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Merger Seekers Beware: Non-Hire Agreements May Be Worthless
The American Lawyer
September 23, 2008
Law firm merger experts say firms interested in finding a parter should take a careful look at last week's opinion from a New York trial court in Monroe County. In that case, a judge ruled that Nixon Peabody was well within its rights to recruit a dozen Taylor Wessing partners, even though the two firms had agreed in 2007 not to hire from each other for two years as a condition of merger talks that eventually collapsed.
Judge Kenneth Fisher's reasoning was simple: such agreements, though they may be common, are unenforceable because they restrict the right of lawyers to work where they want.
"This ruling should make law firms considering being acquired feel great trepidation," says William Brennan, a mergers expert at law firm consulting group Altman Weil. "Once they enter into direct contact with a buyer, they are no longer protected."
Firms often seek protection from such non-solicitation/non-hire agreements during merger flirtations, experts say. A ban on hiring gives the smaller firm in the equation some assurance that a merger partner isn't just looking to scour the books and cherry-pick some talent, says Lisa Smith, a mergers consultant at Hildebrandt International. The non-solicitation contracts are merely "gentleman's agreements," she says, and firms should not expect them to hold up in court. "I don't know if any firm has every thought they were enforceable," Smith says.
Anthony Davis, a partner who specializes in law firm ethics and litigation at Hinshaw & Culbertson, agrees. He says such agreements don't guarantee against a situation such as the one that developed between Nixon Peabody and Taylor Wessing.
The decision is "entirely consistent with existing case law in New York," Davis says. And Nixon argued just this in its successful motion for summary judgment.
Most states have similar case law on lawyer mobility, Davis says. The United Kingdom, on the other hand, gives such agreements much more binding power.
"It is my understanding that in the U.K., the exact opposite principles apply," Davis says.
Fisher's decision is binding only in New York, but almost every large firm has an office here. Even so, while the decision might chill some merger talks, Hildebrandt's Smith says, she doubts it will have any long-term effect.
The court relied on a case from the early 1990s involving a partner who left Breed Abbott & Morgan (now Whitman Breed Abbott & Morgan) and recruited another partner to depart with him. Breed sued, accusing the partner of breaching his fiduciary duty to his old firm. New York's Supreme Court eventually ruled in favor of the partner's right to move and recruit firm personnel to bolt with him.
"There's nothing new here," says Robert Hillman, a professor at the UC Davis School of Law and an expert on law firm business. "But it is a candid reminder of what the rules are."
But Dreier name partner Marc Dreier, who represented Taylor Wessing in litigation stemming from the failed talks, contends the type of agreement at issue in the Nixon-Taylor case is different. It is not a blanket prohibition on mobility, but a contract barring a limited number of lawyers from moving to one particular firm. That scenario, Dreier says, does not fall under the case law Fisher cited.
"There's no prior decision in any court that says something like this," Dreier says. "The judge is writing a new disciplinary rule here."
Taylor Wessing has not yet decided whether it will appeal the ruling.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
