FEDERAL COURT DECISION MAY SIGNIFICANTLY LIMIT RECRUITERS RIGHTS TO PLACE THEIR CLIENTS EMPLOYEES

The issue of "hands-off" policies has long been a controversial one in recruiting. May you recruit your client's employees? May you attempt to place them if they come to you?  If there is any such limitation, does it extend throughout the company, and how long does it last? Well, there are three aspects of this about which virtually everyone can agree:

1.      It's usually a bad business decision, unless the relationship is, for all practical purposes, over.

2.      More and more frequently, recruiters are signing agreements which limit their right to deal with the client's employees, and these agreements are binding.

3.      In the absence of an agreement to the contrary, it is a violation of the NAPS Code of Ethics to recruit a placed employee as long as he/she is with the client, or to recruit other employees of the client within one year of the most recent placement with the client at the same location.

As a result of a February decision by the United States District Court for the Southern District of New York in JPMorgan Chase Bank, N.A. v. The IDW Group, LLC, however, there may now be a new reason to stay away from your client's employees. The court found that a recruiter might have a "fiduciary duty" (more on that later) to avoid attempting to recruit or place a client's employees.

In looking at the facts of this case, it is important to remember that no judge or jury has made a final decision about whether the recruiter is liable to the client. This decision was in response to IDW's motion to dismiss JPMorgan's breach of fiduciary duty claim. For that purpose, the court assumes that JPMorgan's factual allegations are correct. It may well be that a finder of fact later determines that none of JPMorgan's factual allegations are correct.

JPMorgan's allegations are that, beginning in February 2007 and as late as June, 2008, the parties entered into a number of virtually identical agreements, the last two of which provided for the recruitment of candidates for JPMorgan's Proprietary Positioning Group. These agreements provided that "IDW would receive individual search assignments from JPMorgan and then analyze JPMorgan's staffing needs, interview and evaluate candidates, present confidential written reports on the candidates to JPMorgan, schedule interviews between JPMorgan and each candidate, collect references concerning the final candidate, assist JPMorgan in structuring proposed compensation packages for the successful candidate and assist JPMorgan in integrating successful candidates into their respective client teams." (The court did not say whether these were retained or contingency searches, and I do not believe it would matter.)

The agreement also contained a "hands-off" clause, in which IDW agreed not to recruit JPMorgan employees or "accept any direct overtures" from them until the later of one year following termination of the agreement or the last placement.  JPMorgan has also sued IDW for breach of this agreement, but that issue was not involved in IDW's motion to dismiss. The agreement also provided that IDW did not have an "exclusive" arrangement with JPMorgan. 

Between March and July, 2008, six of JPMorgan"s employees resigned and assumed positions at a competitor, Citadel Investment Group. Among those was the president of the Proprietary Positioning Group. JPMorgan alleges that IDW received a "substantial placement fee from Citadel for inducing [its employee] to leave his employment with JPMorgan and accept an offer from Citadel."  According to JPMorgan, IDW also recruited, or failed to reject overtures from, some or all of the other five employees who left for Citadel.

In asking the Court to dismiss the breach of fiduciary duty claim, IDW argued that it could not be found to have a fiduciary duty to its client, and that, even if it did, this claim merely duplicated the breach of contract claim, and should be dismissed on that basis. The court ruled for JPMorgan on both counts, holding that, if a jury believed JPMorgan's allegations, there was a fiduciary duty and, importantly, that the fiduciary duty claim was wholly separate from the breach of contract claim. In essence, the Court was stating that even if you don't have a hands off provision in your contracts with your clients, you may still have a fiduciary duty to stay away from their employees.

So, what is this "fiduciary duty," anyway? It occurs "between two persons when one of them is under a duty to act for or give advice for the benefit of another." Such a  relationship "is grounded in a higher level of trust than normally present in the marketplace between those involved in arms' length business transactions."

Why did IDW have a fiduciary duty to JPMorgan?  JPMorgan cited a number of reasons:

1.      It relied upon IDW's superior knowledge of the market, from knowing the pool of available candidates to structuring compensation packages.

2.      By functioning as the middleman between the client and the candidate, IDW was necessarily exposed to JPMorgan's highly confidential and sensitive business information, so that they could use it to enable candidates to evaluate the employment opportunity.

3.      IDW was given access to JPMorgan's employees "in order to assess JPMorgan's organizational and institutional needs," and was able, as a result, to develop relationships with its employees.

This means, according to JPMorgan, that IDW had a duty not to remain silent in the face of a known risk to JPMorgan's business, not to elevate its own gain above that of its client, to disclose that it had been retained by Citadel to recruit JPMorgan's employees, and to refrain from breaching its contract.

The Court agreed that, if JPMorgan's allegations are true, then IDW breached its fiduciary duty by placing its employees. "These alleged facts, if proven, would take this case far outside the world of the ordinary, garden-variety arms' length business transaction. JPMorgan has alleged a relationship in which IDW served as its adviser, in a position of extraordinary trust, and under circumstances in which it assumed, and may have been entitled to assume, that IDW would act with JPMorgan's best interests in mind...Only discovery will reveal whether JPMorgan can prove these allegations, but they must be accepted as true at this stage of the litigation, and this Court cannot find now as a matter of law that JPMorgan will not be able to establish a breach of fiduciary duty claim."

So, what can we take from all this?

1.      This is not a finding that IDW had a fiduciary duty to JPMorgan, but that it would have such a duty if it possessed expertise and promised to perform services which, let's face it, are similar to much of what many of you hold out as your expertise and services.

2.      The fiduciary duty obligation is separate from that created by your contract, so that you may have a "fiduciary duty" hands off clause even if you don't have one in your contract.

3.      The good news is that this is a trial court decision, not binding on any other state or federal court; but

4.      Other courts may choose to follow it; and

5.      It will probably encourage clients to sue you if you place their candidates, even if there is no contractual prohibition.

6.      There is nothing in the decision to indicate when the fiduciary duty terminates. It may survive termination of the relationship, to the extent you used information learned or relationships developed while the company was a client. Nevertheless

7.      You should endeavor to formally terminate agreements you have with "clients" you no longer regard as such, and who have employees you may wish to place.

8.     Placing your client's employees has always raised business and ethical questions. Now it raises serious legal questions as well. Be very careful if you wish to swim in this pool

For questions or comments, please contact NAPS = Counsel Bob Style at rpstyle@sprynet.com.