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.

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