This article is reprinted with permission from the
March 29, 1999
edition of
New York Law Journal.
1999 NLP IP Company.

 


Inducing an Executive to Change Jobs

By Joseph E. Bachelder

 

IN OCTOBER, Stern's Department Stores Inc., an affiliate of Federated Department Stores Inc., filed a complaint in an Ohio court naming a New York executive recruiting firm, Herbert Mines Associates, a defendant in a tortious-interference-with-contract dispute. The case subsequently was removed to the Federal District Court for the Southern District (Western Division), Ohio.

According to the complaint, the Mines firm induced Matthew Serra, chairman and chief executive officer of Stern's, to leave that position and, in breach of his contract, to become employed by Venator Group, which owns clothing and footwear stores across the United States and is a competitor of Stern's.

The complaint alleges that Mines knew that Serra had an employment agreement at Stern's, that it knew the agreement was for a fixed period and was still in effect and that the agreement contained a no-compete clause. In addition to asserting a claim based on tortious interference with this contract, the complaint also asserts essentially the same acts to have constituted an interference with business relationships between Stern's and its other employees with employment agreements.

The complaint claims damages for, among other things, the original recruiting costs in hiring Serra, its anticipated recruiting costs in hiring his replacement and for lost revenue that would have been generated if he had remained at Stern's during the contract term. It also seeks punitive damages and an injunction preventing Mines from recruiting other employees under employment agreements at Stern's and Federated. Interestingly, the complaint names only Mines as a defendant. It does not name as defendant Serra or Venator or any affiliate of Venator.

Restatement of Torts 766

While the complaint was filed with a court in Ohio and subsequently removed to a federal district court in Ohio, the following discussion will focus on the issues that such a complaint would raise under New York law. New York has adopted the rule regarding tortious interference with contract as set forth in the Restatement (Second) of Torts, 766. 1 Under that rule, in order to prevail, a plaintiff must show:

1. the defendant interfered with the performance of a contract between one third person and another;

2. the interference was
(a) intentional and
(b) improper;

3. the interference caused one of the third persons to not perform the contract; and

4. the other third person suffered pecuniary loss from such failure to perform.

What if all circumstances listed in 766 of the Restatement are present except that it is unclear whether the interference was "improper" (Item 2[b] as listed above)? Section 767 of the Restatement lists seven factors to be considered in determining whether the interference is improper:
(a) the nature of the actor's conduct,
(b) the actor's motive,
(c) the interests of the other with which the actor's conduct interferes,
(d) the interests sought to be advanced by the actor,
(e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other,
(f) the proximity or remoteness of the actor's conduct to the interference and
(g) the relations between the parties.

The principal issue in a dispute like that in the Federated Department Stores case frequently will be the issue addressed by Restatement 767: whether the interference by the defendant (assuming, in fact, interference occurred) was improper.

The Arguments Pro and Con

Following are arguments that might be made on behalf of the recruiter that the interference, if it occurred, was not improper. (No authorities are cited in the immediately following paragraphs that note, briefly, arguments that might be made for and against the position of the search firm. After those comments, the discussion will note cases, primarily those applying New York law, involving tortious interference claims.)

Executive recruiters play a significant role in maintaining competitiveness within our economy. They keep employers alert to competitors' practices, help those companies willing to meet those competitive practices and create a job market for executives that would not exist without recruiters. In short, recruiters have an economic justification for what they do and should not be precluded from "putting the best person in the best job" by anti-competitive, restrictive covenants in employment agreements.

On the other hand, the employer that lost the executive and is suing the recruiter might argue:

Whatever recruiters may contribute to the "vitality" of the economy does not justify willful interference in valid, enforceable employment agreements. Those agreements provide a stability and commitment in employment arrangements that should be encouraged as a matter of public policy. This includes no-compete and non-solicitation clauses that are reasonable in scope and confidentiality clauses that protect proprietary information.

In applying factors such as those noted above from 767 of the Restatement, New York courts give weight to "economic justification" for the interference. "Economic justification" could embody a number of the factors noted in 767 including the actor's motives (b), the interests sought to be advanced by the actor (d) and social interests that may be involved (e).

Thus, for example, a stockholder was found to be acting properly in protecting its economic interest in a corporation and not to be tortiously interfering with a contract between the corporation and an employee in inducing the corporation to discharge the employee in breach of its contract with the employee. 2 On the other hand, the mere fact of an economic stake in the transaction does not give an unlimited free pass to interfere. 3

It is at least doubtful that an executive search firm could claim "economic justification" for an interference with an agreement between an executive and his employer merely on the ground that the recruiter itself had an economic interest in inducing the executive to breach the agreement. If a justification for the recruiter's action in such a case is to be found among the Restatement factors listed in 767 it is more likely to be found, as noted above, in an argument based on clause (e) -- that the social values of allowing the search firm to recruit executives outweigh the contractual interests of the employer from which the executive is leaving. Such an argument might be strongest in a case involving a no-compete clause that is especially onerous and thus itself raises social policy issues.

In New York there are numerous cases in which individuals who have been advising and assisting a party breaching a contract have been sued for tortious interference with the contract. These include cases involving officers and directors of corporations and lawyers advising clients. Most of these cases involved a breach of contract by the corporation of which the individual sued was an officer or director or by the client for whom the individual being sued was the lawyer.

In such cases, if the individual is simply carrying out his duty as an employee or fiduciary or as a lawyer giving advice in good faith to his client, the courts are not inclined to find the individual officer, director or lawyer to be independently engaged in tortious interference with the contract breached by the corporation, or client, as the case may be. 4

What if an officer or director is engaged in a transaction in which the corporation is not itself breaching a contract but instead is engaged in a tortious interference with a contract between third parties? In such a case, the act of the officer cannot be "merged" into a breach of contract by his employer and thus denied as a separate tort by the officer.

For example, in Paramount Pad Co. v. Baumrind, 158 NYS2d 687, 688 (1st Dept. 1957), the court stated that a corporate officer was not automatically shielded from personal tort liability for acting on behalf of a corporation charged with wrongfully inducing an employee of another corporation to breach his contract. (The complaint was dismissed as to the defendant officer, however, on the ground that it failed to allege that the officer knew of the existence of the contract involved.)

In Dumas v. Kalozois, 94 NYS2d 749, 751 (Sup. Ct. 1949), the court, in denying a motion to dismiss a count in an action for tortious interference with contract, held that the directors of the corporate seller of a restaurant were not immune from being found liable upon trial for inducing the buyers to breach their agreement with the real estate broker. In both Paramount Pad and Dumas, the courts distinguished the facts of their cases, which involved representatives of the corporation inducing breach of a contract between third parties, from the cases that found no liability on the part of officers and directors of a breaching corporation.

Protection for Lawyers

Lawyers, like officers and directors, consistently have had protection from tortious interference with contract in those cases in which they have advised in good faith a client who has breached a contract. For example, in Beatie v. DeLong, 561 NYS2d 448 (1st Dept. 1990), the court reversed a $250,000 damage award obtained by a client's original attorney against a subsequent attorney for tortious interference with contract.

The court found that the conduct of the subsequent attorney was immunized from liability under the shield afforded attorneys in advising their clients "even when such advice is erroneous, in the absence of fraud, collusion, malice or bad faith." Id. at 451. In Burger v. Brookhaven Medical Arts Building Inc., 516 NYS2d 705, 708 (2d Dept. 1987), the court found that the claims against the attorneys for a breaching party should have been dismissed on the ground that an attorney is not liable for inducing his principal to breach a contract with a third person, at least where he is acting on behalf of his principal within the scope of his authority.

Case authority is sparse as to whether an attorney would be afforded the same protection if he himself performed, on behalf of a client engaged in tortious interference, services that would satisfy the elements of such a claim. In Servidone Construction Corp. v. St. Paul Fire & Marine Insurance Co., 1992 WL 75064 (NDNY 1992), the federal court, applying New York law, granted summary judgment to third-party defendants, including attorneys who represented parties who had allegedly induced a breach of contract.

The court noted, however, that "even attorneys who are acting in their representative capacity can be held liable to third parties if their actions constitute fraud, collusion, or malicious or tortious acts." Id. at 3.

The foregoing cases suggest that an individual acting as an officer or a director of a corporation, or as a lawyer advising a client, enjoys an immunity from a tortious-interference-with-contract claim even if such individual knows that a breach of contract by the client is occurring, provided such individual is acting in good faith (i.e., is not engaged in acts that are fraudulent or malicious or that otherwise constitute egregious behavior toward the third party).

'Gray Areas'

If, on the other hand, tortious interference with a contract by the corporation, or client, is involved, the individual (whether serving as an officer or director or outside attorney) must be careful not to be drawn directly into the act, or acts, constituting tortious interference. For example, it would seem to be one thing, on this issue, for a lawyer to be advising a client on legal aspects of an employment agreement between an executive and a third party. It would seem to be something else if the lawyer becomes directly involved in inducing the executive to breach the contract. Lawyers' roles being what they are, frequently there are "gray areas" between mere advice and more active involvement by the lawyer.

Obviously, an executive search firm, because it is actively and directly involved in the search process, runs a greater risk of being charged with tortious interference with contract by an unhappy employer than the others noted above who typically may be involved, but on a less active basis, in such transactions.

Going one step beyond a claim of tortious interference with contract is a claim of tortious interference with the business relations of another. This is the second count in the Federated Department Stores complaint. Generally, where employment of an executive is "at will" a claim of tortious interference with that relationship would not appear sustainable. 5 On the other hand, if someone acts so as to interfere in another's business relationship by "wrongful means" (such as fraud or misrepresentation), liability might result even in an "at will" case. 6


FOOTNOTES:

1 Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 428 NYS2d 628, 631-34 (Ct. App. 1980). Delaware has also adopted the Restatement rule. See DeBonaventura v. Nationwide Mutual Insurance Co., 428 A2d 1151, 1154 (Del. Sup. Ct. 1981).

2 Felsen v. Sol Cafe Mfg. Corp., 301 NYS2d 610, 613-14 (Ct. App. 1969). See also Knapp v. Penfield, 256 N.Y.S. 41, 44-45 (Sup. Ct. 1932) (individual who financed play and shared profits not liable for interference with actress's contract by having compelled producer to substitute different actress).

3 See Benton v. Kennedy-Van Saun Mfg. & Eng'g Corp., 152 NYS2d 955, 958 (1st Dept. 1956); Peekskill Theatre Inc. v. Advance Theatrical Co. of New York, 200 N.Y.S. 726, 729 (1st Dept. 1923).

4 Murtha v. Yonkers Child Care Ass'n Inc., 411 NYS2d 219, 220 (Ct. App. 1978); Kartiganer Associates PC v. Town of New Windsor, 485 NYS2d 782, 783-84 (2d Dept.), appeal dismissed, 65 NY2d 925 (1985). On the other hand, if the individual engages in malicious or fraudulent conduct, or in an independent tort outside the scope of his employment, or a tort that serves his personal interest, there may be personal liability. Peekskill Theatre Inc. v. Advance Theatrical Co. of New York, supra note 3, at 729.

5 See Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., supra note 1, at 632 and 634.

6 See NBT Bancorp. Inc. v. Fleet/Norstar Fin. Group Inc., 641 NYS2d 581, 585-86 (Ct. App. 1996) (wrongful means); Della Pietra v. State of New York, 510 NYS2d 334 (4th Dept. 1986), aff'd, 530 NYS2d 510 (Ct. App. 1988) (unlawful means). See also Restatement (Second) of Torts 766B and 768 (1977).