Randall P. Sutton Partner Employment Law & Business Litigation

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2 Randall P. Sutton Partner Employment Law & Business Litigation 2

3 Noncompetition agreements are a waste of paper. Courts just don t enforce them! False - Courts will enforce a valid noncompete that was properly executed. How the agreement was executed is usually the problem If I don t have a valid noncompete, there s nothing I can do to stop an employee from competing. False There are many protections against corporate raiding. The worse the former employees are acting, the better the chances of stopping them. B.Y.O.D - Sounds fun. Count me in... Bad Idea Bring Your Own Device policies can lead to big problems I ll get around to updating our boilerplate employment agreement. It s no rush... Dangerous The laws regulating restrictive covenants are strict, and timing is critical. Actions that are taken post-offer or after hire may be counter-productive. 3

4 Owner who is stepping back and letting others run things Charismatic Key Sales Person or Manager Not So Loyal Staff 4

5 Demanding, Difficult, or Under Appreciative Boss Competitor Eager for New Talent Disgruntled Hot Shot Sales Person 5

6 Noncompete signed without following statutory requirements. Boss & employee are none the wiser. Employee works for many years believing noncompete is enforceable Employee no longer feels the love. Competitor wants to hire employee. Employee s lawyer confirms noncompete is not enforceable. Gives employee the green light Boss asserts the This is so unfair! defense 6

7 Trade Secrets What is a trade secret? Keeping Secrets Devices / BYOD Misappropriation Duty of Loyalty Non-Piracy / Non-Solicitation Agreements Noncompetition Agreements 7

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15 Valuable Competitors can benefit from the information Secret Competitors (actual or potential) don t know the information. Once secret is out, it s not a secret anymore Reasonable Efforts to Maintain Secrecy The company can prove it has taken reasonable steps to keep the information secret.

16 Employee Handbook should include confidentiality policy Employees should sign a Nondisclosure Agreement Visibly identify confidential documents as confidential Require logins and limit access to need to know Red flag alerts when confidential documents are accessed If employee has access to sensitive information, restrict ability to work from home. 16

17 It s a contract, not a policy. Can be enforced in court Preparing No such thing as a standard or form NDA Carefully define what is / is not protected Consider time restrictions & carve outs for stale or known information Venue provisions where will you enforce it? Presenting Make sure there is good consideration hire, promotion, continued employment? 17

18 Bring Your Own Device ( B.Y.O.D ) - Advantages Affordable Costs are shifted to the user Employee responsible to upgrade & replace if lost Employee can choose cell carrier he/she prefers Employee can choose own brand & style of device personal taste rather than what the IT department picked out Devices tend to be newer than company-owned Employee avoids carrying duplicate devices (business & personal) Employee likely to have it with him/her 18

19 Bring Your Own Device ( B.Y.O.D ) - Disadvantages Employee feels more empowered re: manner of use Acceptable Use Policy Required - Will employees accept & follow rules re: how they can use their own personal devices? Employee may have concerns about employer installing monitoring software or periodically scanning device Can be difficult/expensive to retrieve for scanning at termination Does company need to be careful where it looks? Is employee ok with company wiping phone he/she paid for? Litigation Hold More difficult to preserve data in event of lawsuit against company 19

20 Require all business use on company-issued devices Limit personal use of company devices Issue employee a work cell number, which stays with company when employee terminates Eliminate any expectation of privacy Employer has unlimited access to scan, monitor & wipe devices Install monitoring software on all devices - laptops, smartphones, tablets. Red flag suspicious activity IT can remotely terminate access & wipe data

21 Acquiring a trade secret, knowing or having reason to know it was acquired by improper means improper means - theft, bribery, breach of a duty to maintain secrecy, or misrepresentation. Disclosing a trade secret, knowing that it was acquired by accident or mistake Disclosing or using a trade secret, knowing that it was obtained by improper means or in breach of a duty to maintain secrecy

22 An employee leaves Acme, Inc. having signed a NDA. Employee goes to work for Roadrunner, a competitor. Roadrunner is aware of the NDA, but let s the employee use Acme s trade secret information in the new job. Both the employee and Roadrunner are liable for misappropriation.

23 You accidentally receive an from your competitor. The contains the competitor s confidential designs. You know this was forwarded by mistake, and the designs are marked confidential. It would be misappropriation to use or disclose that information. Better to return to sender & destroy all copies.

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25 Common Law Duty Exists with or without a written agreement During Employment Don t disclose confidential information Don t compete with employer Don t solicit other employees Preparing to compete is ok, but don t move the ball forward at all Post-Termination No duty to refrain from competition Still obligated to hold trade secret info confidential

26 Usually OK... Moonlighting for non-competitor (if employer does not have a no moonlighting policy) Sending resumes / interviewing (but not on working time) Off-duty setup of competing business Buying office supplies / Renting office space Printing business cards / Designing website Incorporating new company Breach of Duty of Loyalty Copying information. Stealing forms. Stealing website template Soliciting customers to follow you to new business Soliciting employees to come with you to new business Moving confidential information off-site

27 An Idea Forms: A few good customers encourage the employee... Employee decides he/she is the business & can do it better Steps to Compete A few customers are contacted and informed of plans Employee bad mouths company/management to others Documents & data retained and readied for use Departure Sudden and/or false reasons given for quitting Sabotage of systems / data Immediate use of data and mass solicitation of customers Boss shows up to work. Where are my employees? 27

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30 It s all about personal relationships - Dicky Fox - Late Great Sports Agent Jerry Maguire Non-Piracy Agreement Restricts former employee from: Soliciting customers Soliciting employees Transacting business with customers Noncompetition Agreement Restricts former employee from: Working for a competitor Working within a geographic radius of the former employer

31 Protectable Interest Employee must have knowledge or relationships that could disadvantage company Company specific information / Key relationships Can former employee use information he/she knows to do damage to the company through competition? Partial Restriction Restriction must be limited in time and scope Good Consideration Inducement for employee to sign noncompete must satisfy legal requirements Different rules for Business Sales

32 Limited Time How long does it take for: Relationships to get stale? Information to get old? Competitors to catch up? 2 year limitation... Limited Geography or Scope How broad is the business? Where are customers? Where does company do business? Limit only as far as necessary and no farther Blue Pencil Rule

33 Continuation of Employment Not Sufficient Sign this or you are fired! Commencement of Employment Applicant should know that signing the restrictive covenant is a condition of hire New employee should sign before hire or as part of on-boarding packet Promotion Signed as condition of and at time of significant promotion Employee exposed to new information and/or new relationships

34 Restriction on soliciting customers & employees, and transacting business with customers Requirements: Can be signed at any time, even by current employees Like any contract, Employee must get something in exchange for signing the agreement Is sign it or your fired enough? Is a nice bonus enough? Rules re: protectable interests still apply 34

35 Restriction on working for a particular competitor or within a limited geographic area Non-Bendable Requirements: Can only be signed at commencement of employment or as a condition of a significant promotion If signed at commencement of employment: Must be mentioned as condition of hire in written job offer Written job offer must be received 14 days before work starts Maximum term of 2 years (18 months after January 1) from date of termination 35

36 Bendable Requirements: Employee must be white-collar exempt Administrative, Professional, or Executive Gross compensation must exceed U.S. Census median income for a Four Person Family - For 2015, that s $72,668. Noncompete still enforceable if Bendable requirements not met, if: Employee paid during the restrictive period Employee receives greater of: 50% of former gross pay while employed with company; or 50% of the U.S. Census 4 Person Family Income - $36,334 in 2015 That s $3,028 per month, minimum... for how long?? 36

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38 Demand Letter on Former Employee Remind about obligations Require acknowledgment of obligations Demand compliance Understand that new employer will see the letter Demand Letter on New Employer Evaluate why you are sending the letter. Is goal to harm former employee or protect business interests? Negotiate to establish reasonable restrictions and assurances of compliance New employer may threaten legal action in response

39 Is it worth it? How badly are you hurt? Will employee assert counterclaims? Unpaid wages? Tortious Interference? Other ways to get the same result? Should resources be invested in keeping customers instead? Likely employee will be funded by new employer. Rare that employee just concedes. Can you explain this stuff to a jury? Are you willing to see it through (time, money, energy)?

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41 Temporary Restraining Order Immediate. Ex parte, but probably contested. Must show very likely to win Very short duration. Bonding requirement. In cases of sabotage, can catch former employee by surprise Drop Everything Discovery & Hearing Schedule Depositions, written discovery, experts, witnesses NOW. Preliminary Injunction Hearing Instant trial. Usually within a few weeks of filing lawsuit Outcome usually decides dispute Similar to an actual trial, only with a fraction of the time to prepare Must prove likely to prevail to get injunction Injunction is devastating to former employee & new employer

42 Is the information really a trade secret? Is this something that can even be a secret? Do others already know the secret information? Did you do everything necessary to keep the secret? Has the secret been used or disclosed? Witnesses & Proof Your agreements, procedures, documents showing efforts to maintain secrecy Expert testimony as to what is common knowledge Testimony as to whether secrets were used/disclosed Discovery from new employer showing use of secret

43 What did employee do, and when did employee do it? Before or after employment? Witnesses & Proof Testimony of other employees Phone records and other communications Text messages? Damages How badly did the employee hurt you?

44 Who called whom?? Is agreement enforceable? When signed. Scope. Good consideration? Difficult to prove solicitation without dragging customers into the battle Witnesses & Proof Testimony of your own customers, who are now your former employee s customers Telephone records. . Faxes and letters. Damages - Records of lost business profits

45 Is agreement enforceable? When signed. Scope. Good consideration? Is it reasonable. Easier to prove violation Competition is usually obvious Witnesses & Proof Proof that employee is working for competitor or engaging in own business Expert testimony about protectable interests Expert testimony about reasonable restrictions Sales records of new business Damages - Lost profits of your company

46 Injunction (preliminary or permanent) Restrain use of trade secret Impose restriction on competition for time it takes to eliminate advantage Force compliance with noncompete or other restrictive covenants Limit employee from doing business with customers Damages Reimburse lost profits (if case proceeds to trial) Attorney Fees??

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48 Monitor suspicious activity Disgruntled key employees are key offenders. Is unhappy employee now unexpectedly happy and cooperative? Is sales volume / activity suddenly down? Unusual expenses, trips, or communications Buzz around the office. Closed door meetings Large data downloads. Extended time spent at the copy machine. Is employee lingering after hours or on weekends? Late night work-from-home remote access 48

49 Evaluate whether to continue employment Step-up monitoring efforts Review leading up to announcement Usually, greatest volume of dialog/activity occurs just before the announcement Don t allow employee to tell customers where he/she is going. Control the message. Evaluate other key employees and those friendly to departing employee. Any concern about mass departure? 49

50 At exit interview, inquire about new employer, new position, and duties Ask employee how he/she learned about the new position Remind the departing employee of trade secret and noncompete obligations Eliminate former employee s access to business information Wipe data & get company equipment back

51 Ask key employees to tell you if they are contacted by the former employee or a competitor Let good customers know that the employee no longer works for you. Don t say where employee went. Now is the time to firm up relations with customers Does the customer even know you or the new contact? In person meetings? Customers need to associate a new face. Ask loyal customers to contact you if they are contacted by the former employee.

52 Notify employer in writing of your concerns Inform new employer as to employee s trade secret or noncompete obligations Great care is needed to avoid intentional, interference claims. Don t demand more than you have a right to. Clarify former employee s role in new company Discuss efforts to create Chinese Wall Negotiate a compromise and get assurances Monitor for compliance

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54 A judge may someday scrutinize your conduct. Always wear the white hat... Document your discussions Get legal review of new employee s contracts Consider how much the competitor will be hurt by your action. The more hurt, the more likely a lawsuit Avoid any appearance of impropriety Be prepared to produce all communications if sued. Make sure you are squeaky clean.

55 Ask employee about NDAs or other agreements binding employee and get copies. Get a promise from employee that he/she has not and will not take trade secrets of former employer Specifically instruct that you don t want trade secret information or customers who are off limits Ask about any threats of litigation that employee received in the exit interview or otherwise Evaluate whether employee has previously taken business from other employers. Will employee treat you the same way?

56 Why does the hiring manager want to bring this applicant on board? How many other employees of competitor have we hired? Why do we want this particular employee? To hurt our competitor or help our company? Is applicant in a position to use secret information to help us? Will applicant be required to use the trade secrets to perform the job?

57 Ensure that employee has signed a noncompete & NDA. Written acknowledgement from employee that he/she has returned all confidential documents of former employer Written assurances (under threat of termination) that employee will not attempt to use any confidential information of former employer Written acknowledgment that employee will inform management if he/she is ever asked to violate former employer s NDA or noncompete Acknowledgment that employment does not breach any existing contracts with former employer Employee may be looking for defense or indemnity if sued by the former employer.

58 Advertise for open positions. Don t just target competitors. Don t hire without obtaining legal review Don t encourage new employee to lie to former employer or circumvent duties to former employer Don t solicit confidential information from applicant Be careful about asking applicant to solicit former coworkers or customers Put employee to work. Don t hire employee away merely to hurt competitor

59 Randall Sutton /