The Retirement Benefits Exception

The Retirement Benefits Exception

Rule 5.6(a) forbids a lawyer to participate in offering or making a partnership, shareholders, operating, employment, or other similar agreement that restricts the right to practice after the relationship ends, “except an agreement concerning benefits upon retirement.”¹ That clause is the only carve-out in the text, and it follows from what the preceding section established. As the New York Court of Appeals observed in Cohen v. Lord, Day & Lord, if financial penalties were not restraints, no one would need to exempt the financial arrangements that deal with retirement.²

A firm that wants to attach a condition to a departing lawyer’s money has every reason to call that money a retirement benefit. If the label controlled, the exception would swallow the prohibition, so the live question is how far the phrase “concerning benefits upon retirement” reaches. Two decisions mark the range. Cohen looked past the label to what the payments were and refused to stretch the exception. Schoonmaker v. Cummings & Lockwood of Conn., P.C. went further, holding that public policy does not require absolute cessation of practice as a condition of retirement.

Genuine Retirement Benefits

The exception names a subject, benefits upon retirement, and it does not cover every payment a firm makes when a lawyer leaves. Cohen tested that boundary. The question was whether the firm could treat its departure compensation as a retirement benefit and so escape the ban on restraining practice. The court said no, and its three reasons show how to look behind a label.³

The first reason came from the firm’s own agreement. Retirement benefits appeared in a separate article that expressly excluded withdrawing partners and referred them back to the forfeiture-for-competition provision.⁴ A firm that sorts two kinds of payment into mutually exclusive sections cannot later fold one into the other, and its own classification is the best evidence of what the payment was.

Duration and recipients supplied the second reason. Retirement benefits extend to the death of the retiring partner and may even continue to a surviving spouse. Departure compensation, by contrast, was temporally limited: every payment was to conclude three years after withdrawal.⁵ The contrast suggests purpose. A benefit that follows a lawyer to the end of life, and then to a spouse, secures someone who has left practice, while a payout that ends on a short fixed schedule settles accounts with a lawyer who is moving on.

The third reason looked at consequences. Treating departure compensation as a retirement benefit, the court said, would invert the exception into the general rule and significantly undermine the prohibition against restraints on lawyers practicing law.⁶ Departure compensation is pay to a lawyer who leaves. If that pay counted as retirement pay, a firm could condition every withdrawal payment on staying out of competition and describe the condition as a retirement term, and the rule would bind only firms that neglected to draft around it.

The Cohen payments lie at the opposite pole. They were departure compensation: the retirement article excluded withdrawing partners, and every payment ended three years after withdrawal.⁷ The pension and the three-year payout differ in what ends the relationship, how long the money flows, and who may receive it, and each difference matches one of the court’s reasons.

Applied to a Cohen-style payout, every step points the same way: withdrawal triggered the payment, the agreement sent withdrawing partners away from its retirement article, the payments ended after three years, and accepting the firm’s label would have turned the exception into the rule.⁸ An exam stem that says “retirement plan” invites you to stop at the label, and the points go to the student who tests the substance. A separate problem arises when a plan that really does concern retirement makes its payments depend on staying out of competition, and the next subsection takes it up.

Conditions on Retirement Plans

Rule 5.6(a) exempts “an agreement concerning benefits upon retirement” and goes no further. It does not define retirement, and it does not say whether a plan may make its payments depend on the lawyer’s staying out of competition.¹⁰ The previous subsection showed that a firm cannot turn a withdrawal payout into a retirement benefit by relabeling it. The harder case is a plan built around career service that still cuts off payments to a partner who competes. In Schoonmaker v. Cummings & Lockwood of Conn., P.C. the Connecticut Supreme Court held that, for purposes of eligibility to collect postemployment benefits that become available to former partners whether or not they fully retire from practice, public policy does not require the absolute cessation of practice as a condition of retirement.¹¹

The firm’s plan paid two tiers of benefit. Each was computed from the partner’s length of service and average annual income over five years, subject to a cap of 100 percent or 200 percent of that average. Both were unfunded, so they were paid from future firm income in monthly installments over ten years, and any uncollected revenues went at the former partner’s death to a designated beneficiary or the estate.¹²

The agreements defined retirement broadly. The term covered retirement in the usual sense and also every circumstance other than death in which a person ceased to be a partner, including resignation, withdrawal, and exclusion.¹³ A partner who met the age and longevity criteria could therefore collect whatever the motive for leaving, including a decision to practice somewhere else. On its face the plan resembles the withdrawal payout that Cohen refused to treat as retirement pay, because leaving the firm can trigger the payment in each.¹⁴

The Connecticut court nonetheless held that the plan’s eligibility rules could not be tested against a demand for absolute cessation of practice. A secondary account of the decision supplies the concern behind a forfeiture condition: the firm’s existence would have been in jeopardy if the former partner practiced law in the same area.¹⁵ The funding makes that concern concrete. A firm that pays benefits from what it will earn in the future depends on its clients and revenues to sustain its former partners, and a former partner who opens next door and draws clients away shrinks the pool that is supposed to pay the benefit. The condition protects the income stream that funds the payments.

Placed beside Cohen, the decision shows that the line between a retirement plan and departure compensation runs through the form and terms of the plan. The Cohen payments ended three years after withdrawal, and the firm’s own retirement article excluded withdrawing partners.¹⁶ The Connecticut benefits were measured by career service and income history, were paid from future firm income over a decade, and passed to a beneficiary at death.¹⁷ Those benefits ran ten years rather than for life, and the plan’s definition of retirement reached resignation, so the plan does not match every feature Cohen associated with retirement benefits. The two decisions come from different jurisdictions and neither binds the other, and the contrast marks the range within which the boundary can fall.

The forfeiture condition in that scene is the same condition the Connecticut plan carried. What differs is the payment it is attached to, so on an exam the answer follows the money and not the condition.

Two overreadings cost points. An answer that treats the word retirement in a plan’s name as decisive overreads Schoonmaker, and an answer that treats every condition on pay at departure as a barred penalty overreads Cohen. Schoonmaker is also one state’s highest court applying its own rule 5.6, so it shows how far the exception can stretch and does not state a rule that every jurisdiction follows. The decision addressed two further matters that this chapter leaves aside because they concern arbitration: it held that a court reviews an arbitrator’s interpretation of rule 5.6 de novo, and it considered whether an arbitrator could use a savings clause to preserve a forfeiture provision that would otherwise have violated the rule’s policy.¹⁸