March 24, 2006
Merrill Lynch v. Morgan Stanley
Posted by Christine Hurt

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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