When A Key Employee Resigns, Joins Your Competitor And You Have Nothing In Place To Stop Them

Nicholas Gowen

When a key employee tendered his resignation to join forces with a company’s only competitor in a highly specialized field, the company called Burke, Warren. A brief conversation revealed that standard preventive steps (confidentiality and non-compete agreements) had not been put in place. The company rightly believed it had no way to stop the defection and it found itself in dire straits.

Fred Mendelsohn and a litigation team that included Nick Gowen and Jay Dobrutsky scoured all available information and identified potential alternative grounds for preventing the former employee from shutting down the departing employee — a Disclosure of Trade Secrets claim and/or a Breach of Fiduciary Duty action, both of which can apply to claims against former officers of a company.

They immediately sought and obtained a temporary restraining order, after which the judge called for a standstill. Burke, Warren’s litigation team used this time to file affidavits, schedule depositions, issue subpoenas, and engage investigators to develop a strategy to eliminate the client’s risk. The efforts delivered: a forensic analysis raised a red flag indicating that several non-company devices had been connected to the employee’s company laptop.

With the pressure on, the parties met to discuss a possible resolution — under the condition that defendants produce the forensically identified devices. Further analysis revealed that the employee had downloaded source code and customer data from the company. This discovery allowed the company to stop the employee’s defection — all without the typical contractual provisions that would likely have been relied upon in court.

Employers big and small can benefit from lessons learned on both sides of this matter: prevention and litigation.

Prevention

Key steps should be implemented, and policies followed:

“Plan A” – Protect your company and be prepared. Employees should sign agreements that address key issues including confidentiality, handling of proprietary information and assignment of inventions as well as post-employment restrictive covenants.

Keep a “Plan B” individual within reach. This could be a trusted current employee or outsourced individual who can step in and cover the position of a departing employee who cannot readily be replaced or who has key information that can damage or sabotage the company.

All employees should be required to acknowledge receipt of an employee handbook with information that addresses these and other critical issues, including those beyond the scope of this article — employment-at-will, sexual and other harassment, professional conduct, confidentiality, etc.

Employees (especially those in key positions) should be required to execute agreements addressing issues specific to their position. While one-size-fits-all may often suffice, aspects of key positions often require specific consideration.

Measures for maintaining confidentiality of valuable information need to be taken. Although these take significant time to develop, they become critical when key employees come and go. Many companies have proprietary information that meets the definition of “trade secrets” under federal or state law.

Business operations should be tailored to prevent access to or disclosure of proprietary or trade secret information to any personnel beyond those who truly need the information to perform their work. Access and disclosure practices should be reviewed regularly on an employee by employee and/or department-by-department basis. For example, work and personal electronic devices (cell phones, computers, tablets and work/personal communication portals) should be separated so that non-essential employees do not have access to sensitive business information.

Establish clear, systematic steps to “lock out” key employees from access to work or materials vital to the departing employee, and to prevent sabotage or theft of company property. Processes should be implemented to recover all company property from the departing employee.

Litigation

What can be done if a key employee does depart your employ and, worse yet, heads to work for a significant competitor? Answers vary depending on the applicable law, employment agreements, employee handbooks and specific circumstances:

Consult with counsel and take stock of what damage might be done by the departing employee, assess how many components of the “Prevention” list are in place, and review the law applicable to the situation.

If the employee has an employment agreement, a demand letter should be sent to the employee and his new employer, advising of the agreement’s existence and requiring that these parties cease and desist. While filing suit against a competitor may or may not be strategically wise, advising the competitor that their new employee has obligations to your company may be quite valuable down the road — establishing possible causes of action.

If your employee was a high-level manager, officer or director of your business, he or she may well have heightened fiduciary obligations to your company, such that it may be illegal — even if he or she timely resigns all positions with your company — to use proprietary or trade secret information. Caveats here include the preemption provisions of various trade secret statutes and laws, and the nature of any agreements between the departing employee and the departed employer, but such leverage should not be overlooked.

Don’t forget forensics. If the company can demonstrate that the departing employee converted company property while still employed (or otherwise), the company may likely win the case — by obtaining an injunction or other relief that prevents the key employee from joining the competitor.

For more information, please contact Fred Mendelsohn at fmendelsohn@burkelaw.com / 312/840-7004, Nick Gowen at ngowen@burkelaw.com / 312/840-7088 or Jay Dobrutsky at jdobrutsky@burkelaw.com / 312/840-708