(Originally published on the ABA Commercial and Business Litigation newsletter)
Your client calls in a panic because a key employee just resigned without notice to join a competitor. The client is fearful that the now former employee has the ability to divert business and possibly employees, potentially harming the client’s operation. You know you need to act quickly to stem the losses and protect the client. Having a game plan to keep you on track is critical to your ability to quickly and successfully protect the client.
Investigate the Facts
First, gather key documents. The client should have an employee file that contains any written agreement with the now former employee as well as employee handbooks and policies. This first step is designed to identify any contractual obligations and restrictions on the employee’s conduct during and after employment. These restrictions can be found in written agreements that limit use of company information and post-employment activities, as well as in employee policies and handbooks. Typical restrictions include limits on the use of company information relating to customers, pricing and other valuable information. Additional restrictions often include restrictions on the solicitation of business from actual and potential customers. Finally, many agreements include restrictions on soliciting employees to leave the company.
Now that you know what the employee’s contractual obligations are, it is important to preserve and review the company’s computer system and computer hardware used by the employee. This enables you to evaluate the employee’s activities before he or she left the company. Your client’s information technology team can help search for evidence of improper conduct including communications with customers or prospective customers, solicitation of employees, and transfer of company information. A computer expert should be retained immediately to create a forensic image of the employee’s computer to preserve information, and then help you search for evidence of improper activities. The company must also turn off any automatic deletion programs in its computer system to ensure that information is preserved.
Finally, you should interview key employees to identify any customers, referral sources, vendors or others that the former employee may have been in contact with to determine if he is attempting to divert business, employees or opportunities. Follow up with the customers or sources to document the former employee’s activities to identify possible witnesses and evidence.
Identify Potential Claims
Non-Compete – A traditional “non-compete” provision precludes an employee from accepting employment with another person or entity who engages in competition with the employer. While enforceability varies from state to state, in those states that permit post-employment restrictions, the agreements typically must be in writing, signed by the employee, and be reasonable in time and geographic scope, and the restriction must be supported by a “legitimate business interest.”
Determining the reasonableness of time depends on the industry and the nature of the employee’s duties. Some states, like Florida, have a statutory scheme that provides some guidance, including a presumption that a restriction of less than six months is presumed to be reasonable and a restriction longer than three years is presumed to be unreasonable.
Non-compete restrictions also must be reasonable in geographic scope. The public policy behind the geographical limitation is to permit the employee the ability to engage in work in his or her chosen profession, but also to permit the employer to protect its investment in its customer base. In the medical field, for example, restrictions are often limited to a specified mile radius or county where the patients are likely to reside. In other industries where employers have a statewide or even nationwide customer base, a restriction on competition within the state or even the entire United States could be enforceable.
Finally, enforcement of non-compete restrictions must be supported by a “legitimate business interest.” That is, the restriction cannot be simply for the sake of preventing competition, but instead, enforcement must be necessary to protect an important investment of the employer. States vary as to what constitutes a “legitimate” interest. The Florida Supreme Court recently held that “a legitimate business interest is an asset that, if misappropriated, would give its new owner an unfair competitive advantage over its former owner.” See White v. Mederi Caretenders Visiting Serv. of Southeast Fla., LLC, Case No. SC16-28 (Fla. Sept. 14, 2017).
“Whether an activity qualifies as a protected legitimate business interest is inherently a factual inquiry, which is heavily industry – and context – specific.” Id. Some examples include an interest necessary to protect trade secrets, valuable confidential business or professional information that does not qualify as a trade secret, extraordinary or specialized training, substantial relationships with prospective or existing customers, patients or clients, or customer good will. See, e.g., Fla. Stat. sec. 542.335(1)(b). Most states have fairly developed case law analyzing the extent of a “legitimate” business interest.
The key questions for evaluating a potential non-compete violation include: What activity does the covenant actually restrict (focus on the exact words of the written restriction)? Is the new employer actually engaged in the same or substantially same business as the former employer? What is the need to enforce the restriction in this case (i.e. the “legitimate business interest”)?
Non-Solicitation – A non-solicitation provision typically restricts a former employee from soliciting customers and/or employees of the former employer. Like non-compete provisions, states that permit enforcement require the restriction to be limited to a reasonable period of time and supported by a legitimate business interest. Enforcing such a provision starts with the actual words in the agreement. What is restricted and for how long? Some provisions prohibit solicitation of actual customers as well as prospective customers.
And what evidence is there of solicitation? Without a non-compete restriction, an employee is permitted to join a competitor and engage in a competitive business, but under a non-solicitation provision, he cannot “solicit” the customers of his former employer. If customers follow the employee to a new employer, how do you know the former employee “solicited” the customer and how do you prove it? The customers themselves are one potential source of information about a former employee’s solicitation effort. Are customers reporting that they were contacted by the employee and asked to move their business? Or did customers learn from the company that the employee had left? Many employers understandably do not want to put their customers in the awkward position of becoming witnesses to a lawsuit. But many employers are willing to ask customers to provide relevant emails, voicemails and text messages to develop a case. Often the best source of information ultimately comes from the former employee once a lawsuit is filed.
The language of the non-solicitation provision is critical. Some agreements simply state that the employee is prohibited from soliciting customers or employees from leaving the employer. More sophisticated provisions define what “solicitation” means, often specifying that a former employee cannot directly contact customers by email, telephone, or in person. Some also limit advertisements, while others specifically address social media by stating that updating social media pages such as LinkedIn and Facebook to indicate new employment constitutes “solicitation.” Others go further still and prohibit even the “acceptance” of business from customers of the employer. Breaking down the definition of “solicitation” contained in an employment agreement and finding evidence to support that specific definition can be critical to proving a violation and protecting the client.
Theft of Trade Secrets and Confidential Information – A former employee’s post-employment use of important company information for a competitor can devastate a business. Such information can include customer lists, purchasing history, sales techniques, referral source information and, of course, proprietary product information. Claims to protect against misappropriation of trade secrets and confidential information are independent of enforcement of a restrictive covenant. The key to enforcing misappropriation claims starts with the information itself. Does the information qualify as a “trade secret”? Most states follow the Uniform Trade Secrets Act, which defines a “trade secret” and requires its owner to take steps to maintain its secrecy.
If the information does not qualify as a trade secret, the material may nevertheless be protectable as confidential business information. Employment agreements and company policies often define confidential business information and prohibit its use. Such provisions are enforceable. The first step is thus to identify the information at issue to determine what kind of protection it is entitled to – statutory or contractual, or both.
The second step is to determine whether the former employee retained or is using the information, and to identify the evidence that exists to prove misappropriation. Misappropriation is often proven through a forensic examination of the former employee’s company computer, which may show that information was sent by email or downloaded to an external hard drive. Sometimes customers reveal that the former employee was using customer information to solicit their business.
The third step is to prove that the employer took reasonable steps to keep the information confidential. An employer cannot claim that its confidential information was misused if the employer itself does not protect its information. Did the employer restrict access to the information? Did the employer implement mechanisms to periodically check to ensure that the information was not being improperly accessed and used? Did the company become aware of prior, unrelated improper use of its information and take steps to protect against further disclosure? Evidence of efforts to maintain the secrecy of the information is critical to proving misappropriation claims.
Tort Claims – In addition to the contractual and statutory claims outlined above, the employer also may have viable tort claims against the employee. Breach of fiduciary duty, breach of the duty of loyalty, and tortious interference with business relationships are common claims asserted in competitive hire cases. These claims can be asserted in addition to, or even in the absence of, restrictive covenants or misappropriation claims.
Key questions to evaluate these tort claims include: Was the employee in a management position who recruited others to leave with her to join the competitor? Did the employee “test the waters” by reaching out to customers to see if they would follow her to a new company? These claims are often revealed through a trail of emails located during an examination of the former employee’s company email account. Inspection of the former employee’s company computer and company email account must occur immediately upon the employee’s resignation and departure. A forensic expert may be needed to recover any emails the employee deleted and to authenticate the evidence at an injunction hearing or at trial. Tort claims can be valuable not only when restrictive covenant or misappropriation claims do not exist, but in some states, could support claims against the employee’s new employer as well as punitive damages.
Now that you have investigated the facts to determine what wrongful acts occurred and evaluated the possible claims, you are ready to take action. The first step is to prepare a demand letter to the former employee and instruct her to cease and desist from further improper activities. Your demand must identify the legal basis for the restriction, such as the restrictive covenant or company policies at issue and summarize the basis for believing a violation has occurred. If your evidence suggests that the new employer may have knowledge of the improper activities, you should consider putting it on notice in a separate demand letter. Your demand letter should conclude with a specific demand for action and a deadline to comply.
Preparation of a lawsuit should be done simultaneously with preparation of the cease and desist letter. Although many causes of action are theoretically possible, the complaint should be a focused effort, not a “shot-gun” approach. Keeping it simple will give you credibility and demonstrate confidence in your case. Identify the strongest two or three causes of action that you can most easily prove that will give your client the relief it seeks, and allege them. Leave out the more tenuous, complicated claims.
You also must decide whether to seek injunctive relief, damages or both. Temporary injunctions are often requested at the outset of a litigation in an attempt to stop the type of harm that may not be capable of measurement later through a damages claim. In evaluating a request for a temporary injunction, courts often engage in a stringent evaluation of the evidence, often even before discovery begins, to determine if the threatened harm to the employer outweighs the potential harm to the former employee if he or she is enjoined but ultimately prevails. Attempts to obtain a temporary injunction are often a high stakes process that is critical to the outcome of a case. In most cases, a ruling on a motion for a temporary injunction results in a settlement of the claims, with one side holding significant leverage after a successful outcome at that early stage of the case. Requests for temporary injunctive relief require a separate motion and an expedited process, and typically must be filed along with the complaint. Before filing a motion for temporary injunction, however, you should have your proffered evidence, such as affidavits and electronic or physical evidence, ready to be submitted to the court at the time of filing.
Representing a client to redress wrongful conduct of a former employee often requires swift and decisive action. In such a situation, keeping your strategy simple is the key to success. Your investigation must be focused and your lawsuit should be simple, tight and well supported by evidence.
Where you regularly represent clients in a competitive environment, you should consider encouraging those clients not to wait for the key employee to leave before taking steps to protect itself. You should advise the client to require all key employees to execute written agreements that include restrictive covenants and restrictions on the use of trade secrets and other confidential business information. On-going monitoring of access to and use of company information is also helpful to protect from disclosure and to enforce the employer’s rights in post-employment litigation. Finally, employment agreements and policies should describe clearly and adequately the job duties of key employees to provide clear paths to asserting breach of fiduciary duty and other tort claims.