Holloway v. Faw, Casson & Co.
1990 Md. LEXIS 66, 319 Md. 324, 572 A.2d 510 (1990)
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Rule of Law:
A contractual provision in an accounting partnership agreement requiring a withdrawing partner to pay a fee equivalent for servicing former clients, which functions as a valid liquidated damages clause, is severable and enforceable if it reasonably protects the firm's client base and goodwill without imposing undue hardship or conflicting with public policy.
Facts:
- In 1968, Robert E. Holloway, C.P.A., was initially employed by Faw, Casson & Co. (FC) as a staff accountant.
- Holloway progressed through various roles and became a partner in FC in 1979.
- The June 1, 1980, partnership agreement included Paragraph XXI, which stipulated that a withdrawing partner would not engage in public accountancy within a 40-mile radius of FC offices for five years.
- Paragraph XXI further stated that if a withdrawing partner engaged former FC clients within that five-year period, they agreed to pay FC 100% of the prior year's fee for that client.
- On December 8, 1984, Holloway voluntarily withdrew from FC, where he had been a partner in the Salisbury office.
- Upon withdrawal, Holloway joined another public accounting firm, Twilley & Rommel, located in Salisbury within five miles of an FC office.
- Holloway sent announcements of his new professional affiliation to FC's clients at the time of his resignation.
- At least 171 FC clients, all of whom Holloway had serviced while at FC, subsequently engaged Holloway's services at his new firm.
Procedural Posture:
- Faw, Casson & Co. (FC) filed a complaint in the Circuit Court for Wicomico County (trial court) in February 1986, seeking damages from Robert E. Holloway based on his partnership agreement.
- Holloway filed a counterclaim for damages and a declaratory judgment challenging the validity of Paragraph XXI of the agreement.
- The Circuit Court decided the validity of Paragraph XXI on cross-motions for partial summary judgment, ruling that the provision was valid as judicially modified (reduced from five to three years and limited to clients Holloway had direct contact with).
- A jury trial was held in the Circuit Court, limited to questions of damages and prejudgment interest only, and the jury returned a verdict in favor of FC.
- Holloway appealed, and FC cross-appealed, to the Court of Special Appeals (intermediate appellate court).
- The Court of Special Appeals largely affirmed the Circuit Court's modification of the covenant's duration and scope, affirmed that the fee equivalent was a valid liquidated damages provision, but held that the forfeiture of Continued Income Participation (CIP) was not an enforceable liquidated damages provision.
- Holloway petitioned for certiorari, and FC cross-petitioned for certiorari, to the Court of Appeals of Maryland (this court).
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Issue:
Does a provision in an accounting partnership agreement requiring a withdrawing partner to pay a fee equivalent for serving former clients of the firm, and specifying a five-year duration and a forty-mile radius, constitute an unreasonable and unenforceable restraint of trade or an invalid penalty, or is it severable and enforceable as a valid liquidated damages clause?
Opinions:
Majority - Rodowsky, Judge
Yes, the provision in the accounting partnership agreement requiring a withdrawing partner to pay a fee equivalent for serving former clients of the firm is severable on a client-by-client basis and enforceable as a valid liquidated damages clause, even if aspects of the broader non-competition language might be considered an unreasonable restraint of trade or an invalid penalty. The court determined that such fee-equivalent clauses, while similar to covenants not to compete, function more as a mechanism for a withdrawing partner to "purchase" client accounts from the former firm rather than an outright prohibition on competition. This protects the accounting firm's legitimate interest in its client base and goodwill, which are closely tied to individual partners, without imposing undue hardship on the withdrawing partner (who remains free to compete for other clients) or violating public interest. The court rejected the argument that such covenants are per se unlawful for accountants, finding that the existing "rule of reason" adequately addresses public interest concerns. The fee equivalent provision was upheld as a valid liquidated damages clause because the amount (100% of prior year's fees) is a specific sum and reasonably compensates for anticipated, difficult-to-prove damages, consistent with the valuation of accounting practices. The court found the forfeiture of Continued Income Participation (CIP) to be severable and, given that Holloway's CIP had already been offset against his fee equivalent obligation, its validity was rendered immaterial and moot. Regarding the five-year duration, the court affirmed the lower court's modification to three years for future declaratory judgment purposes, finding three years a reasonable period for the firm to reestablish client relationships through a substitute accountant. The court also held that a specific geographic limitation was unnecessary for the fee equivalent clause since it only restricted access to FC clients. Finally, the court dismissed Holloway's counterclaim regarding FC's alleged material breach of compensation, finding insufficient evidence of loss, and reversed the intermediate appellate court's remand on the conversion claim, deeming any error harmless given the jury's verdict.
Analysis:
This case is significant for clarifying the enforceability of restrictive covenants in professional partnership agreements, particularly in accounting firms. It distinguishes between outright prohibitions on competition and "purchase-price" provisions, treating the latter more favorably as valid liquidated damages clauses. The ruling reinforces an employer's protectable interest in client goodwill, especially in professions where personal client relationships are central, without imposing a per se ban on such agreements for accountants. Future cases will likely rely on this distinction to uphold similar fee-sharing or buy-out provisions as legitimate means of compensating firms for lost client revenue rather than invalid restraints of trade, provided the terms are reasonable in scope and duration.
