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October 16th, 2009
Poaching Lawyers: The Legal Risks
One of the more interesting developments in the legal landscape during the past decade has been the marked change in the way law firms look to achieve growth. Rather than exclusively nurture young associates until they climb the ladder to partner, many law firms take what seems an easier road by recruiting business-generating partners and associates from competing law firms. While hiring lateral partners and associates can provide exciting new entrepreneurial opportunities for the lateral hires and the law firms which recruit them, the law firms who find themselves victimized by this practice, which they often characterize as "poaching," often react by threatening or commencing litigation. Indeed, lateral hiring creates legal and ethical risks of which both the recruited attorneys and acquiring law firms must be aware.
As lateral hiring has developed into a common practice, court decisions and ethical opinions around the country have delineated the duties a departing attorney owes to his former law firm and the practices prudent departing attorneys should follow to avoid breaching those duties. More recently, however, the courts have put acquiring law firms on notice that the liability imposed on a departing attorney can bleed over to the acquiring law firm under the doctrines of tortious interference with contract, tortious interference with prospective business relations, or aiding and abetting breach of fiduciary duty.
Exposure to liability for hiring firms primarily arises in two main areas: soliciting clients and soliciting employees from the departing attorneys’ existing law firm. While this is still an emerging area of the law in the context of law partnerships - there have been few reported cases thus far - the fact that lateral hiring poses legal risks should not surprise acquiring law firms. The relevant legal principles are well-developed in non-legal employment contexts and there is no convincing justification as to why law firms should be insulated from this type of liability. Thus, examining how courts have ruled on claims of aiding and abetting breaches of fiduciary duty and tortious interference in non-legal employment contexts is instructive in predicting where law firms involved in lateral recruiting are likely to court trouble.
We will examine these basic legal principles, show how those principles have been applied thus far to lawyer "poaching" cases, and provide a list of "dos and don'ts" for law firms contemplating lateral hiring. In explaining these legal principles, please recognize that while there is significant uniformity across jurisdictions, the manner in which these principles are expressed, and their specific application, will differ from state to state. The reader should consult the law in his or her jurisdiction to determine whether and how these principles will apply in any given situation.
TRADITIONAL PRINCIPLES: TORTIOUS INTERFERENCE
The level and type of wrongdoing needed to establish liability for tortious interference, and indeed the specific type of tortious interference involved, will depend on the nature of the relationship between the plaintiff former employer and the departing employees. If the departing employees had an existing, written employment contract with the plaintiff, then the plaintiff may be able to sue for tortious interference with an existing contract, which generally requires showing only: (1) the existence of a valid contract between the plaintiff and a third party; (2) the defendant’s knowledge of the contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual disruption of the contractual relationship; and (5) damage. Pacific Gas & Electric Co. v. Bear Stearns & Co., 50 Cal. 3d 1118, 1126, 791 P.2d 587 (1990); Hughes v. City of Chicago, 2003 WL 21518592 (N.D. Ill. 1999); Sklar v. Beth Israel Deaconess Medical Center, 59 Mass. App. Ct. 550 (2003); Restatement (Second) of Torts § 766.
Soliciting another’s at-will employees, however, does not in itself automatically constitute unfair competition or tortious interference with business relations. There is no inherent legal wrong in making an offer of employment to an at-will employee, even if the employee and his new employer competes with the former employer. Improper solicitation of at-will employees therefore is usually treated as tortious interference with prospective contractual relations, which involves a much higher standard. E.g., Snyder v. Sony Music Entmt., Inc., 252 A.D.2d 294, 299, 684 N.Y.S.2d 235, 239 (1st Dep’t 1999) (at will employee may sue only for tortious interference with prospective business advantage); accord, Buxbom v. Smith, 23 Cal. 2d 535, 145 P.2d 305 (1944). It requires showing that the recruitment was done for a wrongful purpose, such as to destroy another’s business, to misappropriate the employer’s trade secrets, or to induce a breach of covenant not to compete. See Schmersahl, Treloar 7 Co., P.C. v. McHugh, 28 S.W.3d 345 (Mo. Ct. App. 2000); see also Carvel Corp. v. Noonan, 3 N.Y.2d 182, 189-90, 785 N.Y.S.2d 359, 361-62 (2004) (to establish liability for tortious interference with prospective business advantage, plaintiff must show, inter alia, either (i) that defendant’s conduct constituted a crime or independent tort, or (ii) the sole purpose of that conduct was to cause intentional harm to the plaintiff).
The defendant’s inducement of a key employee of the plaintiff to resign and accept employment with a competitor frequently causes the plaintiff to lose customers or suppliers to the competitor. The plaintiff may bring a claim against the former employee and the competitor for tortious interference with these business relationships. See, e.g., Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324 (9th Cir. 1980); Western Essex Corp. v. Casio, Inc., 674 F.Supp. 8 (W.D. Pa. 1987); Nationwide Advertising Service, Inc. v. Thompson Recruitment Advertising, Inc., 183 Ga.App. 678, 359 S.E.2d 737 (1987); McRoberts Protective Agency, Inc. v. Lansdell Protective Agency, Inc., 61 A.D.2d 652, 403 N.Y.S.2d 511 (1978); Bray v. Squires, 702 S.W.2d 266 (Tex. App. 1985).
The Hollingsworth case (622 F.2d at 1324) is typical. There, two companies, Hollingsworth and Hoffman, competed in California in the manufacture and sale of solderless terminals. Hoffman recruited one of Hollingsworth’s top sales people, an at-will employee who had extensive knowledge of Hollingsworth’s customer lists. There were, however, no ongoing contracts between Hollingsworth and its customers, just purchase orders for each sale. Because no explicit contracts existed with either the salesman or the customers, the court applied principles applicable to tortious interference with prospective business relations. For example, the court concluded that a tortious interference claim would lie with respect to Hollingsworth’s customers only if Hollingsworth could establish "some type of unfair trade practice, . . . such as where trades secrets or confidential information is used in the solicitation." Id. at 1337. Similarly, with respect to the solicitation of the Hollingsworth at-will employee, the court held that mere solicitation of an at-will employee to leave and accept employment with a competing business is not illegal. Id. "However, if either the defecting employee or the competitor - is guilty of some concomitant, unconscionable conduct, the injured former employer has a cause of action to recover for the detriment he has thereby suffered." Id.
TRADITIONAL PRINCIPLES: AIDING AND ABETTING
As a general rule, because employees are agents, they have at least some fiduciary obligation to their employers. Restatement (Third) Agency § 1.01 cmt. C. The existence of such an obligation becomes increasingly clear when the employees are officers or partners. Under basic aiding and abetting principles, one who counsels, advises, abets or assists in the commission of another’s breach of fiduciary duty is responsible to the injured party for the entire loss. Elements of such a claim are: (1) that a fiduciary breached his or her obligations to another, (2) the defendant knowingly induced or participated in the breach by providing "substantial assistance," and (3) the plaintiff suffered damage as a result of the breach. See Whitney v. Citibank, N.A., 782 F.2d 1106, 1115 (2d Cir. 1986).
Where the employee has solicited the plaintiff’s customers or suppliers for a competitor while still employed by the plaintiff, the plaintiff may bring a claim against the employee for breach of duty of loyalty, as well as a claim against a third party for aiding and abetting that breach. One example is S&K Sales Co. v. Nike, Inc., 816 F.2d 843 (2d Cir. 1987). A sales agency, S&K, brought an action against defendant Nike, Inc. for its participation in breach of fiduciary duty by a former S&K sales representative after Nike contracted directly with the former representative’s new agency. The representative had agreed with Nike to have certain sales contracts executed only in the representative’s name; the representative then told S&K that the contracts were really for S&K, but that Nike just felt more "comfortable" with only the representative being named. Id. at 846. Not surprisingly, the representative stole all the business for his new company. The trial court awarded damages against Nike for S&K’s lost profits. The Second Circuit affirmed, rejecting Nike’s argument that S&K had to show Nike acted intentionally and/or maliciously. The court explained that the tort of participation in a fiduciary’s breach of duty "simply does not require proof of an intent to harm." Id. at 849. Showing that Nike "knew of the breach of fiduciary duty and participated in it" was sufficient. Id. at 848. The court also affirmed the award of compensatory damages, reasoning that once it was established that the agreement was terminated as a result of the defendant’s participation in the breach, the plaintiff was entitled to recover for any resulting damages. Id. at 851-52.
TRADITIONAL PRINCIPLES UTILIZED IN LEGAL EMPLOYMENT CONTEXT
The three main reported cases where these principles have been applied to law firm lateral recruitment are:
Reeves v. Hanlon, 33 Cal.4th 1140, 95 P.3d 513 (2004): In Reeves v. Hanlon, plaintiff law firm brought an action against a former equity partner, a former associate, and their new law firm for tortious interference with contractual relations resulting from the new firm’s hiring of several of the plaintiff’s at-will employees. The court held that in California departing attorneys may be held liable for intentional interference with prospective economic advantage where they recruit an existing law firm’s at-will employees, that recruitment occurs while the departing attorneys are still employed by the law firm, and the departing partners act with the intention "to cripple the [existing firm’s] ability to provide legal services"." Id. at 1154. Significantly, the court looked beyond the recruitment of the existing firm’s employees and focused on the departing attorneys’ entire pattern of behavior, which included failing to provide status reports on cases left at the existing firm, destroying some of the existing firm’s computer records, misappropriating confidential information, improperly soliciting firm clients and "cultivat[ing] employee discontent." Id. at 1155.
Dowd & Dowd, Ltd. v. Gleason, 352 Ill.App.3d 365, 816 N.E.2d 754 (1st Dist. 2004): An Illinois appellate court upheld a damage award in favor of a law firm against two departed partners and their new firm for wrongful solicitation of clients and employees. The partners had spent more than four months planning their departure, secretly making arrangements with at least one major client to follow them to their new firm, and enticing other firm employees to leave as well - all before they had resigned from the firm. Confidential client information was used to facilitate the transfer of the major client as well as to secure financing for the new firm. Id. at 374-79.
The Illinois appellate court affirmed that the departing partners breached their fiduciary duties by soliciting a major client’s business before resigning from the firm and by "arranging a mass exodus of firm employees prior to actual departure." Id. at 377. It also affirmed that the partners had intentionally interfered with the existing law firm’s prospective business advantage by recruiting Allstate, the existing firm’s largest client and one with whom the existing firm had had a 15-year relationship. Id. at 380-82.
Gibbs v. Breed, Abbott & Morgan, 271 A.D.2d 180 (1st Dep’t 2000): The court found that departing partners breached their fiduciary duty to their former law firm by engaging in "surreptitious recruiting" when they supplied their new firm with confidential employment data, such as associates’ billing rates and average billable hours. The court ruled that while departing partners are permitted to discuss the departure amongst themselves, and are permitted to make plans to start a new business (signing leases, opening bank accounts, etc.), they are not permitted to engage in solicitation of associates or support staff before they have announced their departure from the firm - and, possibly, until after they have left. Id. at 187. The dissent disagreed with the finding that disclosing associate salaries was a breach of fiduciary duty: "this information is often the greatest unkept secret in the legal world," since "the salary levels and bonuses paid to associates at large New York law firms are regularly published in professional publications such as the The New York Law Journal." Id. at 197 (Saxe, J. dissenting).
There are limits as to what courts will permit. In a recent Indiana decision, a law firm which had hired lateral partners from another firm was awarded attorneys’ fees when the latter firm’s lawsuit against it was dismissed as a groundless attempt to discourage other lawyers from leaving. See Kopka, Landau & Pinkus v. Hansen, 874 N.E.2d 1065 (Ind. Ct. App. 2007). While an award of attorneys’ fees to a departing partner sued by her former firm is generally governed by the terms of the partnership agreement, that is not true when the suit is brought against the partner’s new firm as well, when sanctions rules and other common law principles take over.
THE NEXT FRONTIER: POACHING PARTNERS
These cases all dealt with recruiting at will employees. With one exception, we could not find a reported case where one law firm sued another for poaching partners. However, in late 2004 the legal press reported that Clifford Chance LLP had agreed to a $5.5 million settlement with the trustee of the Brobeck, Phleger & Harrison bankruptcy estate in order to dispose of claims against Clifford Chance and Brobeck’s former chairman arising out of their alleged solicitation of 16 Brobeck partners whose leaving allegedly hastened Brobeck’s demise. See Brenda Sandburg, "Clifford Chance Settles Brobeck Collapse Claims," The Recorder, Dec. 20, 2004 at 1, cited in Steven C. Krane, "Avoiding Accessorial Liability in Lateral Partner Recruiting," New York Professional Responsibility Report, April 2005 at 1 (hereafter, "Krane" or the "Krane Article"). The suit had alleged that Clifford Chance had engaged in "a systematic campaign of predatory hiring" designed to injure Brobeck and bolster Clifford Chance’s own competitive position in California. See Krane at 1 (citation omitted).
Similarly, in Pepe & Hazard v. Jones, 2002 WL 31255522 (Conn. Super. Ct. Sept. 11, 2002), the plaintiff law firm sued several of its former partners and Dechert Price & Rhoads for misappropriation of trade secrets, aiding and abetting breach of fiduciary duty and tortious interference with both existing and prospective business relations arising out of the partners’ lateral move to Dechert. Though the opinion addresses a collateral issue (the admissibility of an expert opinion), the allegations read like a textbook on what not to do in a lateral recruiting situation: disclosing the existing firm’s information on client matters, billing rates, and how much was billed to each client; disclosing the existing firm’s receipts, expenses, economic forecasts and employee salaries; improper solicitation of the existing firm’s clients; working for Dechert clients and recruiting the existing firm’s employees while still a partner at the existing firm; and continuing to act in a managerial capacity at the existing firm without disclosing plans to leave. See also Fred Siegel Co. v. Arter & Hadden, 707 N.E.2d 853 (Ohio 1999) (firm cannot use another firm’s trade secrets to lure incoming lawyer’s clients away).
In this legal environment, future suits of this kind are inevitable. Nevertheless, it appears that even if the departing partners had signed partnership agreements, courts will still apply the more rigorous analysis applicable to tortious interference with prospective business relations to the claims against the existing law firm, and require the plaintiff law firm to show egregious conduct, the misuse of firm proprietary information or the breach of client confidences. This is because most partnership agreements do not have fixed durations, so they essentially create "at will" relationships. Moreover, allowing law firms to claim tortious interference with an existing contract in this situation would give them extraordinary leverage to prevent lawyer movement from firm to firm and, indirectly, discourage the departing lawyers from soliciting firm clients even after they leave, for fear of incurring their former firm’s wrath. This may cut down on lawyer availability to clients, thereby circumventing the policies behind MR 5.6 and DR 2-108.
One other source of litigation in this area concerns unpaid fees. Often, the departing partner owes his or her former firm a portion of the fees earned on particular cases, either under the terms of the partnership agreement or under common law principles. See, e.g., Jewell v. Boxer, 203 Cal. Rptr. 13 (Cal. Ct. App. 1984) (departed partner of dissolved firm entitled to keep no more of fee than he would have received as his partnership share absent dissolution). Most cases say, however, that even if the partner is personally liable for these fees, the incoming firm is not. See "Withdrawal and Termination," 24 Law. Man. Prof. Con. 366 (2009) (citing cases).
A LIST OF "DOS AND DONTS"
Borrowing from the Krane Article, here is a list of dos and don’ts for law firms engaged in recruiting lateral partners:
- Do not solicit clients of the departing partner’s current firm until the departing partners have formally announced their departure. Krane at 3. Indeed, this rule is viewed so strictly by the courts that we strongly caution against any contact with the departing partners’ clients, other than for routine business, until after the formal announcement - not for "due diligence," a request for a "vote of confidence," or any similar purpose, for fear it will be misconstrued.
- The departing partners and the recruiting firm can solicit clients after the departure has been announced to the current firm. Krane at 3. The announcement is the critical moment. While recruiting firms should not jump the gun, they should make plans to move quickly after the announcement in soliciting clients. See, e.g., Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 N.Y.2d 112, 120 (1995) ("Ideally, [an] approach [to clients] would take place only after notice to the firm of the partners’ plans to leave") (citations omitted).
- When contacting clients of the current firm, avoid disparaging the current firm or its lawyers. Krane at 3. Reviewing courts or arbitrators are likely to consider this unfair competition, even if the disparaging information is true.
- Providing financial information about the departing partners before the announcement is permissible. Krane at 3-4. This should be limited to information about the departing partners. Other information about the existing firm, such as the associate salary schedule provided in Gibbs, should not be disclosed. In this context, the departing partners should be careful about disclosing client information to ensure that they are not disclosing attorney-client confidences or other protected client information under the state’s version of MR 1.6.
- Protect client information during the conflict check. Inevitably, the recruiting firm asks the departing partner, before making an offer, for a client list so that it may check for conflicts. While this creates a slight danger of improper disclosure of client information, it is also necessary to protect the clients of both law firms. To best ensure all concerned are protected, the recruiting firm should set up a mechanism where only one of its lawyers reviews the client list, along with the staff person who normally conducts conflict checks. The recruiting firm should state in writing that this lawyer will not share the client list with anyone else at the firm and should, of course, abide by that promise. The recruiting firm should carefully document the information it receives, to help counter later claims that it received more. See “Withdrawal and Termination," 24 Law. Man. Prof. Con. 366 (2009) (citing cases).
- The hiring firm should not contact, and the departing partner should not recruit, lawyer-employees until after the departing partners have actually left. Krane at 3-4. Though there are certainly arguments to support such recruitment between the formal announcement and the actual departure, the departing partners remain fiduciaries until they leave, so any pre-departure recruitment of staff may be deemed a violation of their fiduciary duties. See Gibbs, supra. The best course is to make this recruitment a subject of discussion with the current firm at the time of the announcement.
- The departing partners should not steal or destroy the property of their current firm. Even eliminating the contact information for clients leaving the firm will be deemed a breach of fiduciary duty, especially in jurisdictions that require that such client information be maintained for a set number of years after the relationship with the client ends. This is especially a danger when the partnership agreement contains a clause protecting proprietary firm information.
- Transfer files only upon the client’s written instruction. Krane at 4. Client files are client property, and should only move from one firm to another at the client’s written instruction. Anything else looks like stealing (and probably is).
- While still at their current firm, the departing partners should continue to service and collect from their current clients. Again, the departing partners remain fiduciaries until they actually leave. They thus have an obligation to keep working and, even more importantly, keep collecting from clients.1 They cannot steer money to their new firm, or delay billing so that payments due the current firm arrive at the new one.
- Avoid managerial decisions. If you are in a managerial position at the existing firm, and are in active negotiations for a lateral move but have not yet made a formal announcement, try to avoid making any significant management decisions during that time frame. You can be certain that if things go sour, you and your conflicting loyalties will be blamed later.
- Do not trust anti-poaching agreements. When two law firms contemplate a merger, they often enter into an agreement that prohibits each firm from hiring the partners of the other for a set period. At least one court found that such an agreement was unenforceable because it created a restrictive covenant that violated MR 5.6. See Nixon Peabody LLP v. De Senilhes, Vasamdidis, Amsallem, Jonath, Flaicher Assocs., No. 2008/10374, 2008 WL 4256476 at *3-4 (N.Y. Sup. Ct., Monroe Co., Sept. 16, 2008).
- Pay attention to notice requirements. The incoming partner’s agreement with her existing firm may require her to give notice a set period in advance of her actual departure from the firm. These provisions give the firm the ability to recruit the departing partner’s clients, while the departing partner remains unable to leave the firm. We are unaware of any court or ethics opinion that has ruled on the propriety of these notice provisions, though we would argue that, if applied strictly and combined with anti-competitive conduct, they violate MR 5.6.
All those involved in the lateral recruitment process should follow these simple rules. This is the best way to ensure that both the departing partners and recruiting firm manage the risks and avoid expensive, acrimonious litigation.
Questions? If you have any questions about hiring and recruitment issues, or other questions about legal ethics, professional responsibility, or commercial litigation, please contact Ronald C. Minkoff at (212) 705 4837 or email@example.com, or anyone else from the Frankfurt Kurnit Legal Ethics Group.
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