This story in yesterday's WSJ struck me as interesting, maybe because I teach a case from Gordon's case book involving a similar fact pattern. Here, James Gordon, a top exec at ML left and eventually went to MS. Now, other employees of ML want to go work for Gordon at MS, and that makes ML very, very angry. Now, the case I teach involves a law partner leaving a law firm and associates following him. That case is taught as an agency case because the partner had no contractual duties not to recruit or hire former associates. In the Merrill Lynch case, the exec had an employment agreement that required him to sit out for six months before taking his new job and not to recruit ML employees for a year. As gordon is now announcing that former ML execs will staff his new management team, ML is seeking to enforce the contract and has obtained a restraining order.
In the law firm world, firms rarely put up a fuss when partners leave, even if they have a Pied Piper following behind them. In the small legal world, we may all be on the same side soon (or referring work), and who knows when we might need each other again? Perhaps the investment banking world is a little different. Also, these employees that are being hired are near-fungible associates, they are top executives. An underlying problem is the same in both industries. The firm may not be concerned about loss of manpower, but loss of the client relationships involved in that manpower move.
But, how do we enforce a contract not to recruit? It's not a contract not to hire. So, if the ML employees contacted Gordon, that would not violate the contract. However, we might suspect that some recruiting did take place, and the only persons involved who know for sure have an incentive to say that no recruiting took place. One way to avoid this bleed of talent would be to have the employees that you don't want to go to the competitor sign contracts with no-compete clauses like Gordon's. Then, if the employees were being recruited by a competitor, at least it would cost the competitor six months pay to close the deal.
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1. Posted by Scott Moss on March 24, 2006 @ 12:05 | Permalink
One reason companies don't use non-competition agreements more broadly is that states are reluctant to enforce broad non-competes, which interefere with the free flow of labor. Many states say that non-competes are only enforceable as to employees with truly specialized, confidential information. So while a key executive could be subjected to a non-compete/non-solicit, many of the underlings he might "solicit" (if he left for a competitor) could not be bound to a noncompete.
Also, under the interpretations of the rules of professional responsibility I've seen, lawyers can't be bound to non-competes; that would be an impermissible restriction on one's ability to practice law. Given the number of over-aggressive lawyers I've seen, I have a hunch that many firms would try to implement non-competes if they could.
2. Posted by Kevin Neely on March 26, 2006 @ 9:58 | Permalink
ABA Rule 5.6 seems to say what Scott Moss is writing, because it limits the ability of clients to choose their lawyer. Retirement seems to be the exception, which is not at issue here.
Meehan v. Shaughnessy (535 N.E.2d 1255) is a MA case where two lawyers in a firm leave to form their own. Other attorneys from the firm follow them. The case only addresses the clients the attorneys took with them, and suggests that attorneys leaving a firm may have to compensate the firm for the clients they take with them.
I suppose that is a round-about way of compensating the firm for taking other partners and their clients, since the clients (and their money) are probably what the firm is upset about in most cases.
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