Recent Court Decisions Conflict With Ethics Committee Opinions on the Propriety of Covenants not to Compete for In-house Counsel

February 26, 2020

Pursuant to Colorado Rule of Professional Conduct 5.6(b), a lawyer “shall not participate in offering or making” an agreement that restricts the right of the lawyer to practice after termination of the relationship, such as a covenant not to compete.  This Rule applies to all lawyers and has no exception for in-house counsel.

Over the years, several state and local bar associations have addressed the applicability of this Rule to in-house counsel and have uniformly concluded that the prohibition does apply to them.  E.g. Virginia Ethics Op. 1650 (1995); Philadelphia Ethics Op. 96-5 (1996); District of Columbia Ethics Op. 291 (1999); South Carolina Ethics Op. 00-11; New Jersey Ethics Op. 708 (2006); and most recently Ohio Board of Professional Conduct Op. 2020-1.

Courts facing the issue recently, however, have taken a different view.  In Gaines v. Schneider Nat’l Inc., 2018 U.S. Dist LEXIS 18242, 2018 WL 5282902 (E.D. Wis. 2018), an attorney was hired in-house and asked to sign both a confidentiality agreement (which she did) and a covenant not to compete (which she did not).  She was terminated for her refusal to sign the covenant not to compete, and then she sued for wrongful discharge.

She lost on summary judgment.  The federal court held that, even if she was asked to violate Wisconsin ethics rules, this would not rise to the level of “clear public policy” that prohibited her termination.  The court then went further and suggested that it would be ethically acceptable to require in-house counsel to sign a covenant not to compete because in-house counsel were fundamentally different than outside counsel, citing only a law journal article for support.

Closer to home, a Colorado trial court enjoined an in-house counsel based on a covenant not to compete he had signed. Dish Network Corporation v. Shebar, Case No. 2017cv31079 (Denver District Court).  In Dish Network, the trial court expressly found that the public policy set forth in Rule 5.6 was overridden by other policies of the State of Colorado.

Thus, both the ethics of an in-house attorney signing a covenant not to compete and its enforceability are open to question at this time, and like most matters, the specific language of the agreement can be significant.  In-house counsel being asked to sign such a covenant should tread carefully and consider obtaining advice from their own lawyer.