Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C.

SUPREME COURT OF ARIZONA
En Banc

WILLIAM D. FEARNOW and ELIZABETH ) Arizona Supreme Court
FEARNOW, ) No. CV-05-0217-PR
)
Plaintiffs-Appellees, ) Court of Appeals
) Division One
v. ) No. 1 CA-CV 03-0650
)
RIDENOUR, SWENSON, CLEERE & ) Maricopa County
EVANS, P.C., ) Superior Court
) No. CV98-019171
Defendants-Appellants. )
)
)
) O P I N I O N
__________________________________)

Appeal from the Superior Court in Maricopa County
The Honorable Anna M. Baca, Judge
The Honorable Colin F. Campbell, Judge

VACATED AND REMANDED

Opinion of the Court of Appeals, Division One
210 Ariz. 256, 110 P.3d 357 (2005)

VACATED
________________________________________________________________

PAUL G. ULRICH P.C. Phoenix
By Paul G. Ulrich
Pamela B. Petersen
Attorneys for William D. and Elizabeth Fearnow

OSBORN MALEDON P.A. Phoenix
By Mark I. Harrison
Thomas L. Hudson
Diane M. Meyers
Attorneys for Ridenour, Swenson, Cleere & Evans, P.C.
________________________________________________________________
H U R W I T Z, Justice

¶1 Ethical Rule (“ER”) 5.6(a) of the Arizona Rules of

Professional Conduct prohibits an “agreement that restricts the
right of a lawyer to practice [law] after termination of [a law

firm] relationship.” Ariz. R. Sup. Ct. 42 (2006). This case

involves the application of ER 5.6(a) to a shareholder agreement

requiring a departing lawyer to tender his stock to a

professional corporation for no compensation if he thereafter

competes with the corporation in the practice of law. We hold

that such an agreement does not violate ER 5.6(a), but rather

should be evaluated under the well-established law governing

similar restrictive covenants in agreements between non-lawyers.

I.

¶2 In 1987, William Fearnow paid $33,674.42 for a law

firm partnership interest. Four years later, the partners

decided to wind down the firm. Several partners, including

Fearnow, formed a new firm, Ridenour, Swenson, Cleere & Evans,

P.C. (“RSCE”). See Ariz. Rev. Stat. (“A.R.S.”) §§ 10-2201 to -

2249 (2004) (governing professional corporations) (hereinafter

“the Professional Corporations Act” or “the Act”). The former

partners made no new capital contributions to RSCE; rather,

their original partnership contributions were converted to

stock. Fearnow was thus deemed to have paid $33,674.42 for one

share of RSCE stock.

¶3 Fearnow and the other RSCE shareholders signed a

Shareholder Agreement (“Agreement”). The Agreement generally

provided for the repurchase of a lawyer’s stock for the original

2
subscription price upon disability, retirement, withdrawal, or

expulsion from the firm. Separate provisions in the Agreement

(collectively, the “voluntary withdrawal provisions”) required a

shareholder voluntarily withdrawing and thereafter competing in

the firm’s “geographic area for more than ten hours per week” to

“tender his or her Share back to the Corporation for no

compensation.”1

¶4 In 1998, Fearnow voluntarily left RSCE to join another

Phoenix firm. Fearnow demanded $33,674.42 for his RSCE stock.

RSCE refused, citing the voluntary withdrawal provisions.

Fearnow sued, alleging that the provisions violated ER 5.6(a).

¶5 The parties filed cross-motions for summary judgment.

The superior court held that the voluntary withdrawal provisions

violated ER 5.6(a) and were therefore unenforceable. Because

the Agreement had no severability clause, the court held the

entire contract invalid. The trial court then found Fearnow to

be a “disqualified person” as defined by the Professional

Corporations Act, see A.R.S. § 10-2201(1), and ordered a

1
The Agreement provides that “[o]ther than retirement, a
Stockholder who withdraws from the Corporation shall tender his
or her Share to the Corporation for no compensation.” In turn,
the Agreement defines retirement from the “private practice of
law” as not “engaging in any lawyering activity in competition
with the Corporation and within the Corporation’s geographic
area for more than ten hours per week.” Collectively, these
provisions bar repurchase if the shareholder voluntarily
withdraws from the firm and then engages in the defined
competition.

3
valuation of his stock pursuant to A.R.S. § 10-2223. The

superior court ordered RSCE to repurchase the stock for $86,500.

¶6 The court of appeals affirmed in part and reversed in

part. Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C., 210

Ariz. 256, 110 P.3d 357 (App. 2005). The court found the

voluntary withdrawal provisions unenforceable, but held that

Fearnow was not a “disqualified person” entitled to redemption

of his stock under the Act. Id. at 262 ¶ 32, 110 P.3d at 363.

¶7 Fearnow petitioned for review and RSCE filed a

conditional cross-petition. We granted review of both petitions

because the issues presented are of first impression and

statewide importance. We have jurisdiction pursuant to Article

6, Section 5(3), of the Arizona Constitution and A.R.S. § 12-

120.24 (2003).

II.

A.

¶8 As a general rule, a contract restricting the right of

an employee to compete with an employer after termination of

employment “which is not unreasonable in its limitations should

be upheld in the absence of a showing of bad faith or of

contravening public policy.” Lassen v. Benton, 86 Ariz. 323,

328, 346 P.2d 137, 140 (1959), modified on other grounds, 87

Ariz. 72, 347 P.2d 1012 (1959); see also 15 Corbin on Contracts

§ 80.15 (2003) (noting that in determining the enforceability of

4
such a provision, “reasonableness is the North Star”). Such a

restrictive covenant is unreasonable if “(a) the restraint is

greater than is needed to protect the promisee’s legitimate

interest, or (b) the promisee’s need is outweighed by the

hardship to the promisor and the likely injury to the public.”

Restatement (Second) of Contracts § 188 (1981).

¶9 The determination of “[r]easonableness is a fact-

intensive inquiry that depends on the totality of the

circumstances.” Valley Med. Specialists v. Farber, 194 Ariz.

363, 369 ¶ 20, 982 P.2d 1277, 1283 (1999). “Each case hinges on

its own particular facts.” Bryceland v. Northey, 160 Ariz. 213,

217, 772 P.2d 36, 40 (App. 1989). As the court of appeals has

noted,

[w]hat is reasonable depends on the whole subject
matter of the contract, the kind and character of the
business, its location, the purpose to be accomplished
by the restriction, and all the circumstances which
show the intention of the parties.

Gann v. Morris, 122 Ariz. 517, 518, 596 P.2d 43, 44 (App. 1979).

¶10 Most of our cases concerning the enforcement of

restrictive covenants deal with “non-compete” agreements, under

which an employee is prohibited from competing with the former

employer in a geographic area for a period of time. See, e.g.,

Farber, 194 Ariz. at 365 ¶ 3, 982 P.2d at 1279 (finding

unreasonable a covenant between physicians forbidding

competition within a five-mile radius of any medical office

5
owned by the former employer for three years); Lassen, 86 Ariz.

at 328, 346 P.2d at 140 (finding reasonable a provision

prohibiting competition for five years within a twelve-mile

radius of a veterinarian’s former employer). We have, however,

employed the same fact-based reasonableness analysis to

determine the enforceability of agreements under which a

departing employee is not entirely forbidden to compete. See

Olliver/Pilcher Ins., Inc. v. Daniels, 148 Ariz. 530, 715 P.2d

1218 (1986). Olliver/Pilcher involved an “anti-piracy”

agreement forbidding solicitation of the former employer’s

customers. Id. at 531, 715 P.2d at 1219. While recognizing

that such a provision is “less restrictive than a covenant not

to compete,” id. at 531, 715 P.2d at 1218, we reiterated that

“‘the test of validity of restrictive covenants is one of

reasonableness,’” id. at 532, 715 P.2d at 1219 (quoting Lessner

Dental Labs. v. Kidney, 16 Ariz. App. 159, 160, 492 P.2d 39, 40

(1971)).2

2
Other courts have adopted a similar approach to agreements
imposing restrictions less onerous than covenants not to
compete. See, e.g., Tatom v. Ameritech Corp., 305 F.3d 737, 745
(7th Cir. 2002) (holding that a forfeiture provision will be
enforced as long as it is reasonable); Pollard v. Autotote,
Ltd., 852 F.2d 67, 72 (3d Cir. 1989) (applying a reasonableness
test to determine if a forfeiture-for-competition provision in a
management incentive compensation plan is enforceable); Harris
v. Bolin, 247 N.W.2d 600, 603 (Minn. 1976) (holding a forfeiture
clause unenforceable as unreasonable); Brockley v. Lozier Corp.,
488 N.W.2d 556, 563 (Neb. 1992) (holding that penalties in
profit sharing plans can be enforced only when reasonable).

6
 B.

¶11 Were Fearnow not an attorney, the voluntary withdrawal

provisions would be subject to a fact-based reasonableness

analysis. This Court, however, has adopted a rule governing the

ability of lawyers to enter into certain types of agreements.

That rule, ER 5.6, provides:

A lawyer shall not participate in offering or
making:

(a) a partnership or employment agreement that
restricts the rights of a lawyer to practice after
termination of the relationship, except an agreement
concerning benefits upon retirement; or

(b) an agreement in which a restriction on the
lawyer’s right to practice is part of the settlement
of a controversy between private parties.

Such restrictions are prohibited because they limit a lawyer’s

“professional autonomy” and interfere with “the freedom of

clients to choose a lawyer.” ER 5.6 cmt.

¶12 The Arizona Rules of Professional Conduct, of which ER

5.6 is part, are based on the 1983 Model Rules of Professional

Conduct promulgated by the American Bar Association (“ABA”).

See Ariz. R. Sup. Ct. 42 (providing that the professional

conduct of State Bar members shall be governed by the ABA Model

Rules, as amended by this Court). But even before the ABA

adopted Model Rule 5.6(a), its Committee on Professional Ethics

had issued several opinions condemning non-compete agreements

among lawyers under previous Canons of Professional Ethics.

7
Those opinions stressed the same themes as the current

commentary to ER 5.6 – lawyer autonomy and client choice. See,

e.g., ABA Comm. on Prof’l Ethics, Formal Op. 300 (1961) (finding

a non-compete agreement improper under Canon 7 (forbidding

encroachment on the business of another lawyer), Canon 27

(prohibiting solicitation), and Canon 35 (protecting client

confidences)); ABA Comm. on Prof’l Ethics, Informal Op. 1072

(1968) (stating that covenants not to compete “interfere with

and obstruct the freedom of the client in choosing and dealing

with his lawyer” and that an “attorney must remain free to

practice when and where he will and to be available to

prospective clients who might desire to engage his services”).

These opinions led to the adoption in 1969 of Disciplinary Rule

(“DR”) 2-108 of the Model Code of Professional Responsibility,3

which in turn was incorporated into Rule 5.6 of the 1983 Model

Rules without substantive change.

¶13 ER 5.6 categorically forbids lawyers from making an

“agreement that restricts the right of a lawyer to practice

after the termination of [a law firm] relationship,” ER 5.6(a),

or a settlement agreement containing “a restriction on a

lawyer’s right to practice,” ER 5.6(b). Neither ER 5.6 nor

3
Informal Opinion 1171 (1971) held that an agreement
prohibiting a departing attorney from working with law firm
clients violated DR 2-108. Informal Opinion 1417 (1978) held
that an agreement prohibiting a departing partner from hiring
away firm associates violated DR 2-108.

8
prior ABA opinions, however, expressly deals with agreements

that do not restrict a lawyer’s right to practice or compete,

but rather impose only some financial disincentive for doing so.

Such provisions are before us today.

C.

¶14 In analyzing the voluntary withdrawal provisions, we

write on a clean slate. No prior opinion of this Court has

applied ER 5.6(a). We did, however, discuss ER 5.6 in Farber,

which involved a covenant not to compete among physicians. In

that case, we analogized the importance of a patient’s right to

choose a doctor to the need for a client to be free to choose an

attorney. 194 Ariz. at 368 ¶¶ 16-17, 982 P.2d at 1282. Citing

ER 5.6, we stated that “restrictive covenants are prohibited

between attorneys,” id. at 369 ¶ 18, 982 P.2d at 1283, and that

“public policy considerations preclude their applicability,” id.

(quoting Dwyer v. Jung, 336 A.2d 498, 500 (N.J. Super. Ct. Ch.

Div. 1975) (quotation marks omitted)). We concluded that the

doctor/patient relationship, like the attorney/client

relationship, “is special and entitled to unique protection.”

Id. ¶ 19. We did not, however, find the covenant in Farber

invalid as a matter of law. Expressly declining the invitation

to hold such agreements between physicians “void per se as

against public policy,” id. ¶ 19 n.1, we instead examined the

covenant for reasonableness, id. ¶ 19.

9
¶15 The above-quoted dicta from Farber support the

conclusion that agreements violative of ER 5.6(a) will not be

enforced. Cases from other jurisdictions so hold, finding void

agreements that expressly forbid attorneys from representing

particular clients or competing in a specific geographic area

for a specified period of time. See, e.g., White v. Med. Review

Consultants, Inc., 831 S.W.2d 662, 664-65 (Mo. Ct. App. 1992)

(upholding a rule prohibiting the restriction of a lawyer’s

right to practice); Dwyer, 336 A.2d at 501 (finding void as

against public policy a covenant prohibiting departing attorneys

from working with partnership clients).

¶16 The case law is less clear, however, when the covenant

does not categorically forbid competition or representation of

former clients, but rather provides only a financial

disincentive that may discourage the departing lawyer from doing

so. Many courts hold such provisions void. For example, in an

oft-quoted opinion, the New York Court of Appeals refused to

enforce a law firm partnership agreement that conditioned the

payment of earned but uncollected partnership revenues upon a

withdrawing partner’s refraining from competing with the firm.

Cohen v. Lord, Day & Lord, 550 N.E.2d 410, 410 (N.Y. 1989). The

court reasoned:

[W]hile the provision in question does not expressly
or completely prohibit a withdrawing partner from
engaging in the practice of law, the significant

10
 monetary penalty it exacts, if the withdrawing partner
practices competitively with the former firm,
constitutes an impermissible restriction on the
practice of law. The forfeiture-for-compensation
provision would functionally and realistically
discourage and foreclose a withdrawing partner from
serving clients who might wish to continue to be
represented by the withdrawing lawyer and would thus
interfere with the client’s choice of counsel.

Id. at 411. Other jurisdictions have reached similar results on

similar reasoning.4

¶17 There is, however, a strong opposing view, articulated

principally by the California courts. The seminal case is

Haight, Brown & Bonesteel v. Superior Court, 285 Cal. Rptr. 845

(Ct. App. 1991), which involved a provision requiring

withdrawing attorneys competing with the law firm to forfeit

capital investments and accounts receivable. Construing an

ethical rule quite similar to ER 5.6,5 the court found that the

4
See, e.g., Jacob v. Norris, McLaughlin & Marcus, 607 A.2d
142, 148 (N.J. 1992) (refusing to enforce a provision
withholding termination benefits for departing attorney who
competes with firm); Katchen v. Wolff & Samson, 610 A.2d 415,
419 (N.J. Super. Ct. App. Div. 1992) (finding that the
challenged provision “has the effect of discouraging competition
and forces an attorney to decide whether he should stay with a
firm that admittedly fairly compensates him or leave the firm at
a financial risk to himself in order to better serve his
clients”); Gray v. Martin, 663 P.2d 1285, 1290 (Or. Ct. App.
1983) (refusing to enforce a contract preventing a withdrawing
attorney from receiving termination benefits if the attorney
continues to practice in certain counties).
5
The rule at issue, Rule 1-500 of the Rules of Professional
Conduct of the State Bar of California, provided as follows:

11
provision was not prohibited because it did “not expressly or

completely prohibit the [attorneys] from engaging in the

practice of law, or from representing clients.” Id. at 848.

The court noted that the rule “simply provides that an attorney

may not enter into an agreement to refrain from the practice of

law.” Id. The rule does not

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
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

_________________________
(A) A member shall not be a party to or participate in
offering or making an agreement, whether in connection
with the settlement of a lawsuit or otherwise, if the
agreement restricts the right of a member to practice
law, except that this rule shall not prohibit such an
agreement which:

(1) Is a part of an employment, shareholders’, or
partnership agreement among members provided the
restrictive agreement does not survive the
termination of the employment, shareholder, or
partnership relationship; or

(2) Requires payments to a member upon the
member’s retirement from the practice of law; or

(3) Is authorized by Business and Professions
Code sections 6092.5, subdivision (i) or 6093.

(B) A member shall not be a party to or participate in
offering or making an agreement which precludes the
reporting of a violation of these rules.

12
 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.

Id. at 848.

¶18 Three years later, the California Supreme Court held

that “an agreement among law partners imposing a reasonable toll

on departing partners who compete with the firm is enforceable.”

Howard v. Babcock, 863 P.2d 150, 151 (Cal. 1994). The provision

at issue required departing attorneys who worked with other

departing attorneys in competition with the law firm to forfeit

all withdrawal benefits; departing attorneys who worked on their

own but competed with the law firm were required to forfeit

seventy-five percent of their benefits. Id. Howard was decided

against a backdrop of California statutes favoring non-compete

agreements. Id. at 154. But the decision did not turn on those

statutes; the court expressly noted that it had the “power to

impose a higher standard of conduct on lawyers” through ethical

rules. Id. at 155. The California Supreme Court concluded,

however, that its ethical rule was not “intended to . . .

prohibit the type of agreement that is at issue here.” Id. at

155-56. Howard found a critical distinction between an

agreement imposing disincentives against competition and one

forbidding competition:

13
 An agreement that assesses a reasonable cost against a
partner who chooses to compete with his or her former
partners does not restrict the practice of law.
Rather, it attaches an economic consequence to a
departing partner’s unrestricted choice to pursue a
particular kind of practice.

Id. at 156.

¶19 Recognizing that law firms have an obligation to

protect their own economic interests and their investments in

training and promoting partners, Howard found “no legal

justification for treating partners in law firms differently in

this respect from partners in other business and professions.”

Id. at 157. Such an approach, the court noted, would “have no

deleterious effect on the current ability of clients to retain

loyal, competent counsel of their choice.” Id. at 156-57.

Thus, Howard concluded that a contract provision that did not

prevent a departing lawyer from competing was not void on its

face, but rather would be evaluated for reasonableness. Id. at

160.6

6
See also Pettingell v. Morrison, Mahoney & Miller, 687
N.E.2d 1237, 1240 (Mass. 1997) (stating that a financial penalty
may be valid if it is a “reasonable recognition of a law firm’s
financial loss due to the departure of a partner”); McCrosky,
Feldman, Cochrane & Brock, P.C. v. Waters, 494 N.W.2d 826, 828-
29 (Mich. Ct. App. 1992) (finding financial disincentive
provisions valid because they were “not so overreaching that
they amount to an actual restriction on the defendant’s right to
practice law”); Capozzi v. Latsha & Capozzi, P.C., 797 A.2d 314,
320 (Pa. Super. Ct. 2002) (finding that a forfeiture clause must
meet the reasonableness standard used to evaluate non-compete
clauses involving other professionals).

14
 D.

¶20 We find the reasoning of Howard compelling. ER 5.6

prohibits only an agreement “that restricts the right of a

lawyer to practice” law after termination of employment with a

firm. (Emphasis added.) It is one thing for this Court, in its

supervisory capacity over the legal profession, to adopt a

limited exception to the general rule construing restrictive

covenants for reasonableness when confronting a contract the

terms of which forbid a lawyer from engaging in practice or

representing certain clients. It is quite another, as Howard

notes, to completely “distinguish lawyers from other

professionals such as doctors or accountants, who also owe a

high degree of skill and loyalty to their patients and clients.”

Howard, 863 P.2d at 160.7 We are unable to conclude that the

interests of a lawyer’s clients are so superior to those of a

7
See Anderson & Steele, Ethics and the Law of Contract
Juxtaposed: A Jaundiced View of Professional Responsibility
Considerations in the Attorney-Client Relationship, 4 Geo. J.
Legal Ethics 791, 846 (1991):

Whether the fulcrum for balancing interests of clients
over those of their lawyers is a narcissistic concept
of ourselves as paragons of professional propriety –
as super-fiduciaries – or the absurdly conflicting
notion that good lawyers are hard to find, we wonder
how much longer these outmoded, unrealistic concepts
can be used to deny attorneys fair access to the norms
of the marketplace, restricted only by the same rules
applicable to doctors, to ministers, to accountants,
and to all other fiduciary-based professions.

15
doctor’s patients (whose choice of a physician may literally be

a life-or-death decision) as to require a unique rule applicable

only to attorneys. The language of ER 5.6 does not support such

a sweeping special treatment of lawyers, nor does protection of

clients mandate such a result.8

¶21 We therefore decline to read ER 5.6(a) in the

expansive fashion suggested by Fearnow. Although the rule

prohibits – and we will hold unenforceable – agreements that

forbid a lawyer to represent certain clients or engage in

practice in certain areas or at certain times, its language

should not be stretched to condemn categorically all agreements

imposing any disincentive upon lawyers from leaving law firm

employment. Such agreements, as is the case with restrictive

covenants between other professionals, should be examined under

the reasonableness standard.9

8
It is difficult to see how client choice is significantly
impacted by our reading of ER 5.6(a). The client is of course
free to remain with the lawyer, whether or not the lawyer
chooses to stay at his original firm or go elsewhere.
9
Neither the comments to the ABA Model Rules nor the
Restatement compel a contrary conclusion. The comments to the
ABA Model Rule 5.6 are simply silent on the topic today before
us. Restatement (Third) of the Law Governing Lawyers § 13(1)
(2000) simply states, in language virtually identical to the
text of ER 5.6(a), that a lawyer may not “enter into a law-firm
agreement that restricts the right of the lawyer to practice law
after terminating the relationship.” The commentary to § 13
recognizes that a majority of courts have construed this
language as encompassing agreements imposing financial penalties
on departing lawyers who decide to compete, id. cmt. a., but

16
 E.

¶22 The Shareholder Agreement requires a withdrawing

attorney engaging in “lawyering activity in competition with the

Corporation and within the Corporation’s geographic area” to

forfeit his or her stock in the professional corporation. The

provisions do not restrict the lawyer’s right to practice law

after termination. Rather, they merely provide a lawyer who

withdraws and decides to practice elsewhere with less money than

others making different decisions.

¶23 Because the superior court held that the voluntary

withdrawal provisions were void as a matter of law, it did not

construe the provisions for reasonableness. The court of

appeals, even assuming that the case was governed by the more

permissive standard of Howard, found the provisions unreasonable

as a matter of law because they required Fearnow to forfeit his

entire capital contribution even if he took no RSCE clients.

Fearnow, 210 Ariz. at 259 ¶ 17, 110 P.3d at 360.

¶24 As an initial matter, we note that RSCE claims that

Fearnow did take clients with him upon his departure; the court

of appeals’ observation that the voluntary withdrawal provisions

might be unreasonable when applied to a lawyer who took none is

_________________________
also acknowledges that other courts and commentators have
reached a different interpretation of the rule. See id.,
Reporter’s Note.

17
thus not dispositive.10 More importantly, because the case was

decided on summary judgment under the superior court’s view of

ER 5.6(a), RSCE never had the opportunity below to present facts

concerning the reasonableness of the provisions. Nor has

Fearnow had the opportunity to present evidence that these

particular provisions are unreasonable. Because “[e]ach case

turns on its own particular facts,” Bryceland, 160 Ariz. at 217,

772 P.2d at 40, we cannot conclude as a matter of law whether

the voluntary withdrawal provisions are reasonable. We remand

to allow the superior court to address the reasonableness of the

voluntary withdrawal provisions.11

III.

¶25 The second issue before us is the appropriate remedy

if the voluntary withdrawal provisions are found unreasonable.

10
Even if a departing lawyer takes no clients, some level of
financial penalty for withdrawal could conceivably be reasonable
if, for example, the firm undertook capital expenditures or
hired associate attorneys based on the presence of the former
partner, or if the departure imposed costs in changing the firm
name and related marketing materials.
11
In determining the reasonableness of the voluntary
withdrawal provisions, the superior court may consider that no
financial penalty is imposed on withdrawing members who do not
compete in the stated geographic area. But even if such
discrimination might tend to show the unreasonableness of the
voluntary withdrawal provisions, we are unable today, on the
record before us, to conclude that this fact alone renders the
provision automatically unreasonable as a matter of law.
Rather, the question is whether there is a reasonable basis for
such discrimination, an issue that turns on the particular facts
of each case.

18
The superior court held that Fearnow was entitled to redemption

of his stock under the Professional Corporations Act as a

“disqualified person.” The court of appeals disagreed, holding

that Fearnow has no such statutory remedy as long as he is

licensed to practice law. Fearnow, 210 Ariz. at 260 ¶ 23, 110

P.3d at 361.

¶26 We agree with the court of appeals. Section 10-

2201(1) defines a “disqualified” person as “an individual or

entity that is not or ceases to be a qualified person”; section

10-2201(7) in turn defines a “qualified person” simply as “a

person that is eligible under this chapter to be issued shares

by a professional corporation.” As the court of appeals

correctly noted, section 10-2220(A)(1) allows issuance of shares

to “[i]ndividuals who are licensed by law in this or another

state to render a professional service described in the

corporation’s articles of incorporation.” At all times relevant

to this case, Fearnow was licensed to practice law in Arizona.

He therefore is not a “disqualified person.”12

¶27 Vinall v. Hoffman, 133 Ariz. 322, 651 P.2d 850 (1982),

upon which Fearnow relies, is not to the contrary. That case

12
Had Fearnow been a disqualified person, the proper
procedure under the Professional Corporations Act would be to
first allow the corporation an opportunity to present a fair
value offer for repurchase of the share. A.R.S. § 10-2224. A
valuation proceeding is required only if the corporation refuses
to make an offer or after the disqualified person rejects the
offer. A.R.S. § 10-2225(A).

19
involved a prior version of the Professional Corporations Act,

which required the repurchase of stock after the “resignation”

of a shareholder. Id. at 323, 651 P.2d at 851 (citing former

A.R.S. § 10-909(D) (repealed 1995)). Our holding in Vinall that

the word “resignation” meant resignation from the corporation,

not the profession, is therefore of no aid in interpreting the

present version of the Professional Corporations Act, which

triggers the right to repurchase upon “disqualification.”

¶28 But it does not follow, as the court of appeals held,

that Fearnow must retain his RSCE stock until his retirement or

disqualification to practice law. The Professional Corporations

Act provides that “[a] provision for the acquisition of shares

contained in a professional corporation’s articles of

incorporation or bylaws or in a private agreement is

enforceable.” A.R.S. § 10-2223(A). Therefore, should the

voluntary withdrawal provisions be eventually found

unreasonable, the next question is whether the Agreement

nonetheless requires the acquisition of Fearnow’s shares.

¶29 The superior court held that because the Agreement had

no severability clause, Fearnow had no contractual remedy. The

court of appeals, while disagreeing with the superior court’s

conclusion that Fearnow was entitled to repurchase of his stock

under the Professional Corporations Act, did not address whether

the Agreement itself provided a remedy. Fearnow, 210 Ariz. at

20
262 ¶ 29 n.8, 110 P.3d at 363 n.8 (stating that “we merely hold

that there is not a remedy under the Act that provides for the

mandatory repurchase of such shares as long as the departing

shareholder remains licensed”).

¶30 Although the Agreement has no severability clause, we

believe that the contract nonetheless requires repurchase of

Fearnow’s share for his original subscription price if the

voluntary withdrawal provisions are deemed unenforceable. Under

the Agreement, any shareholder who becomes permanently disabled,

retires from the practice of law, is expelled from the law firm,

or voluntarily withdraws must tender his or her stock to the

corporation. In all cases but one, that tender is made in

return for the original subscription price. Only the partner

who voluntarily withdraws and competes with the firm in a stated

geographic area is forced to tender stock for no compensation.

¶31 Although “we will not permit courts to add terms or

rewrite provisions” to covenants, Farber, 194 Ariz. at 372 ¶ 31,

982 P.2d at 1286, “Arizona courts will ‘blue pencil’ restrictive

covenants, eliminating grammatically severable, unreasonable

provisions,” id. ¶ 30. In this case, the voluntary withdrawal

provisions are severable from the balance of the agreement. The

contracting parties plainly contemplated that all departing

shareholders would be required to return their stock to RSCE.

The Agreement also provides that all but those choosing to

21
compete would receive their original subscriptions in return for

the stock. If the only exceptions to the rule – the voluntary

withdrawal provisions – are unenforceable, the severability of

those provisions is plainly “evident from the contract itself.”

Olliver/Pilcher, 148 Ariz. at 533, 715 P.2d at 1221.

¶32 Therefore, if the superior court concludes on remand

that the voluntary withdrawal provisions are unreasonable, it

should order RSCE to repurchase Fearnow’s share for $33,674.42,

his original subscription price.

IV.

¶33 For the reasons above, we vacate the opinion of the

court of appeals, vacate the judgment of the superior court, and

remand to the superior court for further proceedings consistent

with this opinion. Because we do not yet know which party will

ultimately be successful in this matter, we decline to award

either party attorneys’ fees either under the Agreement or under

A.R.S. § 12-341.01.13

_______________________________________
Andrew D. Hurwitz, Justice

13
Fearnow has also requested fees under A.R.S. § 10-2226.
That provision, however, applies only to an
evaluation/repurchase proceeding required by the Professional
Corporations Act, and cannot be invoked here in light of our
conclusion that Fearnow is not a “disqualified” person under the
Act.

22
CONCURRING:

_______________________________________
Ruth V. McGregor, Chief Justice

_______________________________________
Rebecca White Berch, Vice Chief Justice

_______________________________________
Michael D. Ryan, Justice

B A L E S, Justice, concurring in part and dissenting in part

¶34 The law firm in this case seeks to impose a penalty of

$33,674 on an ex-partner merely because he competed with the

firm for clients. Exacting significant financial penalties from

former lawyers who compete, I believe, “restricts the right of a

lawyer to practice” in violation of ER 5.6(a). My position,

unlike that of the majority, is consistent with the language and

purpose of our ethical rule. It also comports with the views of

most other courts that have addressed this issue, as well as the

Restatement (Third) of the Law Governing Lawyers (2000)

(“Restatement”). Thus, I respectfully dissent from the

majority’s holdings concerning the scope of ER 5.6(a) and the

need to remand this case to determine the reasonableness of the

“voluntary withdrawal” provisions.

23
 I.

¶35 By its terms, ER 5.6(a) prohibits more than just non-

compete agreements among attorneys. The rule more generally

bars lawyers from entering agreements that “restrict” their

right to practice after departing a firm. We have long

recognized that non-compete agreements are one form of the

broader category of restrictive covenants. See, e.g.,

Olliver/Pilcher Ins., Inc. v. Daniels, 148 Ariz. 530, 531-32,

715 P.2d 1218, 1219-20 (1986) (distinguishing non-compete

agreement from restrictive covenant requiring insurance employee

to pay former employer share of fees earned if customers

followed employee). While stating that the language of ER 5.6

should not be “stretched” beyond non-compete agreements, op. ¶

21, the majority in fact compresses the rule to less than what

its terms expressly provide.

¶36 Most courts and commentators recognize that law firm

agreements that impose significant penalties on competing former

lawyers do in fact “restrict” a lawyer’s right to practice

within the meaning of rules like ER 5.6(a). See, e.g.,

Pettingell v. Morrison, Mahoney & Miller, 687 N.E.2d 1237, 1239

(Mass. 1997) (noting the “strong majority rule” that courts will

not give effect to agreements that impose substantial financial

penalties on lawyers for competing with former firms); Cohen v.

Lord, Day & Lord, 550 N.E.2d 410, 411-12 (N.Y. 1989) (noting

24
that reading rule to apply only to provisions that expressly

prohibit practice of law conflicts with language and purpose of

rule); 2 Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of

Lawyering 47-6 (3d ed. 2005) (“The Law of Lawyering”) (noting it

has become “generally accepted that financial disincentives

‘restrict’ the departing lawyer’s right to practice [and] thus

implicat[e] Rule 5.6(a)”).

¶37 Similarly, the Restatement, like our ER 5.6(a), bars

lawyers from entering agreements “that restrict [] the right of

the lawyer to practice law after terminating the relationship.”

Restatement § 13(1). Reflecting the generally accepted view,

the official comments to the Restatement note that:

[S]uch rules preclude enforcement of a provision of a
firm agreement under which a departing lawyer is
denied otherwise-accrued financial benefits on
entering into competitive law practice, unless the
denial applies to all departing lawyers, whether
entering into private practice or not . . . .

Id. cmt. b.

¶38 The Restatement approach desirably promotes the

policies that underlie ER 5.6. These policies are two-fold:

preserving both the freedom of clients to choose their lawyers

and the professional autonomy of lawyers to choose where to

practice and whom to represent. See ER 5.6(a), cmt. 1; Valley

Med. Specialists v. Farber, 194 Ariz. 363, 369 ¶ 18, 982 P.2d

1277, 1283 (1999). Discussing American Bar Association (“ABA”)

25
Model Rule of Professional Conduct 5.6(a), from which our rule

is drawn, Professors Hazard and Hodes observe:

Rule 5.6(a) is designed in part to protect lawyers,
particularly young lawyers, from bargaining away their
right to open their own offices after they end an
association with a firm or other legal employer. It
also protects future clients against having a
restricted pool of attorneys from which to choose.

The Law of Lawyering at 47-5.

¶39 Some law firms have tried to restrict competition

under the guise of retirement provisions, because ER 5.6(a)’s

prohibitions do not apply to agreements concerning retirement

benefits. See id. Such efforts typically provide for the

forfeiture of capital shares or fee income that would otherwise

be due a departing lawyer. “Often, the anticompetitive nature

of such clauses . . . is made all the more clear by the fact

that they become inoperative if the lawyer relocates to a

different geographic area.” Id. These observations apply to

the voluntary withdrawal provisions at issue here, as they

result in the forfeiture of the stock purchase price only for

those former lawyers who compete with the firm.

¶40 “Onerous financial terms of this kind effectively

limit the mobility and availability of still active lawyers, and

correspondingly reduce client choice.” Id.; accord Cohen, 550

N.E.2d at 411 (“The forfeiture-for-competition provision would

functionally and realistically discourage and foreclose a

26
withdrawing partner from serving clients who might wish to

continue to be represented by the withdrawing lawyer and would

thus interfere with the client's choice of counsel.”).

¶41 In declining to follow the generally accepted approach

as reflected in the Restatement, the majority observes that it

writes “on a clean slate.” Op. ¶ 14. This is true, however,

only in the narrow sense that we have not previously decided a

case that actually applied ER 5.6(a) to lawyers. We have,

however, recognized that ER 5.6(a) prohibits restrictive

covenants among attorneys. See Valley Med. Specialists, 194

Ariz. at 368 ¶ 17, 982 P.2d at 1282 (citing, inter alia, Cohen,

550 N.E.2d at 410-11). Moreover, in other contexts, we have

often noted that, in the absence of contrary Arizona law, our

courts generally follow the Restatement. See, e.g., Espinoza v.

Schulenburg, 212 Ariz. 215, 217 ¶ 9, 129 P.3d 937, 939 (2006).

The majority unconvincingly departs from our usual approach by

observing, op. ¶ 21 n.8, that the Reporter’s Notes to

Restatement § 13(1) acknowledge that some courts and

commentators do not adopt the Restatement’s interpretation —

something that could be said of nearly every provision in any

Restatement.

¶42 The slate is also not clean in that this court only

recently approved extensive revisions to our rules of

professional conduct, including amendments to ER 5.6(a). See

27
Order Amending Ariz. R. Sup. Ct. 42 and 43, E.R. 5.6 (2003).

These rule changes were the end result of a process that began

with the ABA’s Ethics 2000 Commission, which thoroughly reviewed

and updated the Model Rules of Professional Conduct. The

Arizona State Bar’s Board of Governors in turn established an

Ethical Rules Review Group to review the new ABA Model Rules and

to recommend appropriate changes to our rules. The only changes

proposed for ER 5.6(a) were to broaden its scope to clarify that

it applies to all forms of agreements — whether partnership,

shareholder, operating, employment, or otherwise — restricting a

lawyer’s right to practice after leaving a firm.14

¶43 No one suggested that ER 5.6(a) should be revised to

limit the rule’s prohibitions to only those agreements expressly

barring a lawyer from competing in certain areas or for certain

clients. Instead, in requesting changes to ER 5.6(a), the State

Bar specifically noted that, “[a]s amended, the Rule and

Comments are consistent with the corresponding ABA Model Rule

and Comments.” Petition R-02-0045 for Amendment of Arizona

14
The changes to ER 5.6(a), which became effective on December
1, 2003, are indicated with underlined additions and struck-
through deletions in the following text:

A lawyer shall not participate in offering or making:
(a) a partnership, shareholders, operating,or
employment, or other similar type of agreement that
restricts the rightsright of a lawyer to practice
after termination of the relationship, except an
agreement concerning benefits upon retirement.

28
Supreme Court Rules 42 and 43 at 21 (2002). One would think

that, if Arizona had adopted or proposed to adopt a version of

ER 5.6(a) that is narrower than the generally accepted

interpretation of Model Rule 5.6 and Restatement § 13, there

would be some attention to this fact.

¶44 The majority instead defends its constricted reading

of Arizona’s ER 5.6(a) by relying on the California Supreme

Court’s decision in Howard v. Babcock, 863 P.2d 150, 151 (Cal.

1993), which interpreted Rule 1-500 of the California State

Bar’s Rules of Professional Conduct. Op. ¶¶ 18-20. For several

reasons, I find Howard’s reasoning unpersuasive. Cf.

Pettingell, 687 N.E.2d at 1239 (noting that “[c]ourts have not

been attracted to the [minority] view expressed in Howard”).

California’s Rule 1-500 is on its face narrower than ER 5.6(a)

because it expressly allows restrictions on a lawyer’s right to

practice that satisfy California’s Business and Professions

Code, which itself allows certain restrictive covenants.

Consistent with the California statutes, the premise of the

Howard decision is that law firm partners should be treated, in

terms of restrictive covenants, no “differently . . . [than]

partners in other businesses and professions.” 863 P.2d at 157.

¶45 Howard’s equation of law firm partners with other

professionals does not work in Arizona. Our ER 5.6(a) is not

limited to restrictions affecting law firm partners, but instead

29
applies broadly to agreements restricting the right of any

lawyer to practice. See ER 5.6(a) & cmt. 1. Reading ER 5.6

narrowly, as does the majority, will impact all lawyers, and not

merely law firm partners. Arizona, unlike California, also has

no rule providing that lawyers may enter restrictive covenants

otherwise authorized by our general professional statutes.

Finally, we have already recognized that ER 5.6(a) is broader

than the prohibitions on restrictive covenants for other

professionals, such as doctors. See Valley Med. Specialists,

194 Ariz. at 368-69 ¶¶ 16-17, 982 P.2d at 1282-83 (noting that

although the American Medical Association only discourages

restrictive covenants between physicians, such covenants are

actually prohibited among attorneys). Thus, the fact that

professionals other than lawyers may also owe duties to their

clients cannot determine the scope of ER 5.6(a), a rule that

reflects this court’s authority to regulate the practice of law

and interests in client choice and lawyer autonomy that are in

some respects unique to the legal profession.

¶46 At bottom, the majority’s decision to limit ER 5.6(a)

to only those agreements that expressly bar a lawyer from

competing with a former firm rests on a policy concern — the view

that law firms should be able to protect their own economic

interests by imposing financial penalties on former lawyers who

compete. See Op. ¶ 19; cf. The Law of Lawyering at 47-6

30
(recognizing that Howard rests on policy concerns that give

primacy to law firm continuity). This policy, however, is not

recognized by either the text of ER 5.6(a) or its previously

identified purposes. See Pettingell, 687 N.E.2d at 1239 & n.4

(noting that Model Rule 5.6 focuses on lawyer autonomy and,

chiefly, client choice, “not the interrelationship of the

partners and former partners”). If a law firm’s “obligation to

protect [its] own economic interests,” op. ¶ 19, merits

recognition in ER 5.6(a), we should consider proposals to amend

the rule, which would allow an opportunity for broad public

comment and full consideration of the interests involved, rather

than engrafting California’s minority approach onto our rule by

judicial decision.

¶47 The majority’s approach will unfortunately subvert the

interests that are protected by ER 5.6(a). Law firms and other

legal employers will be encouraged to avoid the prohibitions in

ER 5.6(a) by seeking to impose — as this case illustrates —

financial penalties rather than explicit restrictions on

competing former attorneys. Because the legality of such

penalties will be judged only post hoc under a vague

reasonableness standard, lawyers will be discouraged from

leaving their firms to compete or from challenging post-

departure restrictions. Cf. Valley Med. Specialists, 194 Ariz.

at 372 ¶ 31, 982 P.2d at 1286 (recognizing that restrictive

31
covenants that are not challenged in court may have in terrorem

effect on departing employees). This result may help law firms

tighten the golden handcuffs on their lawyers; it will not

promote autonomy on the part of individual attorneys or the

freedom of clients to be represented by the lawyer of their

choice.

¶48 I would instead apply ER 5.6(a) by its terms and hold

that the voluntary withdrawal provisions at issue here — which

require a former lawyer to forfeit the purchase price of his

stock if he competes after departing — are a restriction on a

lawyer’s right to practice and are therefore unenforceable. The

majority’s holding that such provisions escape the prohibitions

of ER 5.6(a) will undermine the interests protected by that rule

and unnecessarily require courts to engage in fact-specific

adjudication over penalty provisions that should be held void on

their face.

II.

¶49 Even if I accepted the majority’s conclusion that the

penalty provisions in this case should be evaluated for their

“reasonableness,” a remand would not be necessary. Although a

fact-specific inquiry, the reasonableness of restrictive

covenants remains a question of law in Arizona. Valley Med.

Specialists, 194 Ariz. at 366-67 ¶ 11, 982 P.2d at 1280-81.

Further, “a covenant not to compete is invalid unless it

32
protects some legitimate interest beyond the employer’s desire

to protect itself from competition.” Id. at 367 ¶ 12, 982 P.2d

at 1281 (citations omitted).

¶50 The law firm did have an opportunity below to present

facts concerning the reasonableness of the “voluntary

withdrawal” provisions. In briefing on the cross-motions for

summary judgment, RSCE specifically argued that the provisions

are reasonable under the Howard approach. In support of this

argument, RSCE contended that the provisions do not result in

any forfeiture on the part of Fearnow (an implausible assertion

which the majority itself rejects) and that the provisions are

reasonable because the firm lost clients who chose to follow

Fearnow after he departed. The second reason offered by RSCE to

support the provisions fails as a matter of law — given ER

5.6(a), the firm has no legitimate interest merely in avoiding

competition for its clients by its former lawyers.

¶51 To the extent that other rationales might be offered

for requiring departing lawyers to forfeit the price of their

capital stock upon withdrawal, e.g., a firm’s desire to recoup

some transition costs or to reserve sufficient funds to cover

firm debts, the provision here is patently under-inclusive, and

thus unreasonable, because it singles out only those former

lawyers who compete. Cf. Pettingell, 687 N.E.2d at 1240

(acknowledging that a firm might reasonably apply a charge to

33
all attorneys to prevent the firm from being left with “onerous”

debts); Denburg v. Parker Chapin Flattau & Klimpl, 624 N.E.2d

995, 999 (N.Y. 1993) (rejecting argument that capital forfeiture

provision was justified by desire to recoup firm’s relocation

costs where penalty applied only to those departing lawyers who

were potential competitors).

¶52 RSCE already had an opportunity to present facts in

support of the reasonableness of its provisions or to identify

disputed material facts that preclude summary judgment. Cf.

Valley Med. Specialists, 194 Ariz. at 372 ¶ 33, 982 P.2d at 1286

(noting party seeking to enforce restrictive covenant has burden

of showing it “is no greater than necessary to protect the

employer’s legitimate interest, and that such interest is not

outweighed by” harm to employee or public). It failed to do so,

and there is no good reason to prolong this litigation by

remanding for further proceedings on this issue.

III.

¶53 I concur in the majority’s opinion insofar as it holds

that, if the “voluntary withdrawal” provisions are

unenforceable, the appropriate remedy is for Fearnow to recover

the amount he originally was deemed to have paid for his stock.

_____________________________
W. Scott Bales, Justice

34