Playbook to Avoid Trade Secret & Noncompete Agreement Violations Involving New Hires

Playbook.jpgHiring new employees ideally opens the door to new opportunities for employers. But new hires may also present litigation risks. Specifically, it is not uncommon for companies to be sued by a newly hired employee’s former employer.

Such lawsuits generally involve two common fact-patterns:

  1. Claims that the new employer interfered with or otherwise induced an employee to breach his or her obligations owed to the prior employer by accepting the new employment; or  
  2. The new employee took confidential or proprietary information (in any format, e.g., documents, emails, spreadsheets, databases, etc.) from the former employer to use in the employee's new employment.

As to the first fact pattern, many employment agreements contain restrictions that will extend beyond the initial employment for some period of time. Common examples include non-compete and non-solicitation agreements, which often are limited to a specific duration. Other restrictions, such as confidentiality agreements, may extend indefinitely so long as the information it applies to remains confidential.

The second fact pattern may involve intentional misappropriation and also mistaken or inadvertent misappropriation of a former's company information. In either case, however, the new employer may be exposed to legal liability. Also there are significant business risks. For example, introducing new innovations and products may be delayed during the pendency of the lawsuit or even permanently shelved if your company loses the lawsuit.  

Best Practices for Eliminating Trade Secret and Noncompete Lawsuits 

Employees are often the life-blood of companies. But when it comes to hiring new talent employers need to have in place best practices for reducing the above business risks associated with new hires. Such practices include:

  1. It is important to ensure that a newly hired or prospective employee will not breach his or her continuing obligations to the former employer. Employers should obtain written representations from the new hire or job applicant that by accepting the job offer will not violate any continuing obligations to any former employer; and
  2. It is important for employers to make it clear to new hires that they are expected to comply with their contractual obligations to their prior employers. It is also important to expressly restrict new employees from using their former employer's confidential or proprietary information, even if they believe that the information is their own (for example, customer lists developed over the course of their career and used at their former employer). Employees should be encouraged (at the very least) that when in doubt, error on the side of caution and discuss the issue with management. 

An Example of Successfully Negotiating a Noncompete Agreement Modification

If the prospective employer would like to extend an employment offer to an individual subject to post-employment restrictions, then legal counsel should review the noncompete agreement or applicable restrictions ensuring that the job duties will not violate any continuing obligations to any former employer or to determine if there are essentially options to work-around those restrictions that are acceptable to the former and new employer.

For example, I represented a highly successful Michigan sales representative who was under a noncompete agreement. The sales representative had received a job offer from a competitor. In responding to the former employer's cease and desist letter, I highlighted certain legal and factual shortcomings in the subject noncompete agreement that called into question its enforceability if litigation was pursued. Using these shortcomings, we negotiated a resolution that significantly reduced the post-employment noncompete restrictions owed to the former employer and that allowed the sales representative to accept the offer.

Specifically, the noncompete restrictions were significantly reduced in both duration (down from two years) and from working for "any competitor" to only restrictions against competing for a handful of specific customers. And prior to agreeing to this settlement, I had confirmed with the new employer's legal counsel that these reductions were acceptable to the new employer. This result was dependent upon the actual circumstances, but it illustrates an example of one outcome that may be available when it comes to noncompete agreement disputes.

Contact attorney Jason Shinn for additional information about Michigan noncompete agreements, trade secret protection, including investigating a suspected misappropriation of trade secrets or violation of a noncompete agreement. Since 2001, Mr. Shinn has represented companies and individuals to address these issues, as well as defending against and pursuing trade secret and noncompete agreement violations.

Enforcing Noncompete Agreements: How to Avoid Wasting A+ Resources on the C- Employee

Grade A +Noncompete agreements have become a staple of the employment relationship. These agreements are intended to give employers the ability to protect their business against unreasonable and unfair competition. Such competition usually takes the form of a former employee directly competing against the employer either by starting a similar business or jumping ship for competitor.  

But what happens if that former employee is not likely to be a threat to your business either directly or indirectly? After all, if an individual didn't make the grade at your company, what are the chances he or she will be successful in competing against your company?

Certainly this is a great simplification, but it does capture a frequent fact pattern: An individual employee who would have been given, at best, a C- on a generous curve, goes onto violate his or her noncompete agreement. But does this now mean you must expend A+ resources in the form of management's time and legal fees to enforce a noncompete agreement and guard against unfair competition?

The Dangers and Risks of Selective Noncompete Enforcement

Not necessarily, but it is critical for a company's management to commit to expending some degree of resources on the legal enforcement of its noncompete agreements.

In support of this position, consider the following points: 

  1. Noncompete lawsuits often include other issues that damage a company's bottom line, including misappropriation of trade secret information, unfair competition claims, or claims under the Computer Fraud and Abuse Act. This sort of theft can cripple the continued profitability of a company either by losing its competitive edge or giving a competitor a significant shortcut to catching up to your business. Accordingly, ignoring such threats is simply not an option in an ultra-competitive market place.  
  2. Selective enforcement of noncompete agreements can create multiple downstream issues. For example, I defended against a noncompete and trade secret misappropriation lawsuit filed against a former executive and that executive's new employer. One of the arguments we were able to make to defeat the plaintiff company's request for a preliminary injunction and related relief was by showing that on multiple occasions the plaintiff had failed to seek enforcement of the same noncompete agreement and protection of trade secrets.      

Cost-Containment Strategies for Enforcing a Noncompete Agreement 

So with some foundation laid for enforcing a noncompete agreement across the board, we can now get back to the original issue, that being how to balance the expenditure of A+ resources to enforce a noncompete agreement against a former C- employee.   

One strategy that my law firm will offer to business clients are flat-fee packages that management can choose from tailored to common fact patterns. These packages offer varying scopes of services to fit most noncompete enforcement situations while providing cost-certainty to the business. 

A second strategy is to make sure your company has a well-drafted employee exit procedure in place. Such a procedure, if done properly, can preempt would-be noncompete enforcement issues or streamline the investigation of supporting facts relevant to enforcing your company's noncompete agreement if necessary. See Employee Exit Interviews - What's On Your Checklist? In both instances, however, substantial cost-savings can be realized through eliminating or reducing the time and effort for investigating the facts to support a potential claim for a breach of a noncompete agreement and related issues that usually follow, such as trade secret misappropriation. 

Conclusion

At the end of the day, noncompete enforcement is like any other business decision in that the expenditure of resources, e.g., time and money, must be tailored to the situation. And not every noncompete situation is going to require a "scorched earth" litigation strategy. But for most businesses taking the long view, it will require some attention and strategy. 

For more information about noncompete enforcement issues in Michigan or strategies for cost-effectively enforcing a noncompete agreement, contact Jason Shinn. Mr. Shinn has consulted with business and individuals about Michigan noncompete law and issues since 2001. He has also litigated noncompete disputes, including obtaining and defending against preliminary injunctions involving the breach of noncompete agreements and trade secret misappropriation claims.

Doubting Attorney Google - Relying on Free Legal Search Results Can be Dangerous Thing

Google Search.jpg

A little bit of knowledge can be a dangerous thing, especially when legal issues are involved. This truism makes the Internet a virtual minefield for the unwary looking for "free legal advice," which often happens in the area of post employment restrictions and noncompete agreements. As discussed below, however, a noncompete lawsuit arising from incomplete or outright inaccurate information is only a Google search away.

Consider for example, a recent question submitted on a popular, public legal website. A person asked if his current employer of nine years could restrict him from starting an identical business even though he had not signed a noncompete agreement.

This question garnered a range of well-reasoned and insightful responses, as well as responses that were less so. For example, some responders offered a blanket conclusion that if the individual had not signed a noncompete agreement there wasn't anything the employer could do to stop the individual from "switching jobs."

Another response offered some sort of conclusion to the effect that if the individual never signed a noncompete agreement "such effect would provide no basis for construing any proviso to be engrafted solely on the whim of a former employer" with respect to restricting a person's post-employment activities. Again, this was some sort of conclusion, but not one I would build a business around.

Noncompete and Post Employment Misconceptions 

The problem showcased by the preceding snapshot of noncompete Q&A is best summarized by a famous observation made by management guru Peter Drucker, "The most serious mistakes are not being made as a result of the wrong answers. The truly dangerous thing is asking the wrong questions."

Applying this to the noncompete Q&A situation exposes two problems: First, the question asked is too narrow in that it focuses on a single issue - can an employer enforce a noncompete restriction if the employee never signed a noncompete agreement - and overlooks a number of other legal issues that could blow-up the questioner's business plans.

Second, the responses - even the very good ones - may provide some measure of truth as to the specific question asked, but those responses do little to shed light on the full range of legal time-bombs that could be diffused or outright avoided.

In this regard, consider the following sampling of issues that often arise in the context of a former employee starting a competing business:

Trade Secrets. Michigan, like many states, statutorily protect an employer's trade secrets under the Michigan Uniform Trade Secrets Act (the "Trade Secret Act"), MCL 445.1901, et seq. And while there is some overlap between trade secret protection and noncompete agreements, one does not have to have a signed noncompete agreement in order to maintain a lawsuit for trade-secret theft, which could certainly halt a former employee's competing business because there are a number of significant remedies available to an aggrieved party, including:

  • The award of an injunction against the competing business from operating;
  • The award of an injunction against the former employee based on actual or threatened misappropriation of trade secrets;
  • The ability to compel a party to take affirmative acts necessary to protect a trade secret; and
  • An award of damages for misappropriation.

Computer Fraud and Abuse Act. We have previously discussed on this site the Computer Fraud and Abuse Act (CFAA), 18 USC 1030 (a federal statute) and its application to employees looking to help themselves to an employer's digital goods before departing. A common argument in such sitautions is that the former employee violated the CFAA, by accessing the employer’s computer “without authorization” while individual was employed and sometimes after leaving the company. A CFAA claim in such circumstances have met with varying degrees of success (depending upon your perspective). But the fact remains, the CFAA is another tool that can disrupt plans for starting a new business that does not depend upon the signing of a noncompete agreement.    

Unfair Competition/Breach of Fiduciary Duties. These sorts of claims are more "elastic" in that they can be molded around various factual scenarios where a former employee engaged in some wrongful or "unfair" conduct that could be deemed unethical or unfair. Common examples include copying information, including information that does not meat the definition of trade secret in preparation for competing against your employer, delaying or diverting orders to benefit a new company or employer, or while employed soliciting fellow employees to leave their current employment for your new venture.

The Take-Away for Departing Employees and Would be Entrepreneurs 

Legal question and answer sites and Internet research is not inherently a bad thing when it comes to getting answers to legal issues. For instance, one of the goals for this blog is to provide a compelling reasons for people and companies to regularly read it when it comes to Michigan and federal employment law issues. And this goal was inspired by a number of other lawyers who regularly publish blogs that provide top-shelf legal analysis and excellent coverage of legal issues.

But Internet legal research should not be the only thing you do when it comes to making decisions that have legal implications for you or your business plans. I mean, if you believe enough to devote your time, money, and other resources into building a start-up or new company, does it really make sense to build on a foundation of free legal advice from the Internet?