Law360 is reporting that General Patent Corporation (GPC) is appealing an opinion denying its request to enforce a non-compete against its former General Counsel who joined the legal department of a competitor and former suitor, Wi-LAN, Inc., last fall. Efforts to restrain in-house counsel are exceedingly rare, and I have to confess that Southern District of New York Judge John Kennan’s opinion slipped under my radar screen when he issued it last November. Having now had the opportunity to read it, the opinion presents a number of very, very interesting issues, including one of great interest to many readers: can in-house lawyers be restrained by a covenant not to compete? (I have attached a PDF of the Opinion as well as GPC’s appellate brief below).
The facts are straightforward. GPC partners with patent holders such as inventors, universities and small patent owners to license and enforce their patents. Defendant Paul Lerner served as GPC’s General Counsel and on its Board of Directors and Executive Committee up until his departure. In 2004, he signed a covenant not to compete that precluded him from working for any of GPC’s competitors for 1 year. The covenant did not apply, however, if Lerner’s employment was “terminated by [GPC] without Cause” or if he was constructively discharged.
In the Fall of 2011, Wi-LAN entered into discussions to acquire GPC and signed a confidentiality and non-solicitation agreement with GPC so that it could conduct its due diligence. Wi-LAN later made an offer to acquire GPC in an April 2011 term sheet, but one week before the acquisition was scheduled to close in June, Wi-LAN decided not to proceed.
At about the time those negotiations fell through, Lerner began discussing possible employment with Wi-LAN. When he resigned and joined Wi-LAN in September 2011, GPC sought and secured a temporary restraining order preventing Lerner from working with Wi-LAN on business development and patents that he had worked on while at GPC. At the preliminary injunction stage, however, Judge Kennan declined to enjoin Lerner or Wi-LAN any further.
Despite its misgivings about Lerner’s departure, the district court found that the covenant only applied if there was a termination for cause; since Lerner voluntarily resigned, the court found that the non-compete did not apply. Frankly, the district court may have misconstrued the covenant and interpreted it backwards, at least based on the provision quoted in GPC’s appellate brief to the Second Circuit. However, the court was also unpersuaded that GPC had viable trade secrets, a more problematic ruling for GPC since that would be the legitimate business interest necessary to justify the non-compete.
As for the non-solicitation agreement singed by Wi-LAN, the district court did not enforce it despite finding that Wi-LAN breached it by hiring Lerner. The district court found that GPC had failed to demonstrate a sufficient protectable interest. I would differ with this holding as well, as it it is difficult to see how a company doesn’t have some kind of protectable interest in preventing a senior officer from joining a competitor that was on the cusp of acquiring it two months before. However, this battle was lost when the court found the non-compete did not apply and that GPC lacked trade secrets justifying protection.
Can an in-house lawyer be restrained? Surprisingly, Judge Keenan did not address this issue in his opinion. The extent to which a lawyer can be restrained, as well as to what extent he or she is bound by trade secret law, is a topic very much in the news these days. Given the number of issues here, I’ll focus today on the ethical canons that are implicated and the ability of a lawyer to be contractually restrained from servicing a future client (I’ll address the other issues in a later post).
The majority rule holds that lawyers cannot be restrained from representing their clients by a non-compete. The basis for this rule can be found in Ethical Rule 5.6 of the Rules of Professional Conduct and DR 2-108 of the Canons of Ethics. Although 5.6 and 2-108 use language that might suggest that they only apply to agreements between lawyers (i.e., law firms), the ABA has concluded that they should be applied to in-house counsel as well. And as Russell Beck notes in a recent article for New England In-House entitled “Are New England’s in-house counsel free to join competitors?, “as the New Jersey Advisory Committee on Professional Ethics (relying on Virginia, Illinois, Connecticut, Washington and Philadelphia bar opinions, as well as cases involving outside counsel) assayed, `the overwhelming majority of jurisdictions in the United States follow the ABA’s approach and hold that restrictive covenants affecting lawyers, whether employed by corporations or private law firms, generally violate state ethical standards.’”
The takeaway? While there might be some obstacles in some jurisdictions, an in-house lawyer should be able to move to a competitor and avoid imposition of covenant not to compete, so long as he or she is providing legal services in that new position and avoids disclosing privileged information and any trade secrets.