG AA LL AA UU TT HH OO RR II TT YY SS II NN CC EE 11 88 77 88

In-House Non-Competes Put to the TestComplaint by BASF staff lawyer prompts ethics investigation

By Henry Gottlieb

Lawyer regulators in New Jersey have begun the firstknown inquiry by a state into the ethical propriety ofnon-compete covenants that some corporations require of

in-house counsel.Agreements that restrict lawyers’ practices upon termination of a

relationship are unethical under Rule of Professional Conduct 5.6, effective

Florham Park corporateoffices of BASF Corp.,

whose staff lawyers havebeen asked to sign a

non-compete covenant.

2 NEW JERSEY LAW JOURNAL, DECEMBER 12, 2005 182 N.J.L.J. 1001

clauses for defecting lawyers unen-forceable.

That’s in stark contrast to the lawon non-compete clauses for other pro-fessionals and workers, which saysrestrictions are permissible if they arefashioned narrowly.

“Generally, non-competes arerestraints of trade and courts allowthem only in limited circumstanceswhen you can demonstrate a real needfor them,” Stryker says.

He says that after joining BASFfrom Siemens Corp. two years ago,he decided that the BASF covenantsin effect for at least 10 years were toobroad. Key employees, includinglawyers, could not work for a com-petitor until two years after leavingBASF.

A lawyer could go into privatepractice and could go in-house to anon-chemical company, but could not,for example, join the in-house opera-

tion of Dow Chemical Co. or DuPontCorp.

The three-part document at BASF,“The Secrecy and InventionAgreement,” has a secrecy restriction,an anti-solicitation agreement that pro-

hibits departing lawyers from recruit-ing colleagues to go with them, and anon-competition agreement. The stric-ture on working for competitors is nowone year.

There is no difference between thepact for lawyers and non-lawyers atthe company, he says.

He says Dow and DuPont havenon-compete strictures for in-houselawyers, which could not be con-firmed. The general counsel for Dowdid not return a call seeking confirma-tion and a representative of the coun-sel’s office at DuPont declined to com-ment.

Stryker says the new covenantalso focuses on defections to competi-tors but reduces the time restraint toone year. He says he does not knowwhy the demand for new covenantsignings generated a protest amongsome lawyers. “Lawyers have signedthem routinely and the issue nevercame up,” he says

Lampert at Saul Ewing says aquick review of cases on the subjectunearthed none about in-house lawyercovenants. In The Hyman Companies,Inc. v. Brozost, 964 F. Supp. 168(1997), a federal court in Pennsylvaniaenjoined an in-house lawyer who han-dled store leasing for a retail jewelrycompany from doing the same workfor a competitor. But that case isn’t onpoint because there was no restrictivecovenant.

Lampert says he reads RPC 5.6 tocover in-house counsel because corpo-rations are in-house lawyers’ clientsand companies, like any other client,deserve an unfettered right to counselof its choice. At the same time, hesays, companies have a right to pre-vent the migration of secrets that in-house lawyers obtain when assumingnon-legal titles or functions in a corpo-ration, he says.

Would Macy’s Tell Gimbels?

The issue is complicated by RPC1.9, which covers conflicts of interest.RPC 1.9(b)(2), for instance, requireslawyers who acquired protected infor-mation in one firm to obtain consentbefore representing an adverse party.

Even without a non-compete agree-ment, an in-house lawyer at Macy’scan’t share Macy’s secrets when shegoes to any company, whether it’s

Gimbels or not.“The bottom line is you can’t have

a covenant in a general sense in thesame way you can’t in a firm. I don’tthink there’s a difference inside or out-side in that way,” Lampert says. “Butif you have dual titles, you may be ableto have a covenant. And it seems thatwith or without a covenant, RPC 1.9prevents people from going to workfor competitors if the competitor isactually adverse.”

Stryker and two other generalcounsel for large corporations in theregion say non-compete covenants forin-house counsel are common and areneeded because the ethics rules alonearen’t enough.

“It is my view that the confiden-tiality rules and the conflict of interestrules within the disciplinary rules donot cover every risk that is createdwhen an in-house lawyer switchessides,” Stryker says. “There is a gapthat is unprotected without the non-compete.”

THE CORPORATE VIEW: General CounselDavid Stryker of BASF says companiesneed non-compete clauses to protect theirinnermost secrets.

EMPLOYEE-CLIENT DICHOTOMY:Medco Health Solutions general counselDavid Machlowitz says non-competerules for companies are different thanthose for law firms.

182 N.J.L.J. 1001 NEW JERSEY LAW JOURNAL, DECEMBER 12, 2005 3

In-house lawyers are far moreintegrated into decision-making thanprivate lawyers called in for discreetmatters, he says.

“It’s not just data, it’s the wholeplan of the company, where we’regoing, what we’re researching, whatour targets are, our product informa-tion,” he says.

“We can hurt a client much morethan a guy from Kirkland & Ellis orSaul Ewing can if they try to switchsides,” he says. “This short non-com-pete we use gives us that incrementalprotection for a one-year period.”

“That’s my view, there are viewson the other side and the committee willdecide which one prevails,” he says.

Don Liu, general counsel at TollBrothers Inc. in Horsham, Pa., saysnon-compete clauses for lawyers arecommon in corporations and that hiscompany has them to prevent the flow

of secrets to competitors.He says they are tailored narrowly

and may be different for differentlawyers, depending on the type ofwork they do for the corporation.When he was general counsel at IkonOffice Solutions Inc., attorneys wererequired to seek permission before tak-ing a job at competitors like Xerox, hesays.

David Machlowitz, general coun-sel of Medco Health Solutions Inc. inFranklin Lakes, suggests it is difficultdrawing analogies between rules gov-erning firms and rules governing cor-porations. A corporate non-competerule is not like a law firm partnershipnon-compete rule because the corpora-tion isn’t just an employer, it’s a client.

On the other hand, it also could besaid that a corporation that can’t hire alawyer because of a non-competeclause is just losing out on an employ-

ee, he says.Stewart Michaels, who heads

Topaz Attorney Search in West Orangeand is a former general counsel ofAdidas United States, says he signedone there. No-compete and no-solici-tation clauses for in-house lawyers areoften included in the batches of docu-ments lawyers sign when they take in-house positions, he says.

“AT&T gives a paper that says,before you join us I want to tell youthat your choices are limited,” he says.“They’re enforceable.”

Rees Morrison, a consultant atHildebrandt Inc. in Somerville whoadvises corporate law departments,says that from a hiring perspective,non-compete clauses might not be agood idea below the general counsellevel.

“It is already hard enough torecruit,” he says. ■