Stevens v. Pitts

                                                  FIFTH DIVISION
                                                  Filed: 6/06/97








No. 1-96-2188

WILLIAM M. STEVENS,                     )    APPEAL FROM THE
                                        )    CIRCUIT COURT OF
     Plaintiff-Appellant,               )    COOK COUNTY
                                        )
          v.                            )
                                        )
ROOKS PITTS and POUST,                  )
a partnership,                          )    HONORABLE
                                        )    PATRICK E. MCGANN,
     Defendant-Appellee,                )    JUDGE PRESIDING.


     JUSTICE HOFFMAN delivered the opinion of the court:

     The plaintiff, William M. Stevens, appeals from an order of
summary judgment entered in favor of the defendant, Rooks Pitts and
Poust (Rooks).  A former partner at Rooks, Stevens alleges that
certain termination provisions in the Rooks Partnership Agreement
(Agreement) are in contravention to Rule 5.6 of the Illinois Code
of Professional Conduct (Code) (134 Ill. 2d R. 5.6) and are,
therefore, unenforceable.  We reverse and remand.
     Stevens became a general partner at Rooks on January 1, 1981,
and continued in that capacity until he voluntarily withdrew from
the firm on May 31, 1992.  Stevens was a signatory to the Agreement
which became effective January 1, 1984.  Article Ninth of the
Agreement contains the following pertinent language concerning
departure compensation to withdrawing partners:
     " *** In the event of the death of a General Partner, or
     the withdrawal of a General Partner by reason of (i)
     permanent disability, (ii) retirement, or (iii) voluntary
     or involuntary withdrawal of a General Partner pursuant
     to subparagraph (c) of ARTICLE FIRST hereof, the interest
     of the estate of any such deceased General Partner and
     the interest of any such withdrawing General Partner,
     (hereinafter in this Article called the "Ex-Partner")
     shall be limited as follows:
     ***
          (b) The interest of the Ex-Partner in the tangible
     and intangible assets of the Partnership shall be limited
     to an amount equal to the net balance of the Ex-Partner's
     capital account, supplemental capital account, current
     account and any other account, on the dates of death or
     withdrawal, together with the Ex-Partner's share of
     collections, if any, received within three (3) years
     after death or withdrawal for work performed prior to
     January 1, 1984 in accordance with the income sharing
     percentages applicable to the year the work was performed
     ("Old Runoff"), plus the Ex-Partner's share of
     collections, if any, received within three (3) years
     after death or withdrawal for work performed after
     December 31, 1983 and before July 1, 1987 in accordance
     with the income sharing percentages in effect on June 30,
     1987, ("New Runoff") and plus the Ex-Partner's income
     sharing percentage at the time of death or withdrawal of
     the partnership's receivables and unbilled time for work
     performed after June 30, 1987 which is collected within
     three (3) years after such death or withdrawal
     ("Inventory"), which shall be paid as set forth below,
     subject to the adjustments, offsets and holdbacks set
     forth below. *** 
     ***
          (iii) If the Ex-Partner has voluntarily or
     involuntarily withdrawn from the Partnership, the Ex-
     Partner shall be paid within a reasonable time after June
     30 and December 31 in each year thereafter an amount
     equal to four-fifths (4/5th) of his share of the
     collections of Old Runoff, New Runoff, and Inventory.  If
     the Ex-Partner is not directly or indirectly engaged in
     the practice of law, in competition to the legal practice
     of the Partnership existing immediately prior to his
     withdrawal either individually or in association with
     another law firm, in the Chicago metropolitan area
     including the City of Chicago and the seven (7)
     surrounding counties in Illinois and Indiana *** for a
     period of one (1) year subsequent to becoming an Ex-
     Partner, the Ex-Partner shall as soon as practicable
     thereafter receive an additional payment equal to one-
     fourth (1/4th) of the amount previously paid to the Ex-
     Partner hereunder and shall thereafter be paid all of his
     share of Old Runoff, New Runoff, and Inventory within a
     reasonable time after June 30 and December 31 of such
     year and each year thereafter."  (Emphasis added.)  
          After Stevens' withdrawal, Rooks paid him $242,561.60 which
constituted 4/5ths of the compensation due to him under Article
Ninth.  Less than a year after he left Rooks, Stevens became
associated with another Chicago law firm engaged in the general
practice of law.  Since Rooks deemed Stevens' practice to be
competitive, it refused to pay him the remaining 1/5th of his
departure compensation.  According to Stevens, Rooks subtracted
$60,640.40 from his total compensation of $303,202.00 in order to
comply with Article Ninth. 
     On August 6, 1993, Stevens filed a complaint seeking a
declaratory judgment that Article Ninth was in violation of Rule
5.6 (count I) and, alternatively, purporting to state a claim for
breach of contract (count II).  Stevens subsequently filed a motion
for declaratory relief, apparently also intended as a summary
judgment motion, alleging that Rooks' application of Article Ninth,
as a matter of law, restricted Stevens' clients' choice of legal
counsel in violation of Rule 5.6.  Rooks also filed a motion
requesting declaratory relief and summary judgment which asserted
that Article Ninth did not violate Rule 5.6.  On February 17, 1994,
the trial court conducted a hearing and found that Article Ninth
constituted a financial disincentive but that a question of fact
existed as to whether the 20% withheld from Stevens amounted to a
restriction of his right to practice law.  On August 18, 1995,
Stevens filed a motion for reconsideration of this order.  Rooks
filed another motion for summary judgment.
     On January 3, 1996, the trial court issued a memorandum
opinion and order denying summary judgment to Stevens and granting
summary judgment to Rooks.  The court acknowledged that the
majority of foreign cases analyzing financial disincentives in a
law partnership or employment agreement hold that any agreement
which causes a withdrawing attorney to forfeit revenues earned
during active practice violates Rule 5.6, or its equivalent, since
it restricts a lawyer's freedom of practice and unduly impairs a
client's choice of attorney.  However, the court distinguished
these cases since they involved the "forfeiture of vested interests
or earned revenues."  The trial court found that the payment
structure in the Agreement here did not include any forfeiture of
funds "earned, due and owing."  The court emphasized that the 80%
collected by the withdrawing partner constituted gross sums from
the "Old Runoff," "New Runoff," and "Inventory."  In contrast, the
remaining partners received percentages of net income. 
Accordingly, the court found that the actual impact on Stevens was
considerably lessened since no adjustment was made for the firm's
operating expenses incurred during the time the receivables were
created.   
     The trial court commented that some of the foreign decisions
finding forfeiture provisions unenforceable under Rule 5.6 had,
nonetheless, recognized the legitimate right of a law firm to
protect its own survival.  The court held that subsection (b)(iii)
of Article Ninth was merely a liquidated damages clause, and found
it to be a reasonable forecast of damages to Rooks.  Based on that
reasoning, the court granted summary judgment to Rooks, concluding
that the Agreement struck a "balance between the interest of a
going concern and the legal profession's obligation to allow a
client's unfettered access to legal services." 
     The trial court's order also allowed Stevens to file an
amended complaint.  Stevens filed a second amended complaint on
February 6, 1996, incorporating counts I and II of his original
complaint and, further, purporting to state a breach of contract
claim for $4,319 allegedly still due to Stevens from the 80%
unadjusted share of his departure compensation (count III), and a
breach of contract claim for the remaining $60,640 withheld from
Stevens after his withdrawal (count IV).  In a final order entered
June 6, 1996, this complaint was dismissed with prejudice.  Stevens
appealed from both the January 3, 1996, and June 6, 1996, orders. 
     Summary judgment is appropriate if there is no genuine issue
of material fact and the moving party is entitled to judgment as a
matter of law.  735 ILCS 5/2-1005(c) (West 1994).  The court must
consider the affidavits, depositions, admissions, exhibits, and
pleadings on file and construe the evidence strictly against the
movant and liberally in favor of the nonmoving party.  In re Estate
of Hoover, 155 Ill. 2d 402, 410-11, 615 N.E.2d 736 (1993).  This
court reviews a summary judgment de novo.  Hoover, 155 Ill. 2d  at
411.
     Stevens contends that the trial court erred in concluding
that, as a matter of law, Article Ninth is not in contravention of
the public policy underlying Rule 5.6(a) of the Code which provides
in pertinent part:
     "A lawyer shall not participate in offering or making:
          (a) a partnership or employment agreement that
     restricts the rights of a lawyer to practice after
     termination of the relationship, except an agreement
     concerning benefits upon retirement ***." 134 Ill. 2d R.
     5.6(a). 
     Stevens argues that subsection (b)(iii) of Article Ninth restricts
both a lawyer's right to practice law and the public's right to
choose legal counsel.  He maintains that a provision which requires
ex-partners to choose between compensation or continued service to
their clients discourages competition in that the disparate
treatment of competing and non-competing ex-partners deters the ex-
partners from practicing law in the Chicago metropolitan area. 
This, in turn, infringes on the public's right to select the lawyer
of their choice.  Stevens notes that Rooks is a general practice
law firm which means that virtually any legal service he renders
could be considered competition.  Stevens' per se approach to this
issue concludes that, whether subsection (b)(iii) is construed as
a financial incentive or disincentive, the disparity in amounts
payable to competing and non-competing ex-partners contravenes
Illinois public policy because it deters ex-partners from providing
legal services to the public after leaving the firm. 
     Rooks counters that subsection (b)(iii) of Article Ninth does
not purport to restrict an ex-partner's practice of law or the
client's right to choose counsel; rather, it provides some modest
measure of recoupment to Rooks for the economic harm caused by the
departure and subsequent competition of one of its partners.  Rooks
acknowledges that an explicit post-withdrawal restrictive covenant
in the Agreement would be facially invalid under Rule 5.6.  Rooks
also agrees that Rule 5.6 is intended to protect the public's right
to choose a lawyer, but it advocates a "rule of reason" approach
that attempts to achieve a balance between economic considerations
associated with a law firm which loses valued partners and the
policy of promoting client choice of counsel.  
     This case presents an issue of first impression in Illinois. 
Other states have considered forfeiture provisions in the context
of rules substantially similar to our Rule 5.6.  Noting that the
objective of these rules is protecting counsel accessibility,
courts have overwhelmingly refused to enforce provisions in
partnership agreements which restrict the practice of law through
financial disincentives to the withdrawing attorney.  See e.g.
Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10, 607 A.2d 142
(1992) (court held that provision in the firm's termination
agreement barring compensation to departing members of the firm if
they rendered services to clients of the firm within one year of
their termination date violated public policy); Anderson v.
Aspelmeier, Fisch, Power, Warner & Engberg, 461 N.W.2d 598 (Iowa
1990) (law firm violated professional rules of conduct when it
terminated payments for former partner's equity interest after he
continued to serve firm clients); Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 550 N.E.2d 410 (1989) (holding as a violation of DR 2-
108 a provision of a partnership agreement conditioning payment of
uncollected partnership revenues on withdrawing partner's
noncompetition).  As the court noted in Jacob:
     "Financial-disincentive provisions differ from direct
     restrictive covenants.  They do not impose a blanket or
     geographical ban on the practice of law nor do they
     directly prohibit an attorney from representing former
     clients.  By selectively withholding compensation,
     however, such provisions strongly discourage competitive
     activities.
          *** We believe that indirect restrictions on the
     practice of law, such as the financial disincentives at
     issue in this case, likewise violate both the language
     and the spirit of [Rule 5.6]."  Jacob, 607 A.2d  at 148.
          However, a few cases follow the "rule of reason" approach
represented in Howard v. Babcock, 6 Cal. 4th 409, 863 P.2d 150
(1993).  In Howard, the court held enforceable an agreement
imposing a reasonable cost against an ex-partner who chooses to
compete with his former firm in a limited area.  The court
concluded that such an agreement does not restrict the practice of
law, but rather attaches an economic consequence to a departing
partner's unrestricted choice to pursue a particular kind of
practice.  Acknowledging "sweeping changes" in the practice of law
and the fact that law firms have a financial interest in their
clients, the court concluded that there was "no legal justification
for treating partners in law firms differently in this respect from
partners in other businesses and professions."  Howard, 863 P.2d  at
157; see also Haight, Brown & Bonesteel v. Superior Court, 234 Cal. App. 3d 963 (1991); Denburg v. Parker Chapin Flattau & Klimpl, 82 N.Y.2d 375, 624 N.E.2d 995 (1993).
     Rule 5.6 of the Code, identical to its counterpart in the 1983
ABA Model Rules of Professional Conduct, was adopted by our supreme
court on August 1, 1990.  Prior to 1990, Illinois ethics rules were
based on the 1969 ABA Model Code of Professional Responsibility.
Illinois Disciplinary Rule 2-108 stated as follows: 
     "In connection with the settlement of a controversy or
     suit, a lawyer shall not enter into an agreement which
     restricts his right to practice law."  Ill. Rev. Stat.
     1989, ch. 110A, Rule 2-108.    
     The Illinois rule omitted the following clause from DR 2-108 of the
1969 ABA Model Code:
     "A lawyer shall not be a party to or participate in a
     partnership or employment agreement with another lawyer
     that restricts the right of a lawyer to practice law
     after the termination of a relationship created by the
     agreement, except as a condition to payment of retirement
     benefits."
     Whereas the ABA Model Code denounced partnership or employment
agreements restricting post-association competition, our Rule 2-108
only prohibited the claimant's lawyer from offering, as an
inducement for settlement, an assurance that he would not represent
future claimants against the target of the suit.  
     In 1990, the supreme court promulgated the Illinois Code of
Professional Conduct.  The many changes included Rule 5.6 which
prohibits lawyers from offering or making any employment contract
that contains a provision restricting a lawyer's future practice. 
Although Rule 5.6 was enacted approximately six years after the
Agreement was signed in 1984, the rule is applicable to pre-
existing contracts.  Dowd & Dowd, Ltd. v. Gleason, 284 Ill. App. 3d
915, 932, 672 N.E.2d 854 (1996), petition for leave to appeal
allowed, 171 Ill. 2d 564, 677 N.E.2d 964 (1997).  In Gleason, this
court noted that the supreme court has exclusive jurisdiction to
regulate attorney conduct.  The rules of professional conduct are,
therefore, distinguishable from penal laws enacted by the
legislative branch of government and are not governed by statutory
prohibitions against ex post facto laws.  Gleason, 284 Ill. App. 3d
at 932.  The court concluded that, "for public policy reasons, such
as protecting the public's right to access to counsel, the supreme
court intended that Rule 5.6 apply to all contracts existing at the
time the rule went into effect."  Gleason, 284 Ill. App. 3d at 932-
33.  Therefore, we must now determine whether the Agreement is in
violation of the public policy underlying Rule 5.6.
     Our courts apply a strict test in determining whether a
contract violates public policy; therefore, the courts will not
declare a contract illegal unless it expressly contravenes the law
or a known public policy of this State.  Schniederjon v. Krupa, 130
Ill. App. 3d 656, 659, 474 N.E.2d 805 (1985).  Moreover, Illinois
public policy strongly favors freedom to contract.  Schniederjon,
130 Ill. App. 3d at 659. 
     Although noncompetition agreements in general are carefully
scrutinized by our courts because they can result in restraints of
trade, an agreement containing reasonable time and territorial
restraints will be enforced where the employee attempts to use for
his own benefit confidential information about the employer's
customers which he would not have acquired but for the employment
relationship.  Williams & Montgomery v. Stellato, 195 Ill. App. 3d
544, 553, 552 N.E.2d 1100 (1990).  The employer is then said to
have a "protectable business interest."  Williams, 195 Ill. App. 3d
at 553.  The employer is also deemed to have a protectable interest
in its customers or clients in those professions where the employer
could anticipate a permanent or near-permanent relationship with
the clientele.  For example, Illinois courts have enforced
noncompetition agreements among doctors (Canfield v. Spear, 44 Ill. 2d 49, 254 N.E.2d 423 (1969)), veterinarians (Cockerill v. Wilson,
51 Ill. 2d 179, 281 N.E.2d 648 (1972)), accountants and business
consultants (Rhoads v. Clifton, Gunderson & Co., 89 Ill. App. 3d
751, 411 N.E.2d 1380 (1980)), and insurance companies (Tomei v.
Tomei, 235 Ill. App. 3d 166, 602 N.E.2d 23 (1992)).
     However, while our courts have employed a reasonableness test
as to noncompetition clauses for other professions, Illinois law
provides little basis for allowing lawyer noncompetition clauses
(see M. Lewis, Today's Associate, Tomorrow's Competitor:  New Rules
Doom Noncompetition Agreements, 79 Ill. B.J. 330, 332 (1991)),
particularly since Rule 5.6 of the Code became effective.  See e.g.
Gleason, 284 Ill. App. 3d at 932 (Rule 5.6 prohibited a provision
in a law firm employment agreement requiring that, for two years
after termination from the partnership, the lawyer will not solicit
or entice away clients of the firm without the written consent of
the firm); Illinois Bar Journal Advisory Opinion No. 91-12 (1991)
(found improper an employment contract requiring an attorney, in
case of termination, to turn over to the firm any personal notes
and reproductions relating to the business and to refrain for a
period of three years following termination from soliciting clients
that dealt with the firm during the term of his employment);
Illinois State Bar Association Opinion No. 93-13 (1994) (found
professionally improper the employer's proposal that new attorney
employees sign a promissory note for a three-year period payable
only if the employee left his practice and either started his own
practice or went to work for another attorney in a four county
area); cf. Williams, 195 Ill. App. 3d 544 and Smith, Waters, Kuehn,
Burnett & Hughes, Ltd. v. Burnett, 192 Ill. App. 3d 693, 548 N.E.2d 1331 (1989) (pre-Rule 5.6 cases where the court evaluated the
noncompete provisions for attorneys withdrawing from the firm 
under equitable principles without addressing ethical issues of
such provisions); Hicklin v. O'Brien, 11 Ill. App. 2d 541, 138 N.E.2d 47 (1956) (court upheld a noncompetition covenant incident
to the sale of a legal practice).
     While we acknowledge the rationale behind the "rule of reason"
cases, our research has revealed no Illinois caselaw which would
support a finding that subsection (b)(iii) of Article Ninth is not
violative of Rule 5.6.  By requiring the departing lawyer to give
up certain compensation due to him if he competes with the firm in
a certain geographic area within one year after his departure, this
financial disincentive provision hinders both the departing
lawyer's ability to take on clients and the clients' choice of
counsel.  We conclude that subsection (b)(iii) of Article Ninth is
in contravention to the public policy underlying Rule 5.6 and is
unenforceable. 
     Where the parties to a contract against public policy are in
pari delicto, a court generally will not aid either party but will
leave both parties where it finds them.  O'Hara v. Ahlgren,
Blumenfeld and Kempster, 127 Ill. 2d 333, 348, 537 N.E.2d 730
(1989).  This rule is intended to protect the public.  O'Hara, 127 Ill. 2d  at 348.  Given that Stevens is a lawyer and a signatory to
the Agreement executed and enforced by Rooks, his former law firm,
we may assume that the parties possessed equal contractual
positions and were in pari delicto.  Cf. O'Hara, 127 Ill. 2d  at
348.  However, simply leaving these parties where we found them
would eviscerate Rule 5.6 and its underlying public policy ensuring
a client's choice of counsel.  We will not leave the parties where
they have placed themselves if it detrimentally affects the public. 
See O'Hara, 127 Ill. 2d  at 349 (the interest of the public, rather
than the equitable standing of the parties, is of determining
importance).  
     We conclude that subsection (b)(iii) of Article Ninth may be
severed and that the remainder of the Agreement may be enforced in
Stevens' favor.  As the court noted in Corti v. Fleisher, 93 Ill.
App. 3d 517, 417 N.E.2d 764 (1981), "if the legal portion of a
bilateral contract is severable, legal promises on one side being
wholly supported by legal promises on the other, and the illegal
portion of the contract does not go to its essence, the legal part
may be enforced."  93 Ill. App. 3d at 533.  
     The Jacob court stated the following on this exact issue:
     "That both the plaintiffs and defendants violated (Rule
     5.6) by signing the Agreement is true.  Plaintiffs will
     get a 'windfall' by receiving compensation despite their
     violation.  But if we barred plaintiffs from receiving
     compensation, (the partnership) would receive a
     'windfall' by receiving the benefits of a covenant that
     is against public policy and unenforceable."  607 A.2d  at
     155.
     Since the primary purpose of the agreement was to provide
compensation to departing members, the court there concluded that
it could excise the illegal provision barring compensation and
enforce the remainder of the contract.  Jacob, 607 A.2d  at 155.
     Article Ninth concerns the interests of the general partners
upon termination of the partnership or upon the death or withdrawal
of a partner.  Our review of this section indicates that subsection
(b)(iii) may be severed since it does not go to the essence of
Article Ninth and the general purpose of the termination provisions
would not be compromised.  The remaining portions of the Agreement
are supported by legal promises from both Rooks and Stevens and,
accordingly, may be enforced without subsection (b)(iii).   
     We note briefly Rooks' argument that Stevens waived the relief
he is seeking or is estopped from his claim because he was a
signatory to the Agreement and benefitted from the Article Ninth
provisions when several partners withdrew before him.  We reject
Rooks' waiver argument.  As a matter of the public policy
underlying Rule 5.6, no law partnership agreement should restrict
a departing partner's ability to practice law.  Any application of
waiver to the contrary would, therefore, be violative of public
policy.  See e.g. In re Marriage of Pagano, 181 Ill. App. 3d 547,
567, 537 N.E.2d 398 (1989).  Nor is Stevens estopped from bringing
his claim.  Since the primary concern with such agreements is the
effect on the clients, application of estoppel principles under
these circumstances is unwarranted.  Corti, 93 Ill. App. 3d at 532.
     We disagree with the trial court's conclusion that Article
Ninth was merely a "liquidated damages clause proper in Illinois as
the loss incurred by (Rooks) would be very difficult of accurate
estimation and it appears to be a reasonable forecast of damages
incurred."  As a general rule, Illinois courts will not give effect
to a liquidated damages provision if there exists a legislative
directive to the contrary.  See Purolator Security, Inc. v. Wells
Fargo Alarm Service, 141 Ill. App. 3d 1106, 1112, 491 N.E.2d 161
(1986).  Since it has been held that the Code operates with the
force of law (see In re Vrdolyak, 137 Ill. 2d 407, 422, 560 N.E.2d 840 (1990)), subsection (b)(iii) would be unenforceable as a
liquidated damages clause.
     For the foregoing reasons, we reverse the order of the circuit
court of Cook County granting summary judgment to Rooks.  We remand
this cause with instructions for the trial court to enter summary
judgment in favor of Stevens and to compute the remaining departure
compensation, prejudgment interest, and costs due to him.
     Reversed and remanded.
     HOURIHANE and SOUTH, JJ., concur.