United States: Employee Piracy

In today's global economy, human capital has become for many companies their most important asset. Using competitive salaries and benefits to attract and retain personnel is now on everyone's radar screen, but it is not enough. Companies also need to be wary of industry rivals who may seek a competitive edge by soliciting or "pirating" away their key employees. Perhaps of even greater concern is that key employees may leave to join a rival or set out on their own, but not without first having taken their pick of a company's most valued personnel.

Some companies seek to insulate themselves against such raiding practices by attempting to lock-up employees under employment contracts replete with covenants not to compete. However, as was discussed in our last column (Restrictive Covenants, N.L.J. Sept. 6, 1999), non-competition covenants are often not enforceable for want of an employer's protectable interest. In those situations, stopping competing former employees from reaching back to entice away their erstwhile co-workers may be the best alternative. In more extreme circumstances, the common law offers remedies to the raided employer. But rather than waiting for the "barn door" to open, employers can take effective preventive steps. At least in an apparent majority of jurisdictions, companies can lawfully bind their employees to what courts have described as "anti-pirating," or "non-recruiting" clauses that ban departing employees from soliciting their former co-workers to leave.

Employee piracy can, under the common-law, constitute a breach of fiduciary duty by the pirating employee or tortious interference with contract, even if the targeted employees were employed under at-will employment contracts. It is not a defense in such an action to say, "But, everyone's doing it." As one court aptly noted, "even if the defendant had established that the custom and trade was to pirate salesmen from competitors, this court would not permit such a custom to justify and legitimize what otherwise would be tortious conduct. The role of the court is to raise the standard of business morality and care, not judicially to sanction tortious activities." Wear-Ever Aluminum, Inc. v. Townecraft Indus., Inc., 182 A.2d 387, 394 (N.J. Super Ct. 1962) (emphasis added).

A now classic instance of employee piracy as a breach of fiduciary duties is Frederick Chusid & Co. v. Marshall Leeman & Co., 279 F. Supp. 913 (S.D.N.Y. 1968), where five salesmen employed by plaintiff Chusid quit to join a competing business. One of those former employees used his relationship with his former Chusid co-workers to assist the competing business to pinpoint which Chusid employees to solicit, and he even recruited some of them prior to his leaving Chusid. The court ruled that the means used to interfere with the employment relationships were tortious because "defendant made use of information as to [the other employees] obtained while they were employed by Chusid," even though those he recruited were at-will employees. The Chusid court focused in on the common law duty of loyalty imposed on employees, holding that the selection and inducement of former co-workers to leave Chusid to work for a competitor was a breach of that duty that the departing employees owed to their former employer. 279 F. Supp. at 918. See also, Veco Corp. v. Babcock, 243 Ill. App.3d 153 (Ill. App. Ct. 1993) (former officer breached duty of loyalty by soliciting three co-employees to join him in leaving for competitor); Jet Courier Serv., Inc. v. Mulei, 771 P.2d 486494 (Colo. 1989).

There are also special duties owed to the employer by officers of the corporation and senior executives. This is illustrated by Bancroft-Whitney Co. v. Glen, 64 Cal.2d 327 (1966). There, the president of a division was recruited by a competitor to start up a legal publishing business similar to the division he supervised for the plaintiff. The competing company, with the former president's assistance, identified and hired away the plaintiff's most skilled editors, all of whom were employees at will. The court found that the president had breached his duties of loyalty and good faith to his former employer by, among other things, disclosing to his new employer the salaries of the plaintiff's employees, discussing their qualities and experience, and quieting concerns expressed by another officer of the employer when rumors surfaced that a competitor was about to raid the plaintiff's employees. The court held:

While each of these acts alone might not have been enough to constitute a breach of the executive's common law duties, the court ruled that "in combination, they show a course of conduct which falls demonstrably short of the 'most scrupulous observance' of an officer's duty to his corporation."

Though a suit for breach of the common-law duty of loyalty can sometimes be a viable option in employee piracy situations, departing employees do not always obligingly leave a trail of evidence to their breach. And, the cause of action requires not only the solicitation of co-workers, but also some breach of loyalty such as the utilization of proprietary information about, for example, the relative abilities of the former employer's personnel or, in the case of senior managers, an abuse of trust and confidence. Moreover, the breach-of-loyalty claim certainly will not provide protection from the raiding entreaties of a business rival unassisted by a departing perfidious employee.

A different common-law action for employers that have had their employees pirated away to their competitors is tortious interference with an employment contract. Even at-will employees, it must be remembered, have an employment contract with their employer -- just one that is terminable at will. Though as a general rule, businesses are free to solicit a competitor's at-will employees, when such solicitation occurs through the use of "wrongful means," is done to injure the target employer's business, or leaves the target employer (or one of its divisions) bereft of personnel, the pirating employer may have tortiously interfered with the contractual relations that the injured business had with its at-will employees.

This cause of action, though, is wrought with hurdles. It requires an aggrieved employer first to overcome what some courts characterize as the common law "privilege of fair competition." Briefly described, absent the infliction of "substantial injury by means of attracting away all or a large percentage of personnel upon whom [the employer] must depend to function," or the use of "improper means" in luring the employee away, a rival is free to solicit another employer's at-will employees. See, e.g., Carroll Anesthesia Assocs., P.C., v. Anestecare, Inc., 234 Ga. App. 646, 648 (Ga. Ct. App. 1998); Avtec Indus., Inc. v. Sony Corp. of Amer., 205 N.J. Super. 189 (N.J. Super. Ct. 1985). Wrongful means is more than just a desire to gain a competitive advantage, it must include such conduct as "fraud, misrepresentation, intimidation, obstruction and molestation," as well as "conduct that fails to accord with generally accepted standards of morality." Avtec Indus., 205 N.J. Super at 194. Or, as one scholar has worded it, "was the interference by defendant sanctioned by the rules of the game?" 1 Harper and James [Torts], § 6.11 (1956).

If the targeted employees are employed under fixed-term employment contracts, the injured employer does not have to overcome the hurdles of the "privilege" of competition. Rather, it may only need to demonstrate that the pirating company, with knowledge of an employee's employment contract, intentionally induced the employee to breach his contract causing damage to the former employer. See, e.g., Kronos, Inc. v. AVX Corp., 81 N.Y.2d 90, 94 (1993); Restatement [Second] Torts § 766.

Because of difficulties in obtaining enough evidence to prove the elements of common-law claims, employers are will-advised to include in the package of restrictive covenant they put in their employment agreements what are often called "non-recruitment" clauses, which prohibit the employee from soliciting his fellow employees to work for another. Many employers now do so. The enforceability of such clauses is not fully settled, though the apparent majority of courts view them as lawful.

Most courts examining non-recruitment clauses have determined that they are not anti-competitive restraints of trade, or violative of public policy, because the employee bound by the clause is not, in reality, impaired at all in her ability to work and compete in the market. See, e.g., Totino v. Alexander & Assocs., 1998 WL 552818 (Tex. Ct. App. 1998); Smith Barney v. Robinson, 12 F.3d 515 (5th Cir. 1994) (Louisiana Law); Loral Corp. v. Moyes, 174 Cal.App.3ed 268, 278-79 (Cal. Ct. App. 1985). As a consequence, no special rules attach, and only a straight-forward contract analysis is used to apply an anti-recruitment clause to the facts at hand.

Illustrative of this approach is Smith Barney, where a former branch manager had been employed under an agreement that prohibited him, for one year following the termination of his employment, to "directly or indirectly solicit or induce any Smith Barney employee to resign." Upon leaving Smith Barney for a competitor, the former branch manager, of course, ignored the non-recruitment agreement he had signed. The employee defended his actions by appeal to a Louisiana statute (La. R.S. 23:921), which renders "null and void" every contract or agreement "by which anyone is restrained from exercising a lawful profession, trade, or business of any kind." The Fifth Circuit found, however, that under the non-recruitment clause, the employee was still "free to recruit [employees for his current company] - anywhere, any time, and from any organization - save only that small class comprising [his former employer's] employees, a class which he willingly agreed not to solicit . . . ." 12 F.3d at 519. The court noted that it might rule otherwise if recruiting was "an indispensable ingredient" of the former branch manager's profession and the agreement prohibited him from all recruiting for his new employer, not just recruiting Smith Barney employees. But those were not the facts. Consequently, analyzing the clause under traditional contract principles, the court enforced it.

At least one court, however, has expressly rejected the Smith Barney approach and held that non-recruitment clauses must still satisfy the traditional reasonableness paradigm for any restrictive covenant in an employment contract. In Communication Tech. Sys., Inc. v. Densmore, 583 N.W.2d 125 (S.D. 1998), the South Dakota Supreme Court took the viewpoint of the prospective future employer - not the departing employee - and invalidated the non-recruitment clause because it "clearly attempts to restrain [the new employer's] ability to seek suitable employees for its business." Whether other courts will follow this approach remains to be seen.

Use of non-recruitment covenants will, in many jurisdictions, provide an employer with a much needed layer of protection against disloyal employees who may look to jump ship and join a competitor or embark on their own, using the human resources of their old employer as part of their "working capital." Due to some uncertainty as to the enforceability of such clauses, it would be prudent for employers to use recruitment restrictions only for higher-level employees and place on them reasonable time limitations so as not to raise a court's suspicion that the agreement may be the product of the employer's over-reaching and coercive bargaining power, rather than an effort to protect its legitimate interest in the continued service of its existing personnel. Properly drafted, non-recruitment clauses can be effective.