Football PenaltyKevin Clark of the Wall Street Journal recently wrote an article, Management Secrets of the NFL, which offered a number of points relative to running a business. 

One point that stood out related to hiring and firing decisions. Specifically, the article noted that 12 of the 32 NFL teams have hired a new coach since the beginning of 2011.

At the front of the hiring pack has been the Miami Dolphins, which have hired seven coaches since 2000. In contrast, the Pittsburgh Steelers have had only three coaches since 1969, with eight Superbowl appearances and six wins.

Employer Considerations for Hiring and Firing Employees

Fortunately for most employers, the management or mismanagement of their company is not on full display like an NFL organization or subject to the intense scrutiny from fans and supposed pundits.

Nonetheless, hiring and firing employees deserve intense scrutiny for any number of reasons that all chip-away at a company’s bottom-line. One absolutely necessary goal for any employer, however, is to make sure an employee termination does not become a public event through the filing of an employment lawsuit, which also only multiplies the depletion of a companies resources, i.e., management time for responding to the lawsuit and money to pay for the defense of the lawsuit. 

For this reason, the more employers can do to build the case for an employee’s termination, the better off it will be going forward. Here are a few considerations employers should examine with the benefit of experienced employment counsel. 

  1. Don’t recreate history; Document it the first time around. Before you decide to fire an employee, make sure that decision has been thoroughly thought through. And equally important, has the reasons giving rise to this decision been properly documented. For example, if the reason an employee is fired is because of incompetence, don’t just take the supervisor’s word for it without more. Instead, ask for documentation of the incompetence, including dates and specific details. Such documentation will go a long way to protect your company in the future if the employee challenges your decision. 
  2. Documentation and Second Chances? Documentation may also provide an important check against a manager acting arbitrarily or to assess whether it is appropriate to give an employee a second chance. My experience is that second-chances are often not appropriate. However, if an employee’s deficiencies are documented, than such documentation can be compared to the metrics your company uses to evaluate employees in order to make an informed decision. Going back to the NFL theme that opened this post, New York Giants ignored media and fan calls to fire Tom Coughlin after his first three seasons of failing to win a playoff game. Presumably, the Giants’ management kept Coughlin based on management’s own assessment of the coaching job Coughlin had done. Two Super Bowls later, keeping Coughlin seems to be a good management decision.     
  3. Smart Documentation. The building block for the preceding point is making sure managers understand the value of documentation. So an important habit to drill into managers is that if something is not written down, then it should be assumed a judge or jury will not believe it happened. The other side of the coin, however, is that written words can’t be changed. So be sure you and your managers carefully consider how a report may be interpreted down the road, especially by a slick lawyer looking to make his or her client’s case.  

Conclusion

The goal for business owners their management and HR professionals should be the same as their employment lawyers when it comes to an employee termination: Imagine the worst-case scenario and then work backwards to prevent it. In terms of employee terminations, a worst case scenario is an employment discrimination lawsuit for a wrongful termination. 

But bad is never good until worse happens (Danish Proverb). And worse happens when an employment discrimination lawsuit is now being decided by a jury who is listening to spotty or inconsistent witness testimony with no supporting documentation to backup your company’s prior decision.

For more information about assessing your company’s hiring and firing procedures, management training, or responding to a termination, contact Jason M. Shinn, who is a Michigan licensed employment lawyer who regularly assist companies and individuals in responding to employment law compliance and representing in employment related lawsuits.  

GoldFish-Transition.jpgCompanies routinely require employees to sign noncompete agreements. But what happens to these employee noncompete agreements if your company offers that same employee stock options or other opportunities to acquire an ownership interest in the company? 

As explained below, when an individual transitions from employee to owner or plays the dual role of employee/owner, companies need to carefully examine the impact on applicable noncompete and stock-ownership agreements in order to avoid unintended consequences. 

Individual Going from Employee to Owner Under Stock Option Plan.

Consider for example a recent Michigan Court of Appeals decision involving a one-time employee in a Michigan closely held corporation. The employee, Quinlan, obtained company stock pursuant to an employee compensation plan during his employment with Landscape Forms, Inc. 

The stock purchase agreements Quinlan entered into contained noncompetition provisions restricting Landscape shareholders from competing with Landscape for a five-year period after ceasing to be a shareholder. After his employment ended, Quinlan was permitted to retain his stock.

An eventual lawsuit between Quinlan and his former employer was filed that involved a number of different legal issues. One such issue relevant to this article and that should cause business owners to carefully examine their current employee stock ownership programs involved the enforceability of the of the noncompete agreement that Quinlan had entered into as part of his stock acquisition.

Differences Between an Employee Nonncompete Agreement and a Shareholder Noncompete Agreement.

Returning to the Quinlan case, the employee contended that the noncompetition agreement he previously entered into was not enforceable under Michigan’s noncompete statute (MCL 455.774a). One particular advantage that employers have under Michigan’s noncompete statute is that if an employee noncompete agreement is found to be unreasonable, a court may “limit [an] agreement to render it reasonable in light of the circumstances in which it was made and specifically enforce the agreement as limited” after it has been revised by the court.However, for various strategic reasons I do not recommend employers relying on a court to revise an unenforceable noncompete agreement. 

d MCL 

The Court of Appeals, however, disagreed with the the trial court’s finding that the noncompetition provisions were employer-employee agreements and therefore specifically governed by Michigan’s noncompete statute. Instead, the Court concluded that the stock purchase agreements containing the noncompete restrictions were made between the company and the shareholders – not the company and employees. Accordingly, Michigan’s noncompete statute was not applicable and the lawsuit was returned to the trial court to evaluate certain issues relative to the noncompete agreement, including when Quinlan ceased being a shareholder.

The Take-Away for Employers and Employees

For Michigan business owners interested in offering employees with stock options or other deferred compensation, many issues must be considered. In addition to the financial issues, business owners need to focus how such options may affect personnel policies and employment agreements, including noncompete agreements.

As the above case illustrates, employee noncompete agreements and shareholder noncompete agreements will be treated differently. Based on experience, such differences can provide employers with significantly more advantages than may otherwise be available under an employee noncompete agreement and correspondingly significantly more restrictions for the individual.

For these reasons, both employers and employees should consult with an experienced noncompete and business lawyer before entering into an employee stock option or ownership agreement. Feel free to contact Jason M. Shinn for information about these issues. 

Line of Questions.jpgThe Detroit Free Press released its fifth annual Top Workplaces to Work finalists of Metro Detroit employers. Congratulations to all the 2012 finalists.

One point that jumps out from the results of the employee surveys submitted (my understanding is that these surveys are submitted anonymously) is the critical value employees placed on cultivating a meaningful “connection” between them and their company. Specifically, employees placed high value on feeling appreciated at work and confident about their future. They also value work that makes them feel like part of something meaningful.   

It is noteworthy that these concerns received higher priority by employees than pay and benefits, managers, and work expectations. 

Based on my employment law and trial experience, however, these results are not entirely surprising. Even in bitter litigation where one side is fighting “tooth and nail” for monetary damages, it is common for a scorned former employee to simply want to “tell their story” about being mistreated at the hands of management. And it is equally common defending such claims – with all the benefit of hindsight – to see at any number of points how a particular lawsuit could have been avoided or, at least, the chance minimized if some degree of common sense or attempt to meaningfully resolve an issue by management.

In this regard, one of the best business books I’ve read was by written by Ari Weinzweig of the Zingerman’s family of restaurants in Ann Arbor. In it, Mr. Weinzweig included his view on the proper management of employee relations:  

Here at Zingerman’s we’ve always taken the approach that we were going to treat people who choose to work with us as if they were volunteers … Ultimately people want to feel that their work makes a positive difference, that their extra efforts are noticed; that they can improve the quality of their lives and the lives of those around them through their work … If you want the staff to give great service to customers, the leaders have to give great service to the staff.

A Lapsed Anarchist’s Approach to Building a Great Business. It is apparent to anyone that has been to any of the Zingerman’s restaurants that the business practices what it preaches.  

I’m not naive enough to walk away completely from an employment law and litigation mantra of “planning for the worst, while hoping for the best.” But as employers and employees head into the Holiday season, especially Thanksgiving, adding Mr. Weinzweig’s approach to employee relations to your employee relations toolbox might be a good thing for the bottom line and for managing employment law risks in the long term.  

Shooting Self in Foot.jpgA recent Michigan Court of Appeals decision extended an employer’s liability for a retaliation claim by employees exercising a right afforded under Michigan’s Worker’s Disability Compensation Act (WDCA) even though the employee had yet to file a petition under the act.

This case is also a reminder that employers and their HR professionals need to fully evaluate the facts and circumstances giving rise to an adverse employment decision before making a decision that could have the unintended consequence of giving rise to a retaliation claim. 

Overview of Retaliation under Michigan’s Workers Disability Compensation Act.

Before getting into the specifics of this case, and for the history buffs out there, going back to 1976, Michigan courts have held that terminating an employee in retaliation for having filed a worker’s compensation petition is against Michigan’s public policy. Sventko v Kroger Co, (1976). 

In 1982, the Michigan legislature essentially added this court ruling and policy by amendment to the WDCA, which specifically prohibits an employer from discriminating and retaliating against an employee for pursuing remedies under the WDCA.

Unlawful Retaliation and Michigan’s Workers Disability Compensation Act.

Fast forward to this past October where a Michigan Court of Appeals panel in the case of Cuddington v United Health Servs, (Oct 25, 2012), held that the filing of a petition for worker’s compensation benefits is not a prerequisite to all retaliatory discharge claims against employers under the applicable statutory provision (MCL 418.301(13)).

Instead, the Cuddington Court reasoned that an employee who exercises a right afforded under the WDCA and is later terminated or discriminated against in retaliation for exercising that right, may maintain a retaliation action under the WDCA.

In the Cuddington case, Raymond Cuddington had been employed by the employer for 12 years. He was injured in an automobile accident while making a delivery for his employer. While EMS were called to the scene, Mr. Cuddington elected not to go to the hospital that night. However, the next morning soreness and pain set in and Mr. Cuddington sought medical treatment and called-off work.  

In response to this call-off, the President of the company and his wife (also an officer of the company) called Mr. Cuddington to ask why he was not at work. The President’s wife then advised Mr. Cuddington over the phone that:

You ain’t hurt, if you were hurt you would have went in the ambulance to the hospital last night. If you don’t come into work, you are blanking — blanking fired.

In spite of the employer’s eloquent and apparent termination notice, Mr. Cuddington reported back to work two days after this doctor’s visit, but he was told that he had been terminated. Following this termination, Mr. Cuddington filed a claim for worker’s compensation benefits and subsequently commenced this action for retaliatory discharge pursuant to MCL 418.301(13).

Unlawful Retaliation for Exercising Rights Under Michigan’s Workers Disability Compensation Act.

While the employee had not filed a Worker’s compensation claim at the time of his termination, Mr. William Webster, an attorney who specializes in representing individuals in bringing Worker’s Compensation claims, explains that a finding of retaliation by the employer is perfectly consistent with Michigan’s Worker’s Compensation Act. Specifically, he notes:

Employees and employers engage in a trade-off under the Workers’ Compensation Act. Employers enjoy immunity from suit by injured workers in exchange for providing workers’ compensation. Employers in essence ‘earn’ this immunity from suit by providing timely benefits to injured workers without regard to fault. Those benefits include medical treatment, wage loss benefits, and possible vocational rehabilitation. If an employee is terminated or otherwise suffers adverse employment action for trying to obtain one of those limited, statutorily defined benefits, then a retaliation claim is available to the aggrieved employee.

In sum, because the employee had sought a right provided under the WDCA – medical treatment – and was allegedly terminated for pursuing that right, the employee had a claim for retaliation even though the employee had yet to file a Worker’s compensation claim.  

The Take-Away for Employers

Retaliation and wrongful discharge claims may arise under any number of theories that may not be immediately apparent at the time an employer makes an adverse employment decision. And while many employers understandably would completely agree with Yogi Berra’s observation that “Prediction is very hard, especially about the future,” it is important that employers and their HR professionals fully consider all the facts and circumstances before taking action in order to eliminate potential retaliation claims. 

According to Mr. Webster, this is especially important in the area of worker’s compensation claim because of recent amendments to the Workers’ Compensation Act that took effect in December of 2011, which altered the manner in which wage loss benefits are calculated. 

Playbook.jpgRegardless of your political preferences, President Obama’s election victory offers an important lesson that can be extended to your company’s protection of trade secret intellectual property.

In sports – similar to politics or business – a critical strategy for success is the concept of “protecting your home turf.” In this regard, after the dust settled on the voting, one point stood out: President Obama and his campaign team was able to hold onto all of the states they won in 2008 with the exception of two (Indiana and North Carolina). In other words, President Obama was able to essentially protect the real estate he won in 2008 on his way to a second-term as the President. For companies, the same concept should extend to their operations when it comes to protecting trade secrets. 

What Actions Can Employers Take to Protect Trade Secret Information?

Often times trade secret misappropriation can be entirely avoided or, at least, the likelihood significantly reduced by taking appropriate preventive measures to protect such assets. Developing those measures should be tailored to your specific facts and circumstances and in collaboration with an experienced trade secret lawyer. But the following topics provides preliminary precautions every business should consider to minimize its risk of experiencing or being accused of trade secret misappropriation:

  1. Perhaps the single most important component of a trade secret protection program involves educating employees, especially those in management, marketing, and sales, about the importance of protecting trade secret and other confidential information. By emphasizing the value of the information to be protected as it relates to the business provides a solid foundation for these constituents to understand the context and rationale for why trade secret precautions are necessary and should be taken seriously.
  2. The second most important component of a trade secret protection program is identifying what protections are available to protect the information the first place. In this regard, your company’s IT professional or professionals play two critical roles in protecting trade secrets: First, IT provides the first line of defense in identifying appropriate security measures, as well as identifying areas where security improvement is needed. Second, IT professionals often will be the “first responders” in terms of identifying tell-tale signs of potential trade secret theft in terms of unusual download activities and access activities. Accordingly, will often be the single best resource for implementing procedures for monitoring and responding to potential misappropriation issues.

Why Should Companies Protect Trade Secrets?

If your company needs convincing of the value in protecting trade secrets, this Blog previously reported that trade secret misappropriation in the U.S. translated into an estimated $45 to $300 billion in annual losses. 

And for more specific examples of the costs of trade secret misappropriation, consider the following:

And you don’t have to be a GM in order to have trade secrets worth protecting. In fact, smaller and medium-sized businesses routinely have “know how,” pricing, marketing, or customer data that has been acquired over the years that has immense value to the business, which would be detrimental if a competitor were to acquire such intellectual property. 

Conclusion.

A company following appropriate trade secret precautions has the beginning point for increases its chances successfully suing to protect its trade secrets and, therefore, maintaining its competitive advantage in the market place.  

Contact Jason Shinn for more information about such precautions, including drafting noncompetition provisions in employment agreements to prevent employees from starting and using trade secrets in a competing business; (ii) having appropriate security measures to protect trade secrets and confidential information from disclosure; and (iii) having a comprehensive employee exit/termination procedure intended to prevent trade secrets from walking out the employer’s front door when employees leave.

DIY InstructionsThe storm that has devastated the U.S. east coast has been dubbed “Frankenstorm” because of the devastating effect of a number of separate natural conditions coming together to create a monstrous “super storm.”  

While with less devastation and real-life danger, employers often experience their own employment storms as a result of stitching together various employment agreements in a “do it yourself” approach to managing employment issues. Certainly businesses can’t be faulted for trying to limit their operational expenses, but too much cost-cutting may end up hurting the business in the long run. 

Take for example a noncompete dispute matter my law firm recently handled:  Specifically, we had the opportunity to take advantage of a “Frankenstein-like” HR strategy to challenge an employer’s noncompete agreement and reach a resolution that favored my sales representative client.     

Generally speaking, the employer’s new employment hire package contained two separate employment related provisions: One provision of the agreement contained a boiler-plate noncompete restriction. It was discovered that this noncompete provision actually came from the employer’s out-of-state supplier and who knows where it came from before this.  

The other provision of the employment agreement contained a 90 day probationary period. The agreement and both provisions, however, had not been reviewed by legal counsel for the employer.

This failure explains why the two provisions – the probationary period and noncompete provision – conflicted. So setting aside the legal sufficiency of both, the real benefit for my client was that in piecing the two agreements together there was a solid argument that one provision negated the other. 

Free Employment Law Forms: Be Careful to Avoid You Getting What you Pay for.

The problem for the employer began and ended with its employment offer letter that provided in part “Either the employee or [employer] may terminate the employment within the introductory period, without consequences …” 

So the argument to be made was as follows: To give full effect to the employer’s provided agreement that if the individual’s employment was terminated within the 90 day probationary period it would be “without consequence,” required that the noncompete would also be of no consequence. 

The end result was that the discrepancy created by the employer’s documents was enough to negotiate a favorable resolution for my client, including voiding the employer’s noncompete provision calling for a year post-employment restriction and 60 mile restriction. 

The Take-away for Employers

Certainly companies have easy access to information over the Internet or through other, non-legal sources that can be used to prepare employment-related contracts, including offer letters and noncompete agreements. If this is the route your company chooses to take, at a minimum, companies should verify that any non-attorney drafted employment forms are valid for your state, are current, and are legally sufficient for your business needs and valid in your company’s jurisdiction. 

But taking a “DIY” approach as your company’s employment/HR strategy is certainly without risks as demonstrated by the above example.  As the above example illustrates, it is likely that had the employer’s agreement been properly drafted by legal counsel, the employer would have ended up with what it intended; an enforceable noncompete restriction that protected the employer’s reasonable competitive business interests by limiting its former sales representative from working in the specified geographical location for one year.

For more information about how noncompete agreements can protect your business against unfair competition, see Locking Down Trade Secrets Begins with Enforceable Noncompete and Nondisclosure Agreements or contact attorney Jason Shinn. 

iStock_000018270897XSmall.jpgCan you, as a Michigan employer, encourage your employees to vote for a particular candidate or ballot proposal? If so, how far can you go in trying to “persuade” employees to vote consistent with your company’s positions?

The short answer to these questions is that Michigan law places certain restrictions on employers when it comes to encouraging employees to vote for employer approved candidates or measures, but employers have significant leeway short of violating these restrictions. 

Mr. Romney to Employers – Nothing illegal about getting employees to vote for me.   

In a conference call hosted by the conservative-leaning National Federation of Independent Businesses, Mitt Romney implored employers to encourage their employees to vote for him for President. Specifically, Mr. Romney said:   

I hope you make it very clear to your employees what you believe is in the best interest of your enterprise and therefore their job and their future in the upcoming elections. Nothing illegal about you talking to your employees about what you believe is best for the business …

To make sure there was no confusion who Mr. Romney believed had employers’ best interests in mind, he further explained that President Barack Obama’s policies have hurt employers with “an anti-business, anti-job agenda.”

Can Michigan Employers Encourage their Employees to Vote a Particular Way?

Regardless of what political leanings you or your company has, before following Mr. Romney’s direction, Michigan employers need to carefully understand what can and cannot be communicated to employees when it comes to making voting recommendations. This is because Michigan law specifically prohibits an employer from communicating threats – direct or indirect – of discharge for the purpose of influencing an employee’s vote.

The specific Michigan restriction against employers trying to persuade employees to vote a particular way reads:

A person shall not, either directly or indirectly, discharge or threaten to discharge an employee of the person for the purpose of influencing the employee’s vote at an election.

MCL § 168.931. 

While Mr. Romney did not ask employers to threaten employees with termination or other discipline in order to win their votes, other employers have made headlines for warning workers of anticipated bad consequences if they don’t vote in favor of Mr. Romney specifically and Republicans generally.

Should Michigan Employers Encourage Employees to Vote a Particular Way? 

Aside from Michigan’s statutory restriction against employers trying to persuade employees to vote a particular way through terminations or threats of terminations, employers have their own free speech rights.

In that regard, employers certainly have broad leeway to say what they want about a particular candidate or ballot proposal, including strongly suggesting that employees vote for candidates and measures that employers support. And to a certain point, it is good business strategy to make sure employees understand the issues. Personally, I would rather have employees learning as much about a candidate or ballot measure to make an educated decision before actually casting a vote.

However, before pursuing this strategy, it is important to understand what can and cannot be done in promoting employee voting. Additionally, there are other Michigan and federal election related laws that employers will want to comply with, which will also need to be addressed. To discuss these and related employment law issues, contact Jason Shinn at Shinn Legal, PLC.    

Medical Marijuana.jpgThe issue of how marijuana should be classified is set to be heard by a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit next week.

This issue is important for employers and employees because of the downstream impact it could have in relation to the use of medical marijuana by employees under various state laws.  

In this regard, this Blog previously reported in April 2011 that approximately 63,735 Michigan residents had registered to use marijuana for medical purposes under Michigan’s Medical marijuana statute. Nationally, it is estimated 16.7 million U.S. residents currently use marijuana, according to the most recent federal surveys. 

The Current Status of Using Marijuana for Medical Purposes 

Under federal law, marijuana is presently classified as an illegal schedule 1 drug. Schedule I drugs, which also include  heroin, are determined not to have any current acceptable medical use. 

The lawsuit challenging this classification seeks to compel the federal government to redefine how marijuana is classified and to open the regulatory doors for medical use. 

The Current Status of Medical Marijuana Use in the context of the Employment Relationship

For Michigan employers and employees, the most recent announcement as to how medical marijuana will be treated in the workplace was provided on September 19, 2012, when the U.S. Court of Appeals for the Sixth Circuit held that a private employer may fire an employee who test positive for medical marijuana in violation of the employer’s drug use policy even if that employee has complied with Michigan’s Medical Marihuana Act.

In other words, the decision arising out of Casias v. Wal-Mart Stores, Inc., makes clear that medical marijuana users are not a protected class in the context of private sector employment. 

What Changes Could Employers and Employees Expect if Marijuana’s Classification Changes?

Personally, I think it highly unlikely that the present challenge to the classification of Marijuana as a schedule I drug will be changed. But it certainly could make things very interesting for both employers and employees if this change were to occur.

As this Blog previously hypothesized, it would open the door for compelling legal arguments that the use of marijuana for medicinal purposes may be a “reasonable accommodation” under Americans with Disabilities Act (ADA) or its Michigan state counterpart Persons with Disability Act.

For example, under the ADA anyone who is currently using drugs illegally is not protected by the ADA and may be denied employment or fired on the basis of such use. Further, the ADA does not prevent employers from testing applicants or employees for current illegal drug use, or from making employment decisions based on verifiable results. But what happens if marijuana is no longer an illegal drug? Does this mean an employer would have to accommodate an employee who is authorized to use medical marijuana? Maybe. But then again, if my aunt had certain physical features, she would be my uncle.

Unraveled.jpgA fantastic, but often overlooked movie is True Romance. The movie stars Christian Slater whose character, Clarence Worley, delivers the following line:

If there’s one thing this last week has taught me, it’s better to have a gun and not need it than to need a gun and not have it.

This line should also be in the mind of every employer when it comes to using employee noncompete agreements. A recent decision by the Michigan Court of Appeals where the court sided against the employer in a dispute between it and the former employee reinforces this point. This decision also provides important insight to individual employees for avoiding liability for improperly competing against their former employers.   

Employee is Hired. Employee Departs. But where is the Noncompete Agreement? 

In Michigan One Funding, LLC v. MacLean, the individual employee was employed as Michigan One’s president, but shortly thereafter resigned to leave for a competitor. 

While employed, Mr. McLean had signed an employment agreement requiring, among other items, that he return all of the company’s property upon termination of his employment. Significantly and ultimately to the detriment of the former employer, Mr. McLean did not enter into any noncompete agreement.

If You Are Trying to Prevent a Former Employee From Working for a Competitor, Creative Legal Theories May Pay the Price of Admission to get into the Courthouse, But without a Noncompete Agreement, Don’t Expect to Stay Too Long.  

Shortly after Mr. McLean’s departure, his former employer filed a lawsuit to obtain a preliminary injunction to prevent him from working for a competitor. However, because there was no noncompete agreement in place, the former employer was left to cobble together the facts and circumstances into various claims, including conversion, unjust enrichment, and a violation of the Computer Fraud and Abuse Act. The Court was not buying this and found that the plaintiff employer simply did not have any proof that its former employee had actually stolen or used any of its confidential information.

In reaching this decision, the court rejected the former employer’s argument that because its competitor’s business actually increased after the former employee’s arrival, there must have been a disclosure of its confidential information. But the court found, again, that there was no proof of any causal relationship between the increase business and claimed disclosure. Accordingly, the court ended up dismissing the employer’s lawsuit, which was affirmed on appeal.    

Lessons Learned For Employers – It is Better to have an Enforceable Noncompete Agreement and Not Need it than Need a Noncompete Agreement and Not Have it.  

For employers, the shortest distance between preventing a former employee from going to a competitor and unfairly competing is an enforceable noncompete agreement. This is because supporting such a claim in a lawsuit is significantly streamlined and an easier preposition rather than resorting to creating a Frankenstein-like amalgamation of legal theories like those relied upon above.

Additionally, having a noncompete agreement means that employers avoid – or at least put off – having to “put up or shut up” in terms of convincing a court your company should be able to prevent an individual from working for a competitor. In other words, the court above picked apart the former employer’s claims at the begninning of the litigation because there was little to no evidence of disclosure. 

In contrast, with a noncompete agreement, an employer’s proof is much more straightforward: Did the employee sign a noncompete agreement; Is that noncompete agreement enforceable; and Did the former employee breach the noncompete agreement? This analysis is intentionally simplified and omits a number of elements to be addressed in a noncompete lawsuit, but it illustrates the entirely different and employer-friendly analysis that a court will likely engage in.

Also in terms of unearthing evidence, it can be an expensive up-front cost because of the frequent need for computer forensic examinations to show the former employee took and used trade secret or confidential information to unfairly compete. Based on our law firm’s experience, in the Metro Detroit market these examinations can run a couple thousand dollars per PC/laptop, which excludes attorney involvement time for reviewing the results making them an expensive gamble for employers. And without a noncompete agreement, an employer is left to double down on the bet that some digital dirt will be found.

In the case under discussion, the parties actually discussed and Mr. McLean agreed to submitting his personal computers and storage devices to a computer forensic examination. It is also noteworthy that this forensic examination did not take place due to no fault of Mr. McLean. In other words, the employer seemed to be the reason for why this computer forensic examination did not take place. 

Lessons Learned for Employees – Don’t Get Into a Noncompete/Unfair Competition Dispute in the First Place, but in any event, Plan for the Worse.     

For individuals, Mr. McLean appears to be a text book example of how to leave one employer for a competitor.

First, Mr. McLean returned all files and information that he had access to during his employment. 

Second, he also confirmed that he was in compliance with the terms of the employment agreement in that he had returned all of his former employer’s information.

Third and most importantly, Mr. McLean’s representations appeared to be truthful, especially in light of his agreement to make his home computers and portable storage devices available to a court appointed computer expert for a forensic inspection.  

Fourth, prior to his resignation, Mr. McLean did delete a number of computer files (416 to be exact) consisting of old work files that were outdated work product. This deletion, however, was in compliance with whatever policies his former employer had in place and the files were retrieved by the former employer’s IT personnel.

In this regard, it is important for departing employees to understand and comply with whatever computer policies an employer has in place. It is also important not to take extraordinary efforts to circumvent those policies, which may raise suspicion. For example, while Mr. McLean did delete files, he did so without using any sort of software deletion tool to irretrievably delete those files.         

Conclusion 

Certainly the steps taken by Mr. McLean did not insulate him from a lawsuit. But that lawsuit was ultimately dismissed in his favor, which is the next best result.

This Blog has written extensively about claims under the Computer Fraud and Abuse Act (see also this link) arising in the employment relationship. For more information about noncompete agreements and court actions for breach of a noncompete agreement. To discuss your specific noncompete agreement questions, contact Jason Shinn, whose law firm specifically focuses on noncompete law and litigation. 

Safe and Barbwire.jpegLast week I attended the State Bar of Michigan’s Information Technology Law Section Seminar, Core Legal Issues in a High-Tech Business World. It was a great overall day of presentations.

One presentation that stood out from a business owner’s perspective, however, was given by attorney Leigh Taggart – Protecting Software Trade Secrets.

Trade Secret Misappropriation by the Numbers: Another Thing to Keep Employers Up at Night.

Mr. Taggart discussed a survey about trade secret litigation that covered 394 federal district court cases with written opinions issued between 1950 and 2008. The numbers further break-down as follows:

  • The number of federal trade secret cases doubled between 1988 and 1995 and doubled again 1995 to 2004;
  • With respect to trade secret misappropriation, 90% of misappropriators were known to trade secret owner: Employees were involved in 59% of trade secret misappropriation claims and business partners made up 31% of trade secret misappropriations; and
  • When it came to what law applied, Michigan trade secret law was applied in 6% of the federal court cases, which was only behind Illinois (11%), New York (10%), and California (8%).

Significantly, when state court cases (appellate courts, not trial court decisions) were analyzed – 358 cases between 1995 and 2009 – the number of known misappropriators was similar (93%), but employees made up 78% of the misappropriation claims and business partners 15%.

Estimated $45 to $300 billion in annual losses due to
trade secret misappropriation

According to Mr. Taggart’s presentation, these misappropriation numbers translate into an estimated $45 to $300 billion in annual losses. 

Next Actions Employers Should be Taking to Protect Trade Secrets

For me, as well as most employers, the number that stands out is that employees are the biggest threat when it comes to misappropriation claims. Accordingly, two critical issues that employers should be addressing:   

The first line of defense in trade secret protection is using smart, well-drafted employment agreements, that contain noncompete agreements and nondisclosure provisions. Such agreements are certainly a “best practice,” but they also provide significant strategic value when it comes to trade secret litigation.

Specifically, a breach of contract claim will more likely be easier to prove than a trade secret claim. And once a breach of contract claim is established, it is much more likely that a trade secret claim will also be successful.

The second benefit provided by appropriate employment agreements, such as noncompete and nondisclosure agreements is that it is an easy, objective means to show that the employer has taken reasonable steps to protect against improper disclosure of the alleged trade secret.

For employees, especially those with entrepreneurial goals for starting their own business, it is important to understand the scope of their contractual obligations before taking steps to start-up their business and compete against their prior employer.

This analysis begins with any noncompete or nondisclosure agreement signed by the employee and what restrictions are in place. It is equally important to evaluate whether the noncompete or nondisclosure agreement will likely be enforceable. For more information on these issues, see Are You Shooting Yourself in the Foot by Making this Common Mistake Before Starting Your New Business?

For more information about Michigan trade secret law or the drafting noncompete agreements or noncompete lawsuits see My former employer can’t prevent me from working, right? Dissecting the Enforceability of a Noncompete Agreement or What Happens When a Noncompete Agreement is Violated? A Blueprint for Noncompete Litigation. Also, contact Jason Shinn with any additional questions.