Non-compete Agreement Ruled No Basis for Damages
Anthony Lin / New York Law Journal
December 21, 2006
A lawyer who signed a non-compete
agreement with his former firm cannot claim damages
on the grounds that the agreement is barred by
New York state disciplinary rules, a Manhattan
federal judge has ruled.
In 2001, New York's Rosenman &
Colin acquired the practice of small intellectual
property firm Helfgott & Karas, naming one
of the latter's founders, Aaron B. Karas, to the
position of counsel. Rosenman & Colin itself
merged the following year with Chicago's Katten
Muchin Zavis, forming the firm now known as Katten
Muchin Rosenman.
Pursuant to an agreement, Karas,
76, stepped down from the firm in 2004 but was
to continue to receive $200,000 a year for the
next three years as long as he did not join another
law firm.
Karas sued Katten Muchin in 2005
in Manhattan federal court, primarily over the
firm's withholding of taxes on the $200,000. But
he also claimed he was owed damages by the firm
because the non-compete he signed was an "illegal
restraint of trade."
Generally believed to be unconstitutional
restraints on clients' rights to the counsel of
their choice, agreements restricting a lawyer's
practice are barred in New York by state disciplinary
rule DR 2-108(A).
But Southern District Judge Sidney
H. Stein said in a Dec. 8 decision that a violation
of the disciplinary rule proscribing non-competes
could not itself be the basis of a suit for damages.
The judge said New York law was clear that disciplinary
rule violations could only be part of other claims,
like breach-of-contract or legal malpractice.
He distinguished Karas' claim from other cases
involving DR 2-108(A) in which defendant law firms
withheld money contractually owed to plaintiff
lawyers on the grounds that the latter had violated
non-compete agreements.
"The plaintiffs in those cases
asserted contract claims for the money owed, and
argued that the non-compete clauses posed no bar
to their claims because the non-compete clauses
were invalid pursuant to DR 2-108(A)," Judge
Stein wrote in Karas v. Katten Muchin Zavis Rosenman,
04 Civ. 9570.
In contrast, he said, Karas had
no similar claims because Katten Muchin had paid
him as contracted. "Rather, he is seeking
money owed as a result of his having refrained
from competition pursuant to a provision that
violates DR 2-108(A)," Judge Stein wrote.
"He points to no authority that New York
law provides such a right of action."
Judge Stein also rejected Karas'
contention that the disciplinary rule violation itself
constituted a breach of contract.
"The existence of a void-for-public-policy
provision in a contract is a violation of public
policy, not a breach of the contract in which
it is contained," the judge wrote.
Karas had initially brought breach-of-contract
and tortious interference claims related to Katten
Muchin's withholding of taxes on his $200,000
payments. He claimed the firm was not entitled
to withhold because the money did not constitute
wages but was consideration for his agreement
not to compete.
Judge Stein dismissed those claims
in January on the grounds that Karas was improperly
seeking to impede the collection of taxes. The
lawyer also had sought declaratory judgment that
the non-compete was invalid, but the judge said
the request was moot because Katten Muchin formally
released Karas from the pact in March. Both Karas
and Katten Muchin appeared pro se.
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