Business Headlock.jpgFestivus – as introduced by Seinfeld – is a holiday celebration that included the “Airing of Grievances,” i.e., public criticism and pronouncements as to how a particular person has been a disappointment in the past year. 

The timing of holiday and year-end bonuses also often mark the beginning of a similar airing of grievances in the form of unfair competition lawsuits against departing employees.

This is because historically, employees plan their exits around receiving their bonuses. And these exits are often for a competitor or to start a competing business.

For example, this blog previously discussed a lawsuit alleging that a group of attorneys stole computer records consisting of client information from their former law firm prior to departing to start a competing venture. This theft came after the former law firm had handed out year-end bonuses. 

Certainly not all competition by a former employee is unlawful. But if a departing employee violates a noncompete agreement, misappropriates company assets, or engages in other wrongful conduct, then the former employer may have a number of claims available for protecting its business interests. 

Such claims may include a variety of business torts, including tortious interference with a contract or a business expectancy, misappropriation of trade secrets, and business defamation, and claims under the Computer Fraud and Abuse act. Speaking from experience, however, it is far better (and cheaper) to prevent such post-employment litigation. 

Preventing or Limiting the Damage done by a Departing Employee

A common sentiment clients express is that the damage done by a departing employee unfairly competing is like a slow wind up punch. In other words, the signs and evidence of such wrongful conduct were clearly evident from the outset.

In this regard, the following are leading indicators that employers should review and otherwise monitor in order to guard against an employee unfairly competing: 

  • Any access logs available to the employer should be carefully reviewed for the month leading up to year-end bonuses. Examples include computer sign-ins, server access logs, copier usage, and building access. Often times, these logs will identify unusual or heavy access or usage of resources that could be indicative of copying, transfer or retrieval of information. Going back to the lawyers that were accused of stealing computer records, it was explained to me that they actually had support staff scan physical files so it was “easier” to find, which also made them easier to download. One attorney reportedly even asked the office manager for moving boxes in order to box up personal items she intended to donate to charity.     
  • E-mail, use of portable hard drives or other memory storage, and downloading of data should be carefully monitored. 
  • After an employee departs, it is prudent to monitor press releases that involve the former employee or that employee’s new employer to determine whether any trade secret information has been misappropriated. 
  • Review back-up email archives to assess whether any information was transferred by the employee in the weeks preceding the employee’s departure.

Responding to a Departing Employee’s Unfair Competition 

The ultimate response an employer should have to a departing employee preparing to or actually engaging in some form of unfair competition will depend upon numerous facts and circumstances that should be evaluated with experienced counsel. But these considerations will often include:

  • Whether the former employee is violating a noncompete agreement;
  • Whether a demand letter asking the employee for voluntary and mandatory compliance by a date certain is appropriate before pursuing litigation; 
  • Whether to also send a demand letter to the new employer. In this regard, hiring an employee in violation of a noncompete agreement may constitute tortious interference with a contract and providing notice may provide a route to pursue the new employer; and
  • Whether you should  contact any vulnerable or targeted clients in order to cement business relationships and how much, if anything, should be disclosed to the client. 

Regardless how these and other issues are resolved, it is absolutely critical that the company act swiftly in order to protect its business interests. Additionally, three areas critical to litigation success will also require swift action:

First, one of the most effective remedies a company may have against a former employee who has misappropriated trade secrets or otherwise is engaging in unfair competition is a preliminary injunction. But unreasonable delay in pursuing a preliminary injunction can jeopardize this remedy.

Second, swift action in responding to a departing employee engaged in unfair competition is also important in terms of setting precedent for current employees and for judges. This is because inconsistent enforcement of a company’s rights or pursuing remedies against some employees while attempting to enforce rights or pursuing the same remedies against other employees sends mixed messages and may undercut any claim a company is protecting legitimate business interests.

Third, evidence of misappropriation and unfair competition will need to be preserved. And this evidence will often take the form of digital evidence that is easily lost through deletion or routine computer operations. Additionally, companies pursuing claims against their former employees should anticipate judges will hold them to a high standard when it comes to preserving digital evidence

The Take Away

Some may consider it to be Grinch-like (or attorney-like) to turn holiday or year-end bonuses into a negative. And while the unscrupulous individual willing to steal is the exception, it is important to consider that such former employees who have gone into business for themselves or have jumped over to a competitor pose a far greater threat than everyday cut-throat competition. This is because these former employees have intimate familiarity with the company’s business operations, services or products, pricing and marketing information, and its customers. 

But the damage done by a departing employee who is unfairly competing or has otherwise misappropriated company assets can often be avoided by taking appropriate preventive measures. And a business taking reasonable precautions, such as including noncompetition provisions in its employment agreements, protecting its trade secrets and confidential information from disclosure, and establishing and following appropriate exit interviews should greatly reduce its chances of becoming involved in subsequent business litigation or, if necessary, significantly increase its chances of prevailing.