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10 Things to Know When a Competitor Hires Your Employees or You Hire Theirs

February 5, 2009

by Charles L. Post and James Kachmar

You Lose A Key Employee; And Then Another And Another …

One of the company’s highest paid employees has decided to look for greener pastures or even start her own company. She is an “at will” employee without a specific written agreement for a set term. She knows your customers and how to handle and manage operations.

She offers to stay for a couple of weeks to help with the transition. You thank her, but make Friday her last day. You leave work slightly depressed, but no one is indispensable.

The next morning, she packs her personal belongings and returns the company laptop, cell phone and keys. You hand the employee her final paychecks and accompany her on a bittersweet farewell.

Then, things change for the worse. Your key employee’s second-in-command resigns, effective that afternoon. Three profitable sales people and their support staff submit resignations, effective that day. You check your email and discover six more employees have also resigned, effective immediately. Over the next four days, ten more employees give notice.

You call your lawyer.

A. 5 Things to Do When Your Competitor Hires Your Employees.

1. Move Fast. Unless a contract states otherwise, employers are not required to let a departing employee work out a notice period. When an employee has announced an intention to compete, there may be little advantage to having them stay for the duration of the notice period. Use caution to insure you are not “financing” the employee’s transition to a competitor.

2. Conduct an Exit Interview. If you have reason to believe the employee will compete, an exit interview may be even more important then usual.

– Remind the employee of post-employment obligations concerning confidential or trade secret information. Provide copies of any signed non-solicitation or confidentiality agreements. In the case of former owners or those falling within Business & Professions Code section 16601 (Sale of Good Will), discuss and confirm in writing the details of any non-compete obligations.

– Inventory all returned company information and property, including copies of any original documents. Advise the departing employee not to download, copy, transfer, forward, or manipulate company information or data on any computer or other electronic device. Document an averment to that effect.

Determine a mechanism for the deletion of “duplicate” confidential information on home computers, laptops, cell phones and PDAs.

– As for a description of the employee’s new position, job duties, nature of business, and address and phone number of the new employer. Be polite, the departing employee may not be obligated to give you this information.

3. Investigate.

– If a high value employee who poses a significant threat to the operation of the company leaves, conduct an investigation to determine what information the employee may have taken or copied prior to departing.

Conduct the investigation within the confines of the company’s policies and procedures. Most companies have polices that make clear that an employee does not have a right to privacy in any company information, including emails, computer files, computer usage histories, voice mails, and the like.

– Consider immediately limiting or terminating the departing employee’s access to company offices and information networks and equipment.

Absent a valid contractual provision preventing it, employees have a right to work for the competition. While it is fair and appropriate for the company to protect its business’ confidential and proprietary information, it should not unnecessarily offend a departing employee.

4. Be Careful What You Say, But Say a Lot. Be sure your customers know that service will not decline as a result of the employee’s departure. Waiting to contact customers may compound the effect of a departure. Don’t bad mouth the departing employee but immediately notify customers that the employee no longer has authority to act on behalf of your company. If you hear from customers or prospects about an employee violating an employment obligation, take action quickly.

5. Prompt Legal Action.

If you determine that a former employee has acted wrongfully you have several options, including:

• Send a Cease and Desist Demand Letter

• File a Lawsuit

• Seek a Temporary Restraining Order/Preliminary Injunction

A single employee taking customer lists or other information related to his former employer’s business is a common cause for litigation. California law protects the rights of employees to sell their services in a free marketplace, and protects employers against unfair competition and the misuse of proprietary, confidential or trade secret information by competitors or former employees. While California law makes clear that employees can lawfully “prepare to compete” against their current employer, it is less clear when those lawful preparations cross over into a breach of the employee’s duty to his/her current employer.

Claims against a former employee (and possibly their new employer) for misappropriation of trade secrets must be brought within three years of the date a plaintiff has reason to suspect the factual basis of a claim of misappropriation of trade secrets.

You Hire A Top Performing Employee From Your Competitor And Then She Brings Along “Her Team.”

You’ve been working for months to recruit a competitor’s star employee. She arrives at your office telling you that she resisted counteroffers and is now on board.

Almost immediately, her cell phone begins to ring. Subordinates and co-workers from her former employer (your competitor) want to know if there is a place for them at your company. She explains that she can do the most for your company if she’s got her “team.”

You start making deals.

You make hurried estimates as to the cash flow that might be realized from this sudden acquisition of 20 skilled employees with established customer relationships. You do not consider the effect this exodus will have on your competitor, nor whether it would have been better if the new employees had given advanced notice.

The new employees bring files and equipment and get their offices set up – everyone seems to be operating as a team.

Then you receive a cease and desist letter from your competitor’s lawyer. The lawyer notifies you that your competitor will be appearing in court Monday morning to seek an injunction against your alleged unfair business practices and to enjoin any further hiring of his/her employees or solicitation of customers.

You call your lawyer.

B. 5 Things to Know and Do When Hiring Your Competitor’s Employees.

1. Beware of “team.” When a manager, officer or employee of another company speaks on behalf of other employees of that company, i.e., “my team,” “my group,” “my office,” he/she may be breaching a fiduciary or other duty to their current employer. An officer breaches a fiduciary duty to his current employer if he solicits his current employer’s employees to go to work for a competitor. In most cases, these duties end when the employment ends. Barring the most unusual circumstances, an employee does not breach any duty to his employer in discussing his or her own future plans for employment.

2. Determine whether employees-to-be are “at-will” or have a contract with their existing employer. Make sure you understand any limitations on the employee’s ability to work for a competitor. Enforceable restrictions can include a contract for a specified term. A company that interferes with another company’s employment contracts with its employees can be exposed to civil liability. Sellers of “good will” or an equity interest in a company may also be prohibited from working for competitors. California courts will also act to prevent a former employee from utilizing a former employer’s trade secrets to the disadvantage of the former employer.

3. Make employment offers in writing. The offer should include a statement that the employee bring nothing with them from any former employer and that everything they need to perform their job will be provided by the new employer. Require the employee to represent and warrant that he or she is free to accept the employment with your company and that he/she has not taken anything from his/her former employer.

4. Employees who wish to “follow.” Recruit for open positions from multiple sources. Avoid “targeting” only employees of a competitor. Advertise positions, get applications and resumes, interview and conduct salary negotiations directly with individual applicants. Document all of these steps.

5. Announce the news. California law permits former employees of a company to announce that they are no longer with their former company and are with a new place of business. In some circumstances, however, an employee may be prohibited from soliciting customers of his former employer. Announcements of employee acquisitions should bear this legal distinction in mind and should be reviewed by legal counsel prior to making such arrangements.

SIDEBAR: What to Do Before Your Employees Give Notice.

Make clear to your employees what information belongs to the company and specifically, what information you consider to be confidential, proprietary or trade secret. California law protects employers who designate and take reasonable steps to secure their business information as trade secret, confidential and/or proprietary.

• Establish a system of reasonable practices to protect this information. Those practices can include proprietary information agreements and other policies that make clear to employees that customer information, customer preferences and indeed the customer relationship itself is the property of the employer. These policies must be carefully drafted so as to not run afoul of California laws protecting employees. You should also take additional security steps such as computer passwords and limiting access, labeling restricted access, utilizing locked file cabinets, etc.

This article first appeared in the January/February 2009 issue of Sacramento Lawyer, the bimonthly publication of the Sacramento County Bar Association. Weintraub Genshlea Chediak thanks Sacramento Lawyer for the right to publish the article, in its entirety, on our website. The article is the copyrighted property of the Sacramento County Bar Association.


 
Photo by Hanna Therkildsen

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