Foti v. Cook
263 S.E.2d 430, 1980 Va. LEXIS 170, 220 Va. 800 (1980)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A restrictive covenant in a professional partnership agreement is reasonable and enforceable if it is no greater than necessary to protect the firm's legitimate business interests, is not unduly harsh on the departing partner's ability to earn a livelihood, and is not against public policy.
Facts:
- Victor F. Foti was a senior partner in the Roanoke accounting firm of Andrews, Burket and Company (the Andrews firm).
- In May 1975, Foti and his partners executed a partnership agreement containing a restrictive covenant.
- The covenant stipulated that if a partner voluntarily withdrew, they would pay the firm one-third of the fees collected for a period of three years from any of the firm's clients they provided services to within twenty-four months of leaving.
- On August 1, 1976, Foti submitted his voluntary resignation, which the firm accepted the next day.
- Following his resignation, the remaining partners restricted Foti's access to work papers and required him to be accompanied when meeting with firm clients.
- Foti alleged these new restrictions constituted an involuntary termination, thereby voiding the covenant.
- In September 1976, Foti joined a new accounting firm, Persinger, Foti and Company.
- Foti and his new firm began performing accounting services for clients of his former firm, the Andrews firm.
Procedural Posture:
- The remaining partners of the Andrews firm filed a motion for a declaratory judgment against Victor F. Foti in a Virginia trial court to determine the validity of their partnership agreement.
- A jury was impaneled at the trial court to determine the factual issue of whether Foti's withdrawal was voluntary.
- Before the jury could rule, the trial court granted summary judgment in favor of the Andrews firm, finding no material issue of fact.
- The trial court held that the covenant was reasonable and valid, and entered a judgment against Foti for $40,264.31.
- Foti (appellant) appealed the trial court's judgment to the Supreme Court of Virginia, with the Andrews firm partners as appellees.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Is a restrictive covenant in a partnership agreement, which requires a withdrawing partner to pay the firm a portion of fees earned from the firm's former clients for a set period, a reasonable and enforceable restraint on trade?
Opinions:
Majority - Harrison, J.
Yes, the restrictive covenant is a reasonable and enforceable restraint on trade. A covenant is reasonable if it is no greater than necessary to protect the employer's legitimate business interests, not unduly harsh on the employee, and not contrary to public policy. Here, the covenant was designed to protect the firm's legitimate interests in its client base and confidential information. The restraint was not unduly harsh because it did not prohibit Foti from practicing accounting anywhere, even next door to his old firm; it only required him to compensate the firm for taking its clients. Finally, the covenant is not against public policy, as it does not limit the public's choice of accountants. The court emphasized that this was an agreement between sophisticated senior partners of equal bargaining power, not a standard employer-employee contract, which further supports its reasonableness.
Analysis:
This decision solidifies the use of a three-part reasonableness test for restrictive covenants within professional partnerships in Virginia. The court distinguishes between covenants that prohibit practice entirely and those that merely impose a financial cost for competing, finding the latter more likely to be reasonable. The case is significant for its emphasis on the equal bargaining power of partners, suggesting that such agreements will be scrutinized less strictly than those in a typical employer-employee context. This precedent provides a clear framework for professional service firms seeking to protect their client base from departing partners.
