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Trial to Begin in Case Testing Attorney Recruitment Methods
Case also tests attorneys' freedom to move between law firms
New Jersey Law Journal
April 13, 2009
Lowenstein Sandler, New Jersey's second-largest firm, is scheduled to go on trial today in a case that could refine the law on the methods firms use to recruit lateral partners and practice groups.
The suit, Ravin Sarasohn v. Lowenstein Sandler, Esx-L-6327, also tests the reach of a 1992 precedential case that allows lawyers to move from firm to firm to best represent their clients, free of restrictive covenants.
The trial judge predicts that no matter what the jury decides, the case will end up in New Jersey Supreme Court unless it is settled.
The suit charges that Lowenstein used secret financial data about Ravin Sarasohn, formerly a 45-lawyer Roseland, N.J., firm, to decide which lawyers and staff to target and that the cherry-picking caused Ravin Sarasohn's collapse in 2000.
The information included billing records, collection rates and the salaries of partners, associates and Lowenstein used the data to woo 15 lawyers plus support staffers, led by the chief defector, bankruptcy rainmaker Kenneth Rosen, the suit says.
Lowenstein doesn't deny it had the information but says it didn't ask Rosen to provide it and didn't use it to decide whom to bring to the firm. Ravin Sarasohn went out of business for reasons independent of what Lowenstein Sandler did, the defense says.
A plaintiff's expert pegs the damages as high as $21 million between 2000 and 2009 and $21 million more in future years, figures Lowenstein Sandler looks upon as fantasy because the estimates assume that the annual billings by the defecting lawyers at the time they left would have continued unabated and indefinitely. The defectors netted about $1.2 million in the year before they joined Lowenstein.
At a pretrial conference on Tuesday, Essex County Superior Court Judge Donald Goldman said, "They're really, really, very, very difficult issues about which there's really not a whole lot of guidance."
"I recognize that I am merely a way point to the final destination, the final destination being the Appellate Division, the Supreme Court," he said.
Goldman said that a jury may be called upon to decide whether the financial data Lowenstein possessed -- and may have acted upon -- went beyond what was necessary to determine whether the 10 defecting partners' practices were worth acquiring.
"The jury will likely be told that limited items of the confidential prima facie, client-specific information may be disclosed by a partner to another firm in connection with that partner's exploration of a possible affiliation with the firm," Goldman said.
But it can only be the minimum information necessary to provide an evaluation of the partner's business, he said. As for bringing in associates and staff, the target firm would have to be told about any recruitment before overtures could be made, he suggested.
Goldman made a Solomonic decision on how the trial would deal with a fundamental issue: Are attorneys bound by the same precedents that bar unfair tactics in recruitment of competitors' personnel in most types of businesses?
Or is much of that swept away by Jacob v. Norris, McLaughlin & Marcus, 128 N.J. 10 (1992)?
The answer, according to Goldman, is a mix of both.
In Jacob, the state Supreme Court outlawed non-compete clauses that restrict lawyers' ability to move to other firms because such clauses might compromise lawyers' ability to represent clients as required by Rule of Professional Conduct 5.6. The Supreme Court also took the client-rights-first view when it came to soliciting associates and staff.
Lowenstein's lawyer, Joseph LaSala of McElroy, Deutsch, Mulvaney & Carpenter in Morristown, N.J., suggested that Jacob gave the defecting partners and Lowenstein the right to obtain information and facilitate the movement of the lawyers from Ravin Sarasohn.
Ravin Sarasohn's lawyer, David Mazie of Mazie Slater Katz & Freeman, argued the Jacob decision was solely a rejection of unethical no-compete clauses and that the controlling precedents in the rulings in the Lowenstein case should be business law rulings that restrict tactics companies can use to raid other companies for key employees.
The chief case in Mazie's arsenal was Wear-Ever Aluminum v. Townecraft Industries, Inc., 75 N.J. Super. 135 (Law Div., 1962). In that case, a utensil manufacturer was found liable for tortious interference and for destroying a competitor through an orchestrated scheme of secret meeting that led to the defection of 35 key employees.
Goldman ruled that the principles in both Wear-Ever and Jacob are relevant.
The jury would be able to consider whether the facts fit the business tort model presented by the plaintiff but also whether what Lowenstein did was permissible under the client-protection principles of Jacob.
"I have to say that in broad strokes, the jury should be allowed to decide if Ravin Sarasohn conduct was improper under the general guidelines set forth in Wear-Ever," the judge said. "Particularly important in this regard is the claim of solicitation of Ravin Sarasohn's staff," he added.
"At the same time, however, the jury will need to know about special rules that relate to the lawyers as a result of the RPC and to public policy," he said, referring to the Jacob case.
"That policy requires that lawyers be allowed the freedom to move from law firm to law firm without fear of incurring contract claims and tort claims," he said. "It requires that lawyers be allowed to take with them those other lawyers that are reasonably necessary to continue service without disruption to those clients that the attorney hopes will follow him or her to the new firm."
Lawyers in the case declined to comment, but the ruling appears to give Lowenstein an opportunity to show that its actions, if they rose to the level of what would be considered a tort in a business setting, were permissible because they were necessary for the good of the defectors' clients.
Goldman said it was too early to decide whether the jury, if it found liability, would be allowed to allocate any damages between Lowenstein and the defecting lawyers, particularly Rosen, one of the state's successful bankruptcy lawyers.
Lowenstein, which had tried but failed at internal efforts to create a substantial bankruptcy practice, contacted Rosen because it read a New Jersey Law Journal article that quoted Ravin Sarasohn insiders as saying the firm had experienced financial setbacks and was looking for merger possibilities, according to depositions.
As a result, the firm approached Rosen, whose originations of $2.8 million in billings the year before were tops among Ravin Sarasohn partners. Members of his group billed another $2.2 million.
Nothing in the record of the case says how Lowenstein obtained the inside financial data about the various lawyers and staff members, but Rosen eventually brought over 10 partners, five associates and a number of staff members necessary to keep his practice going.
Rosen and two other equity partners were named as co-defendants in the suit against Lowenstein, but the case against the defectors was diverted to arbitration and claims against them ultimately were dismissed.
Goldman ruled in March that the arbitration rulings and the dismissals did not estop the plaintiff from pursuing Lowenstein.
On Tuesday, he gave a victory to each side on the issue of how damages might be calculated. He said Ravin Sarasohn could attempt to measure the damages by how much the defecting partners might have earned, but not what Lowenstein might have earned form their services.
Goldman pointed out that it is impossible for the plaintiff to know what Lowenstein might have earned because the arbitrator in the case against Rosen decided that the firm didn't have to produce that information.
The judge said he asked Essex jury managers to send 100 potential panelists to his courtroom today. He said his first task would be to tell would-be jurors the trial might not be over until late May.
