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Suit Over Firm's Collapse Tests Limits of Poaching Lawyers
New Jersey Law Journal
February 03, 2009
Nine years after a 14-lawyer exodus led to the death of a prominent New Jersey bankruptcy firm, the partners left behind are nearing a climax of their efforts to exact revenge on the firm that wooed the defectors, Lowenstein Sandler.
An Essex County judge has scheduled an April trial in a suit charging that Lowenstein Sandler violated fair business practice rules and thieved financial secrets, knowing the recruitment would kill off Ravin, Sarasohn, Cook, Baumgarten, Fisch & Rosen in Roseland, N.J.
Within a month of the February 2000 defections by lawyers who had $5 million in revenues the previous year, the remaining 50 or so attorneys and support staff scattered, leaving behind a shell firm that has been seeking damages.
Lowenstein Sandler has denied it violated any legal or business ethics guidelines on the hiring of laterals and has evidence to support a defense that Ravin Sarasohn collapsed because of longstanding financial woes, not the recruitments.
But barring a settlement or dismissal on summary judgment, the 260-lawyer firm -- New Jersey's second-largest -- will soon be in the uncomfortable position of having to defend its business practices to a jury with millions of dollars in damages at risk in the case, Ravin, Sarasohn v. Lowenstein Sandler , Esx-L-6327-00.
The litigation also puts the spotlight on an issue all large firms face: What is permissible conduct for wooing practice groups, particularly when confidential financial data is exchanged and the recruitment is implicated in the collapse of the target firm?
The case has lasted nine years because the claim against Lowenstein Sandler was put on hold, except for discovery, while Ravin Sarasohn pursued the three defecting equity partners on charges similar to the ones against Lowenstein Sandler in an arbitration that proceeded at glacial speed.
Last year, Ravin Sarasohn agreed to a voluntary dismissal of the charges against the defectors in the arbitration and set its sights on the deeper pocket, Lowenstein Sandler, which has revenues of $180 million a year, according to the most recent Law Journal survey of profits at the state's big firms.
Ravin Sarasohn was best known for its bankruptcy practice on behalf of debtors. It also had nonbankruptcy clients, and at its height in the early 1990s was a 45-lawyer operation. But it suffered financial blows in 1999. Lawyers with substantial books of business had moved to other firms, and some of them were suing for severance pay. Peter Sarasohn, the managing partner, top performer and public face of the firm, died and some of his clients went to other firms. The firm's controller was predicting a budget shortfall of up to $900,000 for 2000 but some partners were reluctant to sign personal guarantees for credit lines and there were merger talks with other firms, such as Philadelphia's Blank Rome.
According to evidence cited in Lowenstein Sandler's defense pleadings, the first thought of recruiting any Ravin Sarasohn lawyer was prompted by a Jan. 10, 2000, New York Law Journal article titled, "Ravin, Sarasohn Being Shopped to Megafirms."
Lowenstein Sandler partner Joseph Steinberg saw the article and asked Elie Gordis, then a principal of Strategic Legal Resources, to serve as a go-between to learn whether Ravin Sarasohn bankruptcy partner Kenneth Rosen wanted to talk. He did.
As Lowenstein Sandler partners testified later, Rosen told them at a meeting that other lawyers at Ravin Sarasohn were crucial to his practice, and he wondered whether the firm would want them, too. It did.
"We are really excited about this opportunity," Lowenstein Sandler's chief financial officer, John Schupper, wrote in an e-mail to key partners. "While not necessarily cut out of the traditional LS cloth, these people seem really terrific."
By Feb. 2, Rosen and three other partners had agreed to move to Lowenstein Sandler. That night, they summoned six other key lawyers to a meeting at Rosen's home. The six were told that the original four were leaving and had until the next day to decide whether they wanted to come, too. They all signed on, and so did a few associates approached in subsequent days.
As a result, after years of trying to build a substantial bankruptcy practice, Lowenstein Sandler had acquired a group that had earned $5 million the previous year. Rosen, with $2.8 million in originations, was the top prize.
By the end of February 2000, the remaining partners had scattered to other firms or solo practice. Associates and support staff were discharged. Joseph Cook, Mark Baumgarten and Jeffrey Fisch became a wind-down committee, and the plaintiff filed in June 2000 against Rosen, the two other equity partners and Lowenstein Sandler.
TOO SUDDEN A WITHDRAWAL
What did Lowenstein Sandler do wrong, according to the suit?
First, it allegedly induced the three equity partners to break a provision of the Ravin Sarasohn partnership agreement that required a 60-day notice of withdrawal. That sudden withdrawal made it impossible for the firm to continue, the suit says.
Second, Lowenstein Sandler's demand that the secondary lawyers had less than 24 hours to decide to come or go and the creation of an illusion that Ravin Sarasohn was a sinking ship contributed to the tortious interference, according to a brief by the plaintiff's counsel, David Mazie of Mazie Slater Katz & Freeman in Roseland.
Finally, Lowenstein Sandler executed a scheme to "steal confidential Ravin, Sarasohn financial information" to target and solicit key attorneys, according to the brief. The material includes Ravin Sarasohn records of salaries of all lawyers and support staff, billing records, draws by partners and other proprietary information obtained without the permission of Ravin Sarasohn.
The plaintiff says that whether any defectors supplied the data is irrelevant.
Experts hired by both parties agree on the obvious point that there is nothing inappropriate about soliciting laterals or investigating whether they are worth bringing in. It happens almost every day among U.S. lawyers.
The disagreement is whether Lowenstein Sandler went too far.
The plaintiff's expert, Joel Mark, who practices ethics and business competition law at Nordman Cromany Hair & Compton in Oxnard, Calif., cites Lamorte Burns & Co. v. Walters, 167 N.J. 285 (2001). There, in a case of a raid on an insurer's agents, the court found that orchestrating a "surprise weekend coup" was tortious.
Another case he cites, Printing Mart-Morristown v. Sharp Electronics Corp., 116 N.J. 739 (1989), held new employers liable for participating in the conduct of departing officers that interfered with a prior firm's prospective economic advantage.
The key precedent for the plaintiff is Wear-Ever Aluminum v. Townecraft Industries, 15 N.J. Super. 135 (1962). That trial decision by future New Jersey Supreme Court Justice Morris Pashman found that it is not wrong to persuade someone to break a contract. But it is wrong when the conduct is also made for the purpose of injuring the plaintiff or of benefiting the defendant at the expense of the plaintiff, Pashman found.
"The tactics employed by Lowenstein Sandler in connection with its pirating plaintiff's entire bankruptcy department, and others, violated accepted standards in the business and legal communities," Mark says.
The counter-report by Frederic Becker of Wilentz, Goldman & Spitzer in Woodbridge, N.J., cites evidence that Lowenstein Sandler's actions and the departure of the Ravin Sarasohn lawyers before the 60 days required by the partnership agreement did not cause the firm's collapse.
Becker cites testimony that suggested the firm was in substantial disarray before any approaches by Lowenstein Sandler.
He notes from the testimony that there was no great outcry at the time about the quick departure of the defectors. Indeed, the defectors were told to leave within a couple of weeks of the announcement of their plans, according to the testimony.
As for the alleged theft of documents, Becker cites testimony that Lowenstein Sandler may have received firmwide information about Ravin Sarasohn but did not ask for it and did not use it in the recruitment process.
Indeed, Lowenstein Sandler made it clear, in a confidentiality agreement during the process, that the departing attorneys would furnish information concerning their own practices, "but no information with respect to the firm with which you currently are associated."
Lowenstein Sandler also is seeking to benefit from the success that defection leader Rosen has had in the arbitration, particularly the plaintiff's decision to drop its pursuit of Rosen and concentrate on Lowenstein Sandler.
That voluntarily dismissal in the arbitration means the plaintiff is collaterally estopped from pursuing claims against Lowenstein Sandler that are predicated on acts by Rosen, according to a partial summary judgment motion filed by defense counsel Joseph LaSala of McElroy, Deutsch, Mulvaney & Carpenter in Morristown.
Superior Court Judge Donald Goldman is scheduled to hear the motion on Feb. 27.
The plaintiff counters that it is not estopped because there was no adjudication of the case against Lowenstein Sandler in the arbitration. Even if the defense wins on that point, counts will remain in the complaint.
Rosen has reason to feel good about the arbitration. Not only was he let out of the case, the arbitrator, retired U.S. District Judge Nicholas Politan, ruled last October that Rosen was entitled to the $200,000 severance pay called for in the partnership agreement.
Politan did, however, reject Rosen's argument that he should share in the proceeds if Ravin Sarasohn prevails in the case against Lowenstein Sandler and wins damages. That would not be quite fair, the arbitrator ruled.
