Haight, Brown & Bonesteel v. Superior Court

• Decision Date: 27 September 1991
• Docket Number: No. B057441,B057441
• Citation: 234 Cal.App.3d 963,285 Cal.Rptr. 845
• Court: California Court of Appeals Court of Appeals
• Parties: , 60 USLW 2270 HAIGHT, BROWN & BONESTEEL, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent, William B. FITZGERALD et al., Real Parties in Interest.

Page 845

285 Cal.Rptr. 845

234 Cal.App.3d 963, 60 USLW 2270

HAIGHT, BROWN & BONESTEEL, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent William B. FITZGERALD et al., Real Parties in Interest.

No. B057441.

Court of Appeal, Second District, Division 2, California.

Sept. 27, 1991.

Review Denied Dec. 19, 1991.

Howarth & Smith, Don Howarth, and Barbara Gregg Glenn, Los Angeles, for petitioner.

No appearance for respondent.

Buchalter, Nemer, Fields & Younger, Howard P. Miller, and Wanda R. Dorgan, Los Angeles, for real parties in interest.

FUKUTO, Associate Justice.

Petitioner, Haight, Brown & Bonesteel (HBB), seeks a writ of mandate after the trial court granted a motion for judgment on the pleadings in favor of real parties in interest (DCC partners). ¹

Haight, Dickson, Brown & Bonesteel was a law partnership with its principal office in Santa Monica, California, and a branch office in Santa Ana, California. In March of 1988, seven of the partners departed the firm, established the law partnership of Dickson, Carlson & Campillo (DCC), and opened an office in Santa Monica, California.

HBB filed a four-count complaint, three counts of which were directed against the DCC partners. ² In the first count HBB sought, inter alia, a declaration of rights and duties of the DCC and HBB partners under paragraphs (13)(c)(1) and (13)(c)(4) of the 1987 partnership agreement in existence at the time the DCC partners departed the Haight, Dickson, Brown & Bonesteel law firm.

Paragraph (13)(c)(1) provides as follows:

"[E]ach Partner agrees that, if he withdraws or voluntarily retires from the Partnership, he will not engage in any area of the practice of law regularly practiced by the law firm and in so doing represent or become associated with any firm that represents any client represented by this law firm within a twelve (12) month period prior to said person leaving the firm, within the Counties of Los Angeles, Ventura, Orange, Riverside or San Bernardino nor within any City in such Counties for a period of three (3) years from the date of withdrawal or retirement, so long as continuing members of this firm engage in practice in the same areas of law."

Paragraph (13)(c)(4) provides as follows:

"A Partner ... may violate this Section 13. However, by so doing, he forfeits any and all rights and interests, financial and otherwise, to which he would otherwise be thereafter entitled as a departing Partner under the terms of this Agreement." ³

Also contained within paragraph 13 is the following language: "It is the intent of the Partnership in this Section 13(c) to comply with and take advantage of the provisions of California Business and Professions Code [emphasis in original] Section 16602."

HBB alleged within its operative complaint that "[d]espite the express language of [paragraphs 13(c)(1) and 13(c)(4) ]" HBB has been advised that the DCC partners do claim an interest in HBB capital accounts and assets and HBB accounts receivable and sought "a judicial declaration that the DCC partners are not entitled to any interest in the capital accounts, assets or accounts receivable of HBB, that [paragraphs 13(c)(1) and 13(c)(4) ] are valid, and/or that the DCC partners are estopped to deny the validity of these provisions."

The DCC partners answered and filed a seven-count cross-complaint, seeking, inter alia, a declaration that paragraphs (13)(c)(1) and (13)(c)(4) are "illegal, void and unenforceable," and that "[T]he DCC Partners are entitled to their Partnership [i]nterests in the capital accounts, assets and accounts receivable of HBB pursuant to the 1987 Partnership Agreement." ⁴

On the DCC partners' motion, the court granted judgment on the pleadings as to the first count for declaratory relief contained within HBB's operative complaint. The court appears not to have ruled upon the validity of paragraph 13(c)(1), focusing its attention instead on paragraph (13)(c)(4). ⁵ The court characterized it as a "forfeiture provision," and found it to be "invalid and unenforceable as a matter of law." The court also found as a "matter of law that estoppel, waiver, unclean hands or in pari delicto may not be raised as grounds for enforcement of or to prevent challenge to" paragraph 13(c)(4). This petition for writ of mandate followed.

A motion for judgment on the pleadings tests whether, as a matter of law, a pleading states facts sufficient to constitute a cause of action. (La Jolla Village Homeowner's Assn. v. Superior Court (1989) 212 Cal.App.3d 1131, 1141, 261 Cal.Rptr. 146.) On review, the material facts alleged in the operative complaint and facts that may be implied or inferred from those expressly alleged are usually treated as true (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 572, 108 Cal.Rptr. 480, 510 P.2d 1032), and we determine whether the trial court erred when it decided the plaintiff failed to state a cause of action as a matter of law. (Banerian v. O'Malley (1974) 42 Cal.App.3d 604, 611, 116 Cal.Rptr. 919.)

Business and Professions Code section 16602 ⁶ provides that "Any partner may, upon or in anticipation of a dissolution of the partnership, agree that he will not carry on a similar business within a specified county or counties, city or cities, or a part thereof, where the partnership business has been transacted, so long as any other member of the partnership, or any person deriving title to the business or its goodwill from such other member of the partnership, carries on a like business therein." Originally codified as Civil Code section 1675 in 1872, it has never been amended to prohibit attorneys from availing themselves of the contractual right contained therein.

The DCC partners argue, however, that California has imposed limitations on agreements restricting the right to practice law, by promulgating the RULES OF PROFESSIONAL CONDUCT OF THE STATE BAR. RULE 1-500⁷ provides, in pertinent part, that an attorney licensed to practice in California may not "be a party to ... an agreement ... if the agreement restricts the right of a member to practice law." (Rules Prof. Conduct, rule 1-500(A).) Such restrictive covenants are not prohibited, however, if the agreement "[i]s a part of [a] ... partnership agreement among members provided the restrictive agreement does not survive the termination of the ... partnership relationship." (Rules Prof. Conduct, rule 1-500(B)(1).) ⁸

Paragraph 13(c)(1) of the 1987 partnership agreement requires that the withdrawing partners agree not to represent any client previously represented by Haight, Dickson, Brown & Bonesteel within the 12-month period preceding the date of the withdrawal from the partnership. Paragraph 13(c)(4) then provides that if a withdrawing partner represents a client of the former partnership, he or she "forfeits any and all rights and interests, financial and otherwise, to which he [or she] would otherwise be thereafter entitled as a departing partner...." These provisions, read together, do not expressly or completely prohibit the DCC partners from engaging in the practice of law, or from representing any client.

It is argued, however, that the contractual provisions exact a "significant" monetary penalty and thus have the "effect of dissuading departing partners from handling cases for clients in competition with the firm or from practicing law in competition with the firm." The DCC partners conclude, therefore, that the partnership agreement constitutes an impermissible restriction on the practice of law in violation of the public policy embodied within rule 1-500.

We do not construe rule 1-500 in such a narrow fashion. In our opinion, the rule simply provides that an attorney may not enter into an agreement to refrain altogether from the practice of law. The rule does not, however, prohibit a withdrawing partner from agreeing to compensate his former partners in the event he chooses to represent clients previously represented by the firm from which he has withdrawn. Such a construction represents a balance between competing interests. On the one hand, it enables departing attorneys to withdraw from a partnership and continue to practice law anywhere within the state, and to be able to accept employment should he choose to so do from any client who desires to retain him. On the other hand, the remaining partners remain able to preserve the stability of the law firm by making available the withdrawing partner's share of capital and accounts receivable to replace the loss of the stream of income from the clients taken by the withdrawing partner to support the partnership's debts.

In our opinion paragraphs 13(c)(1) and 13(c)(4), when read together, are similar to a provision upheld in Farthing v. San Mateo Clinic (1956) 143 Cal.App.2d 385, 299 P.2d 977 as a liquidated damages clause. The contractual provision at issue in Farthing provided that a group of physicians who practiced in partnership at the San Mateo Clinic would not practice in competition with the clinic upon withdrawal from the partnership. The agreement further provided that if any of the withdrawing physicians did compete, they would waive their share of the partnership's accounts receivable. The Court of Appeal, in upholding the provision, recognized the right of physicians who practice in partnership to enter into noncompetition agreements pursuant to section 16602. (Id. at p. 392, 299 P.2d 977.) The court acknowledged that the plaintiff physician enjoyed the "privilege of practicing medicine anywhere in this state," and that this was a privilege which could not be withheld from him by his former partners. The court opined, however, that the partners could enter into a contract providing that if a withdrawing partner "exercises that privilege he will compensate his former partners to some extent at least for the business which he expects to take from them." (Id. at p. 394, 299 P.2d 977.) The provision was characterized as one for liquidated...