This article is reprinted with permission from the
October 31, 2000
edition of
New York Law Journal.
2000 NLP IP Company.


Responsibilities of Departing Partners and Executives

By Joseph E. Bachelder

THE CASE OF Gibbs v. Breed, Abbott & Morgan, 710 N.Y.S.2d 578 (1st Dept. July 13, 2000), deserves extra consideration and study not only because of its consequences regarding lawyers leaving their law firms but also because of uncertainties it might create in what had seemed to be settled law regarding duties of executives in business enterprises generally who are leaving their employers.

In Gibbs, a case involving the question whether departing law firm partners had breached fiduciary duties they owed to the partnership, the Appellate Division of the Supreme Court of New York reversed the trial court on two of three claims on which the lower court had decided against the departing partners.

Two attorneys, Charles F. Gibbs and Robert W. Sheehan, were partners of Breed, Abbott & Morgan (Breed, Abbott) specializing in trusts and estates. They withdrew from Breed, Abbott in 1991 to join Chadbourne & Parke (Chadbourne). At the time, they were the only active partners in the Breed, Abbott trusts and estates department.

Trial Court in 'Gibbs'

The trial court found three breaches of fiduciary duty:
        1. Mr. Gibbs and Mr. Sheehan discussed and planned their departure from Breed, Abbott to join a competitor before they advised Breed, Abbott of their plans.
        2. When they left, the partners took with them their "chronology files" containing private correspondence relating to clients.
        3. The partners furnished to Chadbourne a memorandum listing trusts and estates department personnel and their respective salaries, bonuses, billing rates and certain other items of information.

Upon review of the trial court decision, the Appellate Division:
    reversed the trial court on the first point noted above, holding that the partners did not breach a fiduciary duty by discussing between themselves their plans to leave Breed, Abbott;
    reversed the trial court on the second point, holding that the partners did not breach their fiduciary duty in taking with them their chronology files;
    and upheld the trial court on the third point, finding a breach of fiduciary duty in providing the memorandum on personnel to Chadbourne.

The decision was 3-2. The two dissenting judges would have reversed the trial court on all issues, thus permitting the partners also to share with another law firm information regarding Breed, Abbott personnel. At the time this column was written, the case was pending on remand to the trial court for a finding on damages, if any, on the third point - the sharing of information about Breed, Abbott personnel with the Chadbourne firm.

Because of public policy that favors clients having freedom to choose among lawyers, courts have taken a very critical look at arrangements that would impede the mobility of lawyers.

D.R. 2-108A of the New York Code of Professional Responsibility provides,
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.

The following discussion will examine two of the points at issue regarding asserted breach of fiduciary duty by the departing partners in the Gibbs case. In order to provide a contrast with the rules affecting fiduciaries in other business enterprises, the results in two leading New York cases, both of which involved the advertising industry, also will be discussed. These two cases are Duane Jones Co., Inc. v. Burke, 306 N.Y. 172 (1954) and Lord, Geller, Federico, Einstein, Inc. v. Lord, Einstein, O'Neill & Partners, No. 6014/88 (Sup. Ct. N.Y. County 1988).

Issue No. 1: Commencing at a point before they announced their intent to others in their firm, the fiduciaries (partners in the Gibbs case; officers and directors in Duane Jones and Lord, Geller) discussed among themselves plans to depart and take some of the business of the enterprise with them (a law practice in Gibbs; an advertising business in Duane Jones and Lord, Geller).

In the Gibbs case, the trial court found as follows:
Gibbs' active encouragement to persuade Sheehan to leave [Breed, Abbott] was improper. The testimony revealed that Sheehan was not dissatisfied with his relationship with [Breed, Abbott] and had not considered leaving until Gibbs approached him and successfully persuaded him to leave [Breed, Abbott]. ...
Furthermore, the testimony revealed that Gibbs and Sheehan were aware of their unique importance to [Breed, Abbott] - they were the only partners in the [trusts and estates] department -- and they anticipated the damage to the firm by leaving at the same time to join Chadbourne. ... [T]he testimony revealed that Gibbs' actions in encouraging Sheehan to leave, and the way in which the leave was orchestrated, was done, at least partially, to cripple [Breed, Abbott]'s [trusts and estates] department. This constituted a breach of Gibbs' fiduciary duties to his then partners. ...
Gibbs v. Breed, Abbott & Morgan, N.Y.L.J., Oct. 2, 1998, at 26 (Sup. Ct. N.Y. County 1998).

In contrast to the trial court, the Appellate Division dismissed the Breed, Abbott claim without much comment. "[W]e find no breach with respect to Gibbs' interactions with Sheehan. ...," Gibbs v. Breed, Abbott & Morgan, 710 N.Y.S.2d at 582, and further, "[Breed, Abbott] did not establish that Gibbs breached any duty to [Breed, Abbott] by discussing with Sheehan a joint move to another firm, or that Sheehan's decision was based upon anything other than his own personal interests." Id.

The conclusion of the Appellate Division seems difficult to reconcile with the standard of duty suggested by the following statement by the Court of Appeals: [L]aw partners, no less than any other business or professional partners, are bound by a fiduciary duty requiring "the punctilio of an honor the most sensitive". ...
Graubard Mollen Dannett & Horowitz v. Moskowitz, 86 N.Y.2d 112, 118 (1995), quoting, in part, from Meinhard v. Salmon, 249 N.Y. 458, 464 (1928).

In the Duane Jones case, the defendant fiduciaries, officers and directors of an advertising agency, were found to have been discussing and planning their departure including taking with them important clients of the agency. In this respect the Court of Appeals noted the following:
The inferences reasonably to be drawn from the record justify the conclusion - reached by the jury and by a majority of the Appellate Division - that the individual defendants-appellants, while em ployees of plaintiff corporation, determined upon a course of conduct which, when subsequently carried out, resulted in benefit to themselves through destruction of plaintiff's business, in violation of the fiduciary duties of good faith and fair dealing imposed on defendants by their close relationship with plaintiff corporation. ... Nor is it a defense to say that the defendants-appellants did not avail themselves of the benefit of the customers and personnel diverted from plaintiff until after defendants had received notice of discharge or had informed plaintiff of their intention to leave Duane Jones Company. Upon this record the jury might have found that the conspiracy originated in June or July while a fiduciary duty existed, and that the benefits realized when defendant Scheideler, Beck & Werner, Inc., commenced operation in September were merely the results of a predetermined course of action. In view of that circumstance, the individual defendants would not be relieved of liability for advantages secured by them, after termination of their employment, as a result of opportunities gained by reason of their employment relationship.
Duane Jones Co., Inc. v. Burke, 306 N.Y. at 188-89 (1954).

Similarly, the Supreme Court in Lord, Geller found that, prior to announcing their departure, "[v]arious defendants met to discuss strategy in negotiations with [the owner]." Lord, Geller, Federico, Einstein, Inc. v. Lord, Einstein, O'Neill & Partners, No. 6014/88 (Sup. Ct. N.Y. County 1988), at 5. The court found that this, together with other circumstances, provided sufficient basis for granting a preliminary injunction against the departing executives.

The two advertising cases affirm the rule that fiduciaries owe a responsibility to the enterprise employing them not to secretly plan and discuss a group departure and a taking away of business of the enterprise. The Appellate Division in the Gibbs case, in reversing the trial court on this issue, reached an opposite conclusion in analogous circumstances involving two lawyers. Presumably such result follows from the public policy of protecting client choice among lawyers. It would have been helpful if the Appellate Division had articulated more clearly, in its disagreement with the trial court's conclusion, why it considered that private discussions among law partners and with competing law firms are necessary to protect clients' freedom of choice among lawyers.

Taking Confidential Info

Issue No. 2: The departing fiduciaries took with them confidential information relating to firm clients.

In the Gibbs case, the trial court found as follows:
When Gibbs and Sheehan left [Breed, Abbott], they took with them various documents and materials, including materials which they called a "chronology file" or "desk file." Specifically, the chronology file contained a copy of every letter written by the particular attorney during the previous years. The letters included, among others, those written to adversaries about pending legal matters, letters written to clients, and letters written to others about ongoing [Breed, Abbott] matters. ... By taking the desk file, Gibbs and Sheehan to a large degree hobbled their former partners in their effort to rebuild the [trusts and estates] department in order to maintain a viable department, and in their ability to serve their clients without undue disruption. [Breed, Abbott] has proven that the desk files and the documents and letters contained therein were its property. To the extent that these were letters written about matters that Gibbs and Sheehan were working on, they wrote them in connection with their work as partners at [Breed, Abbott]. They had no authority or right to take these letters when they left. ... The taking of these files constitutes a breach of fiduciary duty by both Gibbs and Sheehan (Graubard Mollen Dannett & Horowitz v. Moskowitz, 86 N.Y. 2d 112, supra [taking clients and files is inconsistent with a partner's fiduciary duties]).
Gibbs v Breed, Abbott & Morgan, N.Y.L.J., Oct. 2, 1998, at 26.

In contrast to the trial court, the Appellate Division concluded as follows:
[W]hile in certain situations "[A] lawyer's removal or copying, without the firm's consent, of materials from a law firm that do not belong to the lawyer, that are the property of the law firm, and that are intended by the lawyer to be used in his new affiliation, could constitute dishonesty, which is professional misconduct under [Model] Rule 8.4(c)" (D.C. Bar Legal Ethics Comm. Op. 273 at 192), here, the partners took their desk copies of recent correspondence with the good faith belief that they were entitled to do so. ... These were comprised of duplicates of material maintained in individual client files, the partnership agreement was silent as to these documents, and removal was apparently common practice for departing attorneys. ...
Gibbs v. Breed, Abbott & Morgan, 710 N.Y.S.2d at 582.

The Appellate Division made no distinction between the client correspondence contained in the chronology files relating to those clients that left with the departing partners and those clients that remained at Breed, Abbott. What if a Breed, Abbott client did not want correspondence relating to the client taken by the departing partner to another law firm? What safeguards were adopted to prevent this from happening? There is no statement in this regard by either the trial court or the Appellate Division.

There was no finding in the trial court that Breed, Abbott had been lax in addressing the issue of file-taking by departing partners. The Appellate Division, as noted, simply stated that "removal was apparently common practice for departing attorneys." Id. Why is it not appropriate to require, at the very least, that a departing partner review confidential files with his/her partners before taking them from the firm? This would seem consistent with the long- standing rule, as noted above, that such partner is "bound by a fiduciary duty requiring 'the punctilio of an honor the most sensitive.' "

In contrast to the Gibbs case, issues regarding taking of confidential information were not present in Duane Jones and Lord, Geller.

Employees in business enterprises generally are subject to a fiduciary duty not to disclose trade secrets or proprietary information of the enterprise to third parties to the detriment of the employer. Thus, an employee who had been entrusted with confidential information pertaining to the clientele and conduct of the employer's business could not use that information for his own ends or divert it to a third party. Harry R. Defler Corporation v. Kleeman, 243 N.Y.S.2d 930, 935-36 (4th Dept. 1963), aff'd, 278 N.Y.S.2d 883 (Ct. App. 1967). If an employee diverts or uses such confidential information, the employee is in violation of the duty of loyalty. Id. at 938.

Conclusion

Similarly specific agreement should be made with regard to the process of review of any files and other material that is confidential in nature. Obviously, law firms are under constraints as to what they can do in this regard that general business enterprises are not. General business enterprises, in contrast to law firms, frequently require no-compete agreements as well as non-solicitation and confidentiality agreements. It behooves all enterprises seeking to protect their businesses to review what they can and cannot do under applicable law and to implement reasonable agreements to protect the enterprise in this regard.