Category Archives: Non-compete agreements

DEPARTING EMPLOYEES: WHAT INFORMATION CAN THEY TAKE TO COMPETE WITH YOUR BUSINESS?

Improvements in the job market over the last several years have increased employee mobility among businesses.  As a result, I am seeing a substantial uptick in cases where employees have elected to get a “jump start” on their new jobs by absconding with confidential and proprietary information.

This article discusses:

  • The boundaries of what employees may take from their former employers when embarking on new jobs, or starting new businesses.
  • Preventive measures to avoid the theft of company information.
  • How to stop an ex-employee in their tracks when there has been a theft of confidential or proprietary information.

Image result for trade secrets

THE RULES OF THE GAME

Employees who take customer lists, marketing data or strategies, website designs, manufacturing processes, or other company information are often found to have misappropriated “trade secrets.”  A trade secret is defined as information, including a formula, pattern, compilation, program, device method, technique or process that both:

(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use.

(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

In Arizona, “misappropriation” is defined as either:

(a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.

(b) Disclosure or use of a trade secret of another without express or implied consent by a person who either:

(i) Used improper means to acquire knowledge of the trade secret.

(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.

(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

“Improper means” is defined as including “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.”

To state a claim for misappropriation of trade secrets, one need not allege that the person/party itself stole the trade secrets; it is sufficient to allege that the party is using trade secrets that it knows or has reason to know were acquired through improper means.  In other words, misappropriation is not limited to the initial act of improperly acquiring trade secrets; the use and continuing use of the trade secrets is also misappropriation.

THE FINE LINE BETWEEN TRADE SECRETS AND PUBLIC INFORMATION

A customer list may be entitled to trade secret protection when it represents a selective accumulation of detailed, valuable information about customers — such as their particular needs, preferences, or characteristics — that naturally would not occur to persons in the trade or business.  On the other hand, matters of public knowledge are not trade secrets.  The subject matter of a true “trade secret” must be sufficiently novel, unique, or original that it is not readily ascertainable to competitors.

Whether information constitutes a trade secret is decided on a case-by-case basis.  For an understanding as to how the law is applied, observe the following case rulings:

  • specific policyholder information, including amount of outstanding loans and dividends accrued, was trade secret
  • general knowledge of business and customers acquired during employment was not trade secret
  • customer list containing detailed information about customers’ “personality traits, hobbies and likes, credit history, buying habits and pricing agreements” was trade secret
  • customer list containing “pricing information and knowledge about particular roofs and roofing needs of customers” was trade secret
  • customer list containing client names, “farm description, past insurance coverage, and loss histories” was trade secret
  • customer list was trade secret when employer winnowed potential customers down to the “elite” 6.5%
  • customer list was not trade secret when compilation process was “neither sophisticated nor difficult nor particularly time consuming,” market was highly competitive, and customers did not have exclusive business relationships
  • to be protected as a trade secret, customer list must be “more than a listing of firms or individuals which could be compiled from directories or other generally available sources”
As a general principle, the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find such information constitutes a trade secret.

STOPPING WOULD-BE MISAPPROPRIATION:  AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE

The best means to protect your company’s trade secrets is not after the proverbial toothpaste is out of the tube, but rather through implementing vigorous and sustained measures to ensure the secrets are not taken in the first instance.

Contact counsel to develop a solid program to protect your trade secrets.  Among other things:

  • Have employees sign non-disclosure agreements
  • Consider non-compete and non-solicitation agreements
  • Embed in employee handbooks non-disclosure and other language regarding the confidentiality of company information
  • Protect and secure information stored in your company computers and devices
  • Monitor employees’ use of company information
  • Perform “self-audits” from time to time to ensure that management and employees have not been lax or loose with company information
  • Maintain password and information security
  • Establish procedures for on-boarding/off-boarding employees
  • Consider marking certain documents and materials as confidential

CLAIMS AGAINST EX-EMPLOYEES WHO HAVE ABSCONDED WITH TRADE SECRETS OR OTHER CONFIDENTIAL INFORMATION

In most cases it is wise to send the ex-employee, and possibly their new employer, a “cease and desist” letter.  If this proves ineffective and/or significant damage has already been done, employers can seek an injunction to stop the ex-employee from using the information and, separately,  seek damages arising from the misappropriation.

In counseling businesses as to whether it is “worth it” to file a lawsuit, I engage in an interactive process with management designed to focus on (1) the damage which has occurred to date; (2) the potential for future business losses; and (3) the risk that other employees or ex-employees will be emboldened into similar misconduct by inaction.  This cost-benefit analysis is a perfect way to understand the facts, law, and develop a solid plan going forward.

If you are interested in a methodology for dealing with any kind of contract dispute, read “How to Successfully Handle Any Type of Contract Dispute.”

For further information on contract or other employment law topics, contact Art Bourque at Bourque Law Firm.

THE 10 BEST WAYS TO PREVENT EMPLOYEES FROM LEAVING AND COMPETING AGAINST YOUR BUSINESS

The saddest thing about betrayal is that it never comes from your enemies.  Anonymous

Competition is the backbone of business in this country.  It forces companies to hire and train quality employees and to develop unique processes that provide an edge over the competition.

All too often, however, employees use their employers to extract information and training so that they can start their own business and compete.  This article shares highly effective ways to avoid getting burned by employees leaving and competing against one’s business.  While businesses can never fully prevent employees from leaving and competing, they can make it very difficult and costly to unfairly compete.

1.TREAT AND PAY YOUR TALENT WELL

A recent survey by CareerBuilder found that thirty percent of workers reported that they regularly search for job opportunities even though they’re currently employed.

What makes an employee look for another job? A previous CareerBuilder survey found that 66% percent of discontent employees cited concerns over salary and 65% said they don’t feel valued.  Others who are likely to leave their job: workers who are dissatisfied with advancement opportunities at current company (45%), workers who are dissatisfied with their work/life balance (39%), workers who feel underemployed (39%), workers who are highly stressed (39%), workers who have a poor opinion of their boss’s performance (37%), workers who feel they were overlooked for a promotion (36%); workers who have been with their company two years or less (35%), and workers who didn’t receive a pay increase in 2013 (28%).

The data provides a simple lesson for employers:  to keep employees from leaving and competing against one’s business, value them and pay them well.

2.  HAVE IMPORTANT EMPLOYEES SIGN NON-COMPETE AND NON-SOLICITATION AGREEMENTS

Even the best employers — who treat and pay their employees well — lose employees who go on to compete against them.  In Arizona, employers can effectively delay and deter that competition by having employees sign non-compete and non-solicitation agreements at the outset of employment.

Here is an article I wrote on the benefits of a good non-compete and non-solicitation agreement, versus the considerable and unnecessary downside of not having one.

3.  GUARD YOUR CONFIDENTIAL AND PROPRIETARY INFORMATION

The law protects those who protect their confidential and proprietary information.  Therefore, both your company handbook and non-compete/non-solicitation agreement should contain specific and detailed language prohibiting the improper use or dissemination of the company’s confidential and proprietary information.

4.  LEGALLY MONITOR COMPANY COMPUTERS

Monitoring computers and other devices is an effective way to (1) discourage employee theft and goofing off and (2) uncover theft or other misconduct as it is occurring and/or after it has happened.   Employee monitoring thus reduces the chance for unfair competition and, if it occurs, makes it easier to establish the misconduct.

Computer forensics experts can determine if an employee connected a device such as a removable USB storage device or if a CD was created which contained confidential data.  A true expert can even identify the make, model and serial number of the removable storage device, when it was first connected and the last time it was used.  The expert can also identify which data was deleted and often times can even recover the information. Printing a document also leaves a trail which can be uncovered and can provide key information about the theft itself. Frequently, websites visited by an employee will bring context to the theft or even constitute direct evidence.

Note:  employees should be informed at the outset of employment, or at the outset of monitoring, that monitoring may occur to, among other things:  ensure the security of company information, prevent theft, and enhance productivity.  Failing to advise employees that monitoring may occur may give rise to civil or criminal wiretapping or other claims.

5.  CELL PHONES RARELY LIE 

Cell phones travel everywhere with your employees.  Because of this, they are sometimes used for the wrong reasons — when employees secretly take steps to leave and compete against their employer.

If your company issues cell phones to employee, it may monitor them (again, after proper notice).  Because cell phones are the “preferred” device for employees to use when starting to compete, issuing phones that one can monitor during employment and inspect upon the employee’s departure is an effective way to deter and uncover misconduct.

iPhones, Blackberries (has anyone seen a Blackberry lately?), and Android phones contain information which can provide significant insight on what an employee is doing or was doing leading up to the theft of data. For example, a forensics investigation of an Apple iPhone will generally result in the recovery of 50,000 – 60,000 files, most of which the employee never realized existed or thought they had deleted. For the iPhone, the files recovered include all voicemails that were ever left on the phone, all emails ever sent or received, and data users often believe is deleted but can be recovered – including text messages, contacts, call logs and pictures. The blending of modern smart phones with GPS technology can also pinpoint a departing employee’s location at a particular date and time.

Conversely, if your company does not issue cell phones it will be very difficult to determine how the phone is being used during work time.  Also, when the employee leaves the employee will retain the cell phone and the information in the cell phone.  Equally bad, your customers and other employees will easily know how to contact your ex-employee — whose telephone number will stay the same.

In conclusion, carefully consider how cell phones can be used by your employees, whether they should be monitored, and how they will be treated upon the employee’s departure.

6. PRESERVE EVIDENCE OF EMPLOYEE MISCONDUCT

It should be standard operating procedure to have your IT department properly secure all computers and other data storage devices (cell phones, etc.) that may be necessary to assist in any subsequent investigation.  The IT department should store in a secure area any computer or electronic information storage device before anyone attempts to search or access data on the device.

Computer forensic experts can copy, evaluate, and mine data from hard drives and other electronic devices assigned to former employees where there exists a belief the employee may have engaged in misconduct. If a computer is immediately taken out of service, most computer forensic evaluations will permit the recovery of files and emails that have been deleted from even the computer’s recycle bin.

Also, the internet access history of a computer may potentially result in a wealth of information that can be used in any subsequent proceeding. As stated above, a forensic investigation can further determine if any external device was installed on the computer and, if so, what documents and information may have been down loaded and when.

7.  BE LIKE SHERLOCK:  FOLLOW THE EVIDENCE TRAIL AND BE PROACTIVE

If you suspect or uncover misconduct, follow any evidence to its logical endpoint.  This can mean, for example, that you interview other employees identified in any communications or that were close to the ex-employee; it may mean that you reach out to customers serviced by the ex-employee to ensure they are happy with your company’s services and that their business has not been co-opted; or, it may mean that you go to third parties (e.g. Verizon or Sprint) for cell phone data.

A disloyal employee should bring out the Sherlock Holmes in your business.  As in many mysteries, the evidence is often hidden in plain site.

8.  CONSULT WITH LEGAL COUNSEL

Consult with legal counsel immediately if there is a reasonable chance that an employee or ex-employee could inflict lasting harm on your company.  Experienced employment counsel should be able to quickly determine the enforceability of your non-compete and other agreements.  Counsel can also determine whether the wrongdoer has violated any statutes (e.g. the Uniform Trade Secrets Act) or whether your company has any common law claims (e.g. breach of the duty of loyalty; conversion).

Further, legal counsel can provide a company with a plan of attack, including how to gather evidence to support your claims and damages — should a lawsuit be necessary.

9.  DEMAND THAT THE EX-EMPLOYEE STOP THE UNLAWFUL CONDUCT

A demand letter is typically a letter from the company’s attorney setting forth the misconduct and demanding that it cease and that the ex-employee pay any damages that have been caused by the alleged misconduct.

It is almost always prudent to send a demand letter before filing a lawsuit. First, the demand letter may cause the ex-employee to stop the misconduct, rendering a lawsuit unnecessary.  Second, judges like it when parties try to resolve disputes short of a lawsuit.

Demand letters should be carefully drafted.  Among other things, demand letters set the tone for the dispute, reveal the party’s level of sophistication, and can be used against the drafter if there are any admissions or omissions.

Finally, consider whether to send a copy of the demand letter to the ex-employee’s new employer (unless the employee started the employee’s own business), or whether to send a separate demand letter to the new employer in which the new employer is itself implicated in the misconduct.  This is a huge decision:  on one hand it may be prudent to put all potential wrongdoers on notice, yet on the other your business may be cultivating a new enemy and a two-front war.

10.  TO SUE OR NOT TO SUE, THAT IS THE QUESTION

Oftentimes an ex-employee will ignore a company’s demand letter or impolitely respond: “pound sand!”  In this situation, a solid cost/benefit analysis is needed to determine whether to stand down or file a lawsuit.    A business owner must determine:

  • What will it cost in lost business and/or employees to allow the misconduct to continue?
  • Will inaction send a signal to other employees and competitors that the company is a pushover — thereby encouraging others to engage in similar misconduct?
  • What are the odds of prevailing in court and what will it cost?
  • Should the lawsuit include the ex-employee’s new company?
  • Might the ex-employee file a counterclaim alleging damages (e.g. for unpaid wages, breach of contract, and/or discrimination)?

The answers to these and other carefully considered questions allow a company to intelligently go forward — accepting the consequences of its reasoned decision.

CONCLUSION

There are various reasons that compel employees to leave their companies and compete.  Unfortunately, there are many schemes that less than scrupulous employees devise  to unfairly compete — including helping themselves to customer lists, downloading proprietary processes, and pirating employees and customers.   Follow this article and reduce the chances your company will be burned by one of its own.

If you have any questions regarding protecting your business from unfair competition or employee misconduct, please contact Art Bourque of Bourque Law Firm.