Jeff’s On Call!: Corporate Raiding

Oct 13, 2010

This week’s inquiry comes from Dave Glaser:

Dear Jeff,

Thank you so much for your great column and advice over the years.  I am a long time subscriber to Fordyce and have used your office successfully in the past.

In running a small search firm of 6 people, we occasionally run into problems where companies are not too thrilled about us contacting their employees.  We specialize in the high net worth/wealth management area, so often we are recruiting talent from large accounting firms and financial service firms.  We have been contacted via email and phone calls with threats of law suits for raiding their firms, enticing their staff with other employment, etc.  Can you please expound on where we stand from a legal perspective?

Thank you!

Dave Glaser, President
ECG Resources, Inc.

Hey Dave!

Thanks for the compliment and for asking about the raiding rules of the road. It’s always a pleasure assisting you, and now assisting our readers by answering your question.

Here’s how those raiding rules work for recruiters:

As you speed down Search Street, just a-smilin’ and dialin’ on your way to Placement Place, there’s a bright red light that flashes “STOP”! It’s the warning that prevents you from crossing over to Raid Road. That rocky road just ahead is dark and dangerous.

Literally dozens of federal and state laws prohibit corporate raids. The initial problem is defining what they are.

Remember how cautious and tentative you were in your first direct recruiting call? Then as you drove that familiar path toward Raid Road, you felt more and more comfortable in offering someone a better opportunity at Placement Place.

But did you then cold-call someone during working hours? On the job? Did you send an e-mail to the prospect’s work address? Did you get it surreptitiously by some misrepresentation? Did you persist after a recruit asked you to stop? After a supervisor asked? Did you ask for referrals? How? Did you use an e-mail blast? Was it a direct solicitation to leave the source? Did it go to unintended recipients like source management? Did you jeopardize a critical project at the asylum by spooking the inmates?

Recruiting is all about the chase, so it’s easy to get lost. Crossing over to Raid Road can happen instantly if you don’t watch where you’re going. And that assumes you can control all the variables.

I could teach an entire traffic school class on this subject, but here’s the (don’t) crash course:

The raid theories used by employer lawyers include interference with contractual relations, interference with prospective business advantage, misuse of trade secrets, unfair competition, invasion of privacy, conspiracy, and a web of federal and state unfair trade practice statutes.

However, the underlying law is an intentional tort (non-contractual civil wrong) theory called inducing breach of contract. Although it sounds like breach of contract, the similarity ends there.

Inducing breach of contract is the act of persuading the candidate to break his or her employment contract with the source employer. If the source proves this “maliciously” occurred, an injunction (an order that you cease and desist) can be immediately obtained. At the trial, punitive damages (to punish you) and exemplary damages (to discourage other recruiters by making an example of you) in an unlimited amount (in the discretion of the judge or jury) can be awarded.

For those readers we’ve represented or who’ve followed our writing, inducing breach of contract is familiar. That’s because it is one of the primary ways we nail runaway recruiters who take and misuse use the client and candidate data base of their ex-employers.

The quick three-point analysis when you’re smilin’ and dialin’ while drivin’ is like this:

1. Was there a legally enforceable contract?

Everyone you’re trying to recruit has a contract with his or her employer. Generally these are at-will contracts, meaning they are “terminable at will” by the employer or employee.

The usual analysis – too often even made by lawyers – is “Since the employee can terminate the contract at any time, recruit away!” This is a serious oversimplification that has been consistently addressed by a century of federal and state appellate court rulings.

My favorite is the U.S. Supreme Court decision rendered in 1915 (Truax v. Raich, 239 US 33, 60 L Ed 131, 36 S Ct 7) that stated:

The fact that employment is at the will of the parties respectively does not make it at the will of others . . . and by the weight of authority the unjustified interference . . . is actionable although the employment is at will.

So we’re dealing with a contract, and you can interfere with it.

2. Was the conduct “malicious”?

The courts aren’t quite sure what malice is. But you’re supposed to know.

American Law Reports, one of the most highly-respected legal encyclopedias, states:

Any further discussion of [malice] should, for purposes of clarity, here point out the lack of scientifically accurate terminology which has mitigated against clearness in decided cases, both in conception and discussion . . . The “malice” which will make one liable for procuring a breach of contract is malice in its legal sense, and does not consist of spite or ill will. (84 ALR 50)

Malice can be presumed by a raid and placement with a competitor. This shifts the burden of proof to you to show an absence of malice. If you can show something didn’t occur that isn’t defined, you may qualify for honorable mention in the next edition of ALR.

3. Are you doing the source a favor by removing its undesirables?

We call this the “outplacement fee defense.” Maybe the source should split the fee with your client! Believe it or not, this argument can be quite effective to stop the source employer from pursuing its inflated claim.

This is why it’s so important to find out what your candidate doesn’t like about his or her current position. It not only helps you recruit and helps you place. It helps you defend against the (usually grossly inflated) claims of how the candidate was solely responsible for the employer’s survival.

I originally started using the “outplacement fee defense” just to get a laugh from the judges. It did, so like any comedian I kept it in my repertoire.

Then one took it seriously and dismissed the case against my client. That was all I needed to use it seriously too. Tell your lawyer. If he or she laughs, get another one.

The amount of injury to the source employer doesn’t necessarily affect your liability. It is the wrongful interference itself that is being enjoined (stopped) and then punished once the trial is held.

A Harvard Law Review comment states how expansive liability can be:

[Inducing breach of contract] includes not merely the procurement of a breach of contract, but all invasion of contract relations . . . Any act . . . which retards, makes more difficult, or prevents performance. (4 Harv L Rev 728)

We’re seeing an increasing number of contractual interference cases these days. Since you’re a paid member of the raiding (not “racing”) team, and since your client has the money, it’s inevitable that conspiracy will also be alleged. This leads to you and your client wrestling at the wheel, and a wild ride to the courthouse.

Thanks again, Dave. This should help many drive safely – to VIP parking at Placement Place!


If you have a legal question you’d like to have Jeff answer here on The Fordyce Letter, check out Jeff’s On Call! and submit your question.

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