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lawyerwillshareholder agreementpartnershipcorporation
attorneylawyerappealwillpartnership

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Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C., 213 Ariz. 24, 138 P.3d 723, 482 Ariz. Adv. Rep. 3

Facts

William Fearnow, a former partner at Ridenour, Swenson, Cleere & Evans, P.C. (RSCE), paid $33,674.42 for a partnership interest in the firm. After the firm decided to wind down, he and other partners formed RSCE, converting their partnership contributions into stock. The Shareholder Agreement required that a shareholder who voluntarily withdrew and then competed with the firm must tender their stock back to the corporation for no compensation. After leaving RSCE to join another firm, Fearnow demanded compensation for his stock, which RSCE refused, citing the agreement's provisions. Fearnow subsequently sued, claiming the provisions violated ethical rules governing lawyers.

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. The former partners made no new capital contributions to RSCE; rather, their original partnership contributions were converted to stock.

Issue

Did the voluntary withdrawal provisions of the Shareholder Agreement violate Ethical Rule 5.6(a) of the Arizona Rules of Professional Conduct, which prohibits agreements that restrict a lawyer's right to practice law after leaving a firm?

Did the voluntary withdrawal provisions violate ER 5.6(a)?

Rule

Ethical Rule 5.6(a) prohibits agreements that restrict a lawyer's right to practice law after termination of a law firm relationship, except for agreements concerning benefits upon retirement.

ER 5.6(a) prohibits an 'agreement that restricts the right of a lawyer to practice [law] after termination of [a law firm] relationship.'

Analysis

The court analyzed the voluntary withdrawal provisions under the reasonableness standard, concluding that they did not categorically restrict Fearnow's right to practice law but rather imposed a financial disincentive for competing. The court noted that such provisions should be evaluated based on the totality of the circumstances and the specific facts of the case, as reasonableness is a fact-intensive inquiry.

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.

Conclusion

The Arizona Supreme Court vacated the lower court's judgment and remanded the case for further proceedings to determine the reasonableness of the voluntary withdrawal provisions in the Shareholder Agreement.

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.

Who won?

The Arizona Supreme Court vacated the lower court's judgment, indicating that neither party prevailed outright, as the case was remanded for further proceedings.

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.

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