What are my obligations when I want to leave my partnership and start a new business that will compete with the current partnership?

Partnerships come to an end, with partners going their different ways, often with select partners coming together afterwards and forming a new partnership.   In order for new partners to start their business right away, planning and preparation happens while the old partnership is still in place.  There are specific obligations and fiduciary duties that departing partners owe to their remaining partners.  This shall be examined in the context of partners in a law firm, as this industry is more heavily regulated than others.

Departing partners should be aware of and follow explicitly any specific rules set forth in the partnership agreement.  For instance, the partnership agreement may require a formal notification time period for departing partners to provide awareness of their impending departure.   Some agreements prohibit partners from approaching employees of the current firm to join the new firm, such as paralegals, receptionists, and associates, but allow partners to approach other partners to change firms.

 

Fiduciaries may plan to compete with their current partnership, provided that while making their arrangements they do not act in violation of the their fiduciary duties.  This means they must properly handle cases not for their own benefit, but for the benefit of the partnership.  But it also allows them to make the proper logistical arrangements necessary to start their new business, such as executing a lease, preparing lists of clients expected to leave, and obtaining financing.

 

At the same time, in the course of this process partners are not allowed to obtain unfair advantage over their former partners in breach of their fiduciary duties.   This can be seen in the obligation to render on demand true and full information of all things affecting the partnership to any partner.  So if rumors get around the office of a group of partners planning to leave, they have an obligation to answer truthfully any questions that remaining partners put to them.

 

A specific obligation that is germane to certain professional groups, such as doctors, and attorneys, is the obligation for clients to be given the opportunity to choose if they want to keep their representation with the current partnership, or move to the new one.  This prohibits these types of partnerships from enforcing non-compete clauses to the partnership agreements.  This is due to the fact that services rendered by one’s doctor or attorney can be so personal that clients must be given the opportunity to choose who provides them that service.

 

Each state bar organization provides guidelines for legal partnerships that include duties and obligations that each partner must follow.  Other types of organizations are not as strictly controlled, but these principles provide a basis from which to gauge proper conduct.  Consult local counsel in order to obtain the proper guidance and rules to follow for your specific industry and jurisdiction.

 

Picture by: Moyan Brenn