Loss of Multiple Key Employees - Prevention and Remedies

Robert J. Wood, Jr.Tuesday, October 7, 2008

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THE PROBLEM: MULTIPLE EMPLOYEES LEAVING FOR COMPETITOR

Possible legal remedies against ex-employee and new employer

Preventive measures DISCLAIMER: State laws vary greatly (must know which law governs your situation)

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PREDATORY HIRING CLAIMS

Violation of Sherman Antitrust Act Actual Monopolization (Actual Harm) Attempted Monopolization (Potential Harm)

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ACTUAL MONOPOLIZATION ELEMENTS

D’s possession of monopoly power in relevant market

Willful acquisition of such power Causation

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UNIVERSAL ANALYTICS CASE (9th Cir. 1990) Plaintiff and Defendant in aerospace technology field

Defendant had 90% of market Plaintiff had 5% of market Defendant hired 5 of Plaintiff's key employees

Employees difficult to replace; required two years to train

Court assumed first prong (possession of monopoly power) met

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UNIVERSAL ANALYTICS CASE – Cont.

Second prong: Whether talent hired not for using it but to deprive competitor

Must prove subjective intent to engage in exclusionary conduct

The "we wound UAI again" memo Court = primary motivation was to obtain productive employee

Defendant put the employees to work

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ATTEMPTED MONOPOLIZATION ELEMENTS

Predatory or exclusionary conduct Specific intent to monopolize Dangerous probability of achieving monopoly power

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AMERICAN PROFESSIONAL TESTING CASE (9th Cir. 1997)

Defendant offered BAR/BRI in 46 states Plaintiff competed in 4 states Defendant hired Plaintiff's instructor, "crippled [plaintiff's] effort to compete in Florida"

Monopoly Power = new rivals can't enter market, existing competitors can't expand

Plaintiff = Defendant's high-quality courses = entry barrier

Court = not enough

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EMPLOYEE RAIDING

Claim not widely accepted Hiring to cripple competition rather than to obtain services

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BREACH OF FIDUCIARY DUTY (DUTY OF LOYALTY)

Competing while still employed (bad) Preparing to compete (okay) Possibility of obtaining injunctive relief

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ABETTER CASE (Tex. App. 2003)

Plaintiff owned trucking fleet; Defendant was key employee

Defendant prepared to start competing company Defendant mentioned his plans to Plaintiff's customer

Defendant told Plaintiff about his plans; Plaintiff's other employees inquired

Defendant left; followed by 12 of Plaintiff's other employees

No breach of fiduciary duty

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GRESHAM CASE (Ga. App. 2004)

Defendant revealed plans to start new company to co-employees

Arranged for new employee's 401(k) loan to be re-paid

Other employees simultaneously resigned

Breach of fiduciary duty

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MISAPPROPRIATION OF TRADE SECRETS

Must tighten security/treat information as secret

Secret = not in public domain Secret = not in public domain Customer and pricing information

General knowledge Specific knowledge

Employee may use general skills and knowledge

Inevitable versus threatened disclosure

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TORTIOUS INTERFERENCE VS. NEW EMPLOYER

Departed employee bound by non-compete agreement

Inducing versus merely hiring (with knowledge of non-compete)

Claim based upon hiring at-will employee

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TORTIOUS INTERFERENCE VS. DEPARTED EMPLOYEE

Based upon solicitation of employer’s customers/employees

Difference between tortious interference and fair competition?

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REEVES CASE (Cal. 2004)

Senior partners in law firm Abruptly resigned, left no status reports Destroyed client computer files and documents

Misappropriated confidential information Solicited law firm's clients Cultivated employee discontent Offered jobs to law firm's at-will employees

Tortious interference

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FOOT LOCKER CASE (S.D. Ind. 2006)

Defendant systematically hired Plaintiff's employees

Needed the employees "Hit the competition where it hurts" memo

Court: "Offhand remarks" No tortious interference

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MEMORIAL GARDENS CASE (Colo. 1984)

Plaintiff and Defendant sold preneed funeral contracts

Defendant made random telephone calls Defendant told Plaintiff's customers they could cancel contracts

Defendant completed and mailed cancellation forms

Tortious interference Customers not at-will

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CONSTRUCTION MANAGEMENT (8th Cir. 2002) Defendant = long distance telephone company

Plaintiff = cable inspector for Defendant

Defendant sought bids for cable services Plaintiff chose difference vendor Plaintiff Defendant's inspectors: Seek employment with other companies

No tortious interference

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NON-COMPETE AGREEMENTS

Consideration required Reasonableness of scope Judicial modification No “one size fits all” agreements Need to update agreements Binding incumbent and departing employees Providing (creating) new confidential

information "Stale" information not confidential Choice of Law/Forum Selection provisions California

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NON-SOLICITATION AND NON-DISCLOSURE AGREEMENTS

Non-solicitation versus non-compete agreements

Difficulty of proving "solicitation“ Use of broader terms (e.g., "communication")

Non-disclosure agreements = more enforceable

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PRACTICAL TIPS WHEN EMPLOYEES LEAVE

Exit interviews to determine their intentions

Remind of obligations Confiscate company property Search emails

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AVOIDING RAIDING ACCUSATION

Use job postings Headhunters Obtain copies of agreements signed by prospective employees

Prevent employees bound by non-solicitation provisions from recruiting

Direct new employees to comply with agreements and not disclose information

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DISCLAIMER

State laws vary greatly Must determine law applicable to your situation