04 Civ. 9570 (SHS).
December 8, 2006
Defendant, the law firm of Katten Muchin Zavis Rosenman ("KMZR"), has moved to dismiss Count III of plaintiff Aaron Karas's Second Amended Complaint alleging that a non-compete agreement between the parties violates Disciplinary Rule 2-108(A) of the New York Code of Professional Responsibility. KMZR contends that the fact that it has released Karas from his non-compete obligations moots the dispute at issue and that, in any event, New York does not recognize an independent cause of action for the violation of a disciplinary rule. As discussed below, the Court agrees that there is no private right of action for a violation of DR 2-108(A) and accordingly dismisses that cause of action — the sole remaining claim — pursuant to Fed.R.Civ.P. 12(b)(6).
The Court assumes familiarity with the facts underlying this litigation, which are more fully set forth in Karas v. Katten Muchin Zavis Rosenman, No. 04 Civ. 9570, 2006 U.S. Dist. LEXIS 109 (S.D.N.Y. Jan. 3, 2006). Briefly stated, plaintiff's law firm merged with a predecessor firm of defendant in July 2001 pursuant to an Agreement. (Second Amended Complaint ("Compl.") ¶ 8.) The Agreement provided, inter alia, that plaintiff would work for three years as counsel for defendant, with both his work and his salary to be reduced during each of those three years. (Id. ¶ 11.) Subsequent to that three-year period, plaintiff would receive three annual payments of $200,000 per year provided that he did not work for another law firm during that time period. (Id. ¶ 12.) It is the latter provision that is presently at issue.
In early 2005, Karas commenced the present action maintaining that KMZR had tortiously interfered with and breached the Agreement by denying his request to refrain from withholding income taxes from the three annual $200,000 payments. Karas maintained that those payments were not wages but rather were payments in consideration for his agreement not to compete with KMZR. This Court dismissed both the tortious interference and contract claims on the ground that they improperly sought to restrain the collection of taxes. Karas, 2006 U.S. Dist. LEXIS 109, at *18-19.
However, the Court denied KMZR's motion to dismiss — and denied Karas's motion for summary judgment on — the third and final claim, viz, that the provision in the Agreement precluding him from working for another law firm violated DR 2-108(A) and was unenforceable. Id. at *20-27. Subsequent to that decision, in March 2006, defendant formally released Karas from his obligations not to compete pursuant to the Agreement (Nemeck Aff., Ex. B.) and again moved to dismiss the sole remaining claim for relief pursuant to Fed.R.Civ.P. 12(b)(1).
In support of that motion, defendant contends that because the Second Amended Complaint seeks only a declaration that the clause was unenforceable, the controversy has been mooted by the release and the Court accordingly lacks jurisdiction over this matter. Defendant also maintains that New York law does not provide a private right of action for a violation of DR 2-108(A). Karas contends that his Second Amended Complaint seeks not only a declaratory judgment but also money damages for the unlawful restraint of trade in violation of DR 2-108(A), such that his claim is not moot, and that the relief he seeks is countenanced by New York law.
The Second Amended Complaint specifies that "this is an action for declaratory judgment pursuant to 28 U.S.C. §§ 2201 and 2202 for . . . restraint of trade." However, under the heading of "Count III," Karas does specify that he "has been injured and continues to be injured by reason of this illegal restraint of trade in an amount presently unknown, but which will be proven at time of trial." The parties dispute whether, given this seemingly conflicting language, Karas has sought only a declaration that the non-compete clause is invalid or has also sought money damages incurred as a result of being subjected to that allegedly invalid clause. As the law firm points out, if Karas has sought only declaratory relief, the action has been mooted by the firm's execution of a release that nullifies the contractual provision at issue.
The Court need not engage this dispute because it finds that, even if Karas has pled a claim for money damages, there is no private right of action pursuant to DR 2-108(A) pursuant to which he can recoup those damages. DR 2-108(A) provides that
A lawyer shall not be a party to or participate in a partnership or employment agreement with another lawyer that restricts the right of a lawyer to practice law after the termination of a relationship created by the agreement, except as a condition to payment of retirement benefits.
Generally, pursuant to New York law, "a violation of a disciplinary rule does not generate a cause of action," Mackley v. Sullivan Liapakis, No. 98 Civ. 8460, 2001 U.S. Dist. LEXIS 21723, at *21 (S.D.N.Y. Dec. 17, 2002) (citing William Kaufman Organization, LTD. v. Graham James LLP, 703 N.Y.S.2d 439, 442 (N.Y.App.Div. 2000)). Limited exceptions to this rule exist, such as when a violation of a disciplinary rule forms part an alleged breach of contract or malpractice. See Kaufman, 703 N.Y.S.2d at 442. In Kaufman, the plaintiffs sued their former law firm because the firm had allegedly wrongfully ceased the parties' lawyer-client relationship in order to represent a third party that the plaintiffs had been litigating against. Id. at 441. The trial court had dismissed the case, holding that no private right of action existed for suits based on disciplinary rules. The First Department reversed, holding that the disciplinary claim could proceed in the context of the plaintiffs' claim for breach of the parties' contractual relationship. Id. at 442. (noting that, "[i]n the absence of a contract, the mere violation of a disciplinary rule will not sustain a breach of contract action," and holding that "[s]ince plaintiffs do not base their breach of contract claim solely on the attorneys' violations of the disciplinary rules, but, rather, on breaches of a contractual relationship in a complex litigation, the claim should be reinstated").
Additionally, DR 2-108(A) has itself been the subject of private litigation. The New York Court of Appeals has held that DR 2-108(a) reflects the public policy of New York, thus "rendering certain anticompetition clauses void and unenforceable." See Denburg v. Parker Chapin Flattau Klimpl, 82 N.Y.2d 375, 381 (1993) (characterizing the holding in Cohen v. Lord, Day Lord, 75 N.Y.2d 95 (1989)). Pursuant to Cohen andDenburg, a lawyer such as Karas possesses a private right of action with which he can seek to invalidate a clause that hampers his ability to practice law. See Denburg, 82 N.Y.2d at 378, 382 (finding a clause invalid pursuant to DR 2-108(a)).
But neither Cohen, nor Denburg, nor Kaufman — the cases upon which Karas relies — involve an action for damages resulting from the breach of a disciplinary rule itself. In both Cohen andDenburg, the defendant law firms withheld money that the plaintiffs were contractually owed because the firms claimed that he plaintiffs had violated their non-compete agreements. The plaintiffs in those cases asserted contract claims for the money owed, and argued that the non-compete clauses posed no bar to their claims because the non-compete clauses were invalid pursuant to DR 2-108(A). Denburg, 82 N.Y.2d at 379; Cohen, 75 N.Y.2d at 96-98. Here, Karas has styled this claim as one for restraint of trade, not for breach of contract. Karas does not dispute that KMZR has been paying him the money owed pursuant to the allegedly invalid provision. He is thus not seeking money owed to him as part of the Agreement, unlike the Denburg andCohen plaintiffs, because he has been paid that money. Rather, he is seeking money owed as a result of his having refrained from competition pursuant to a provision that violates DR 2-108(A). He points to no authority that New York law provides such a right of action.
Indeed, Karas contends that "[l]ike Denburg, plaintiff's damages here flow, at least in part, from a breach of contract." (Plaintiff's Sur-Reply Memorandum of Law dated Nov. 22, 2006, at 4). He points to Count II of his Second Amended Complaint for breach of contract in connection with KMZR's allegedly unlawful withholding of income taxes from the $200,000 payments, and notes that Count III of the Second Amended Complaint — for restraint of trade — incorporates all that came before it, including the breach of contract count. This, Karas maintains, provides the nexus between contract and disciplinary rule rendering his case akin to Cohen, Denburg, and Kaufman. But in Cohen and Denburg, the contract provision allegedly breached was the very provision that violated DR 2-108(A), and in Kaufman, the alleged breach of contract was synonymous with the alleged disciplinary violation. Here, however, the alleged contractual breaches involved tax withholdings and, as such, have nothing to do with the allegedly invalid promise not to compete.
Karas in effect is arguing that the existence of the allegedly unlawful non-compete provision in the Agreement is itself a breach of contract. Indeed, he characterizes the holding in Cohen as finding that "the contract [was] breached by an invalid provision which imposed a financial harm on plaintiff's livelihood" and claims that his case presents the same scenario. But that was not the holding in Cohen. There, as explained, the alleged breach was the defendant law firm's failure to pay money owed to the plaintiff lawyer; the validity of the non-compete provision was relevant only insofar as the contract was not breached if the provision was valid. Here, to the extent that Karas alleges that the existence of the provision is itself a breach, that allegation does not present a scenario similar toCohen, and also does not make logical sense: the existence of a void-for-public-policy provision in a contract is a violation of public policy, not a breach of the contract in which it is contained. Indeed, tax withholdings aside, Karas has pointed to no provision of the Agreement that has not been honored by KMZR.
Because neither Denburg, Cohen, nor Kaufman suggest that plaintiff has a private right of action for damages sustained in connection with a DR 2-108(a) violation, and because rights of action generally do not exist in New York for violations of disciplinary rules, see Mackley, 2001 U.S. Dist. LEXIS 21723 at *21, Karas is left with his claim for a declaration that the alleged non-compete provision is void as against public policy, which claim is cognizable pursuant to Denburg and Cohen. But that cause of action is now moot because defendant has voluntarily released Karas from any obligation he has pursuant to the non-compete provision. Federal courts do not have subject matter jurisdiction when "the question sought to be adjudicated has been mooted by subsequent developments." See Flast v. Cohen, 392 U.S. 83, 95, 88 S. Ct. 1942, 1950, 20 L.Ed.2d 947 (1968); cf. Crown Media, LLC v. Gwinnett County, 380 F.3d 1317, 1324-25 (11th Cir. 2004) (where a party challenged a statute seeking only declaratory and injunctive relief, and not money damages, litigation was mooted upon repeal of statute). Accordingly, Karas's Second Amended Complaint must be dismissed.
Plaintiff also claims in his sur-reply and at oral argument on this motion that the law firm's insistence on the validity of the non-compete clause constitutes a "deceptive act or practice in the conduct of any business" pursuant to New York General Business Law § 349(a). However, Karas points to nothing that even suggests deception by defendant.
Because Karas's claim for a declaration that the Agreement violated DR 2-108(a) is now moot, and because New York does not provide for a private right of action for damages in connection with a violation of DR 2-108(A), defendant's motion is hereby granted and the Second Amended Complaint is dismissed pursuant to Fed.R.Civ.P. 12(b)(6).
Defendants moved to dismiss pursuant to Fed.R.Civ.P. 12(b)(1), for lack of subject matter jurisdiction. The parties in this action are diverse, such that the Court does have subject matter jurisdiction pursuant to 28 U.S.C. § 1332. Because the Court has effectively concluded that, despite this diversity, plaintiff has failed to state a claim for relief, the dismissal is more properly entered pursuant to Fed.R.Civ.P. 12(b)(6).