Drawing A Bead On The Headhunters

Federated sues a search firm for recruiting one of its execs

When Matthew D. Serra decided to leave his job as chief executive of Stern's, a unit of Federated Department Stores Inc., to become CEO of sports-shoe chain Foot Locker last fall, Federated didn't chalk up the loss to the combination of a hot commodity and a hot economy. Nor did it look inward to see how it could have better retained a key employee. It didn't even sue Serra for allegedly breaking his three-year employment contract.

Instead, Federated went after the executive search firm that recruited Serra to Foot Locker. In October, the company filed an unprecedented suit against Herbert Mines Associates Inc., claiming that it interfered with Serra's duty to fulfill his contract when it dangled a more lucrative offer from Venator Group Inc., Foot Locker's parent company, in front of him. Says a Federated spokeswoman: "A third party is not part of that contract and is interfering."

"VEXATIOUS AND SILLY." Beyond that, Federated refused comment on the suit. But its aggressive move is sending tremors up and down the swanky corridors of the country's leading search firms, since previous suits by jilted employers have targeted only the employee or the new company. While headhunters have been sued for raiding their own clients' talent pool or violating noncompete agreements by sending executives to rivals, none has ever been sued for doing what headhunters typically do: helping precipitate the breakup of a manager and his company. Says Scott A. Scanlon, chairman and CEO of recruiting industry consultant Hunt-Scanlon Advisors of Greenwich, Conn.: "This lawsuit is a threat to the entire executive search profession."

Neither Venator nor Serra will comment on the suit, but Harold D. Reiter, president of New York-based Herbert Mines, dismisses it. "[The suit] is frivolous and vexatious and silly," says Reiter. "We abolished slavery 130 years ago." Still, search firms are watching the case--still months from trial--with trepidation. They fear a win could set a precedent in which anyone who tries to lure a contract-bound executive to greener pastures might be liable for his leaving. Since many top-level executives have employment contracts, that could have a chilling effect on how search firms do business.

But not everyone thinks reining in the headhunters would be a bad thing. Some hope the case will lead to greater accountability for the profession. Currently, targeting an executive under contract is not an absolute no-no. Recruiters typically ask a candidate if he has a noncompete agreement with his current employer, and, if so, notify the company that wants to hire him. But they're not obligated legally to do more. "This lawsuit opens the question, `Where is the line?"' says Garry G. Mathiason, senior partner at San Francisco employment law firm Littler Mendelson. "I applaud it."

Federated's suit could also have a big impact on companies grappling with the problem of retaining highly skilled execs. It's a key issue at a time when explosive job growth has many struggling to stem defections. Yet restricting headhunters would cut two ways, since most companies are on both sides of the issue: Sure, they want to hang on to their own best people, but they also want to pursue outside talent. Indeed, one of the ironies of this suit, according to Herbert T. Mines, chairman of Herbert Mines Associates, is that Federated has used search firms in the past to recruit outsiders using the same procedures it is now suing over.

Certainly Federated's complaint paints a picture of a fairly standard search. Serra, a well-regarded executive who had been at Stern's since 1993, signed a three-year contract extension in April, 1998. It stipulated that he not divulge trade secrets or go to a rival.

But after being contacted by Herbert Mines in the spring of 1998, Serra decided to move to Foot Locker, where he would work for Venator CEO Roger N. Farah, who had been head of Federated's merchandising unit until mid-1993. Farah and Serra had worked together before: In the late 1970s, Farah reported directly to Serra at Saks Fifth Avenue. Mines says that Venator offered a much fatter pay package. He also says Serra provided a copy of his contract for Venator's lawyers to examine before making him an offer.

There may also be a more personal twist to the seemingly straightforward case. When Farah left Federated to become CEO of Macy's in 1993, Federated sued him for violating his noncompete agreement and prevented him from going to work there for nearly a year. Then, two weeks after he started, Federated bought Macy's. Farah quit, and it was Herbert Mines Associates that ultimately placed Farah at Venator.

REAL GOAL? Federated has filed for undisclosed damages and an injunction barring Herbert Mines from ever contacting anyone at Federated. That has led some to conclude that their real goal is scaring others away. "The point of action is not even necessarily to collect damages but rather to ward off recruiters from going after their people," says David A. Lord, president of Executive Search Information Services, a search firm advisory service.

Thomas G. Cody, Federated's executive vice-president for legal and human resources, lost no time in making sure other recruiters understood its position. In October, he sent out a letter to such prominent search firms as Heidrick & Struggles Inc. and Kenzer Corp. "A company's key executives are among its most important assets...," it says. "By necessity, Federated must take all appropriate action to protect its valuable interest in its employment agreements...including legal action against third parties who interfere with those agreements."

In the short term, the strategy could dampen the enthusiasm of some recruiters to go fishing at Federated. J. Blade Corwin, vice-president at San Francisco search firm Seitchik Corwin & Seitchik Inc., is doing a search in which there are some Federated candidates. "Am I deterred? Well, it makes me think a second time," says Corwin.

Long-term, though, search industry executives have been quick to assume that Federated can't win the suit, since courts tend to favor the individual's right to quit. But John C. Coffee Jr., a corporate law specialist at Columbia Law School, thinks it won't be dismissed immediately. "It sounds like a triable suit," he says. Yet winning could create as many problems for Federated as it does for the headhunters. The retailer's own recruiters could face a backlash from potential candidates unwilling to join them--for fear they may never be able to leave.

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