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Dangerous Liaisons

Dangerous Liaisons

More and more often, employers ask courts to place limits on the future employment of their departing workers. These employees are potentially dangerous-if not properly handled, they can seriously harm the organisations with which they are associated. Courts, however, are loath to make rulings restricting people's rights to work where they can and want to.

We've seen this in some famous disputes. In General Motors v. Lopez, despite evidence of theft of trade secrets, GM was unable to stop Volkswagen of America from hiring its purchasing czar. In another more recent case, Wal-Mart v. Amazon.com, Wal-Mart lost several key inventory-management specialists to Amazon.com. In 1999 Nike filed suit against its former CIO, who left for The Gap. So what should you do to keep such dangers from your door?

Trying to legally limit the move of an employee will rarely be worth the risk of exposing confidential information at a public hearing. Because that is precisely what may be required during a request for a preliminary or a permanent injunction. In one of the few cases reported thus far under The Economic Espionage Act of 1996, US v. Hsu, the federal district court ordered plaintiffs to provide the defendants with the very trade secrets that the defendants were accused of stealing. The court said the defendants needed the details in order to prove that the asserted trade secrets could be found in the public domain. You can imagine the reluctance of the plaintiffs to give further secret information to people they already believed to be thieves. This explains why few such cases are brought.

Once you learn of an employee's impending departure, it is often too late to prevent it. If you suspect any infringement of confidentiality, you probably don't want to keep the employee anyway. But parties should agree at the time of hiring how they will conduct themselves in the event of a dispute. Sometimes only the threat of litigation can drive the parties to agreement on a sensible plan for moving forward with their lives, goals and objectives. This is best embodied in a court-approved document called a consent order. To clarify what your goals should be in negotiating a consent order, let's review the rights and duties of the parties to the dispute.

Your Rights and Duties

Having well-drafted contracts with employees in advance of a problem is key to obtaining the best possible result in court. In addition, assess how likely it is that the employee will live up to his or her obligations. Interview the employee as soon as you learn of an impending move. Find out about the nature of the new assignment, what the job duties will be and how closely they relate to that employee's job with you. If your departing employee has a good reputation for truthfulness, you will trust him or her to maintain your confidences. That's not the case for a sneak or a cheat. Past examples of dishonesty and clandestine conduct will tip the balance in your favour should the case end up in court. Pay particular attention to whether the employee has copied or removed information from the workplace. Nearly all courts are sympathetic to the notion that an employee must not unnecessarily harm the legitimate interests of the employer he or she is leaving.

But what about preventing the employee's use of such information even if it is not actually disclosed? It will be exceedingly difficult to control the use of information that is not in tangible form or formally protected as a trade secret, patent or copyright. In the absence of a written noncompetition agreement, you are in a very weak position to get effective relief if an employee moves. The courts are almost unanimous in refusing to prohibit the movement of the employee or the employee's right to use his or her knowledge even in closely related activities.

The New Relationship

Companies are of course free to compete vigorously against one another. As long as the competition does not benefit from the misappropriation of your trade, it faces little liability simply from hiring your employee. Still, that employer must take care to determine that indeed it gains no benefit from your company's confidential information as a result of hiring your former employee. They must carefully review the employee's obligations to you before they hire, particularly when they are direct competitors or when the employee is hired to function at a very senior level. All employers ought to understand that the shoe could easily be on the other foot and behave toward other companies as they would like to be treated. Besides, if they don't take these precautions, their case will be weaker in court.

When a company tries to restrain an employee from accepting new employment or to assign an employee's invention to itself, the court must balance the relief requested by the employer against the impact on the employee. The general view is that employees own whatever knowledge, skill or experience they have developed. An employee is free to use that knowledge and skill in future endeavors, even to compete against the employer. Even when you have contracted with the employee respecting such matters, the courts go to great lengths to avoid placing undue hardships on a person's employability.

While the concept of undue hardship varies most jurisdictions won't enforce a noncompete agreement for more than one year, or an invention assignment for more than 12 months after the employee leaves. State courts most favourable to employees' rights include California, Michigan, North Carolina, Minnesota and Washington. These states have statutory limits on the extent to which an employer can impose contractual limits on employees' rights to take whatever knowledge and skill they possess to a new employer.

The Antidote

Seek a consent order that assures that information possessed by an employee will no longer be current when it benefits his or her new employer. Since the employee in most cases will be permitted to move, a consent order should focus on specific commitments that restrict him or her from communicating directly with parts of the new workplace that would benefit most from your confidential information. It is usually sufficient if, for a limited period of time, the employee's work requires different skills and knowledge than was important during his or her work for you. Courts will generally enforce such a restriction for six months to two years depending on the agreements to which the employee is obligated and the effect on his or her employability. The consent order should require an officer of the hiring company, such as the general counsel, to certify every few months that the employee is abiding by the restriction.

In the absence of a written agreement, employers have few legal safeguards assuring the confidentiality of information lawfully in the possession of an employee. However, if a dispute arises, it is always more easily resolved when proper agreements are entered into on hiring. Challenge your legal and human resource professionals to give you contract tools and training to reduce or eliminate disputes over employee movements to competitors.

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