Avoiding Common Pitfalls When Hiring an Employee from a Competitor

When you seek to hire new staff you may immediately see the benefit of hiring an employee from a competitor. After all, he or she may already have the skills or knowledge to “hit the ground running” in your company or even bring with her valuable relationships with potential customers or partners. As you can imagine, your competitor would like to keep this from happening, so is likely to use legal means to prevent it. Read this post to learn the 3 steps you should take when hiring an employee from a competitor. To manage such a risk, technology companies throughout California, particularly in San Francisco and Silicon Valley, have for sometime been using a variety of agreements with their employees as protection.  The documents help them prevent theft of intellectual property by departing employees. Specifically, these contracts impose a variety of restrictive covenants on employees that pertain to non-compete, customer non-solicitation, employee non-solicitation and non-disclosure of confidential information. In fact, across the country, increased media attention on the practice of requiring rank and file employees to sign a form of non-compete agreement, combined with the widely publicized report on non-compete restrictions issued by the Obama White House in its waning days, has led to an increase in the number of lawsuits reported nationwide. Moreover, an increasing number of states are passing new laws or considering changes to existing laws on the subject. Non-disclosure agreements in their various forms can provide a powerful benefit to your company by shielding trade secrets and confidential business information from disclosure, protecting important business relationships, and preserving your investment in hiring and training employees. The downside, however, is that recruiting talented employees to join your company has become increasingly complicated. As your competitors use similar types of restrictive covenants to prevent poaching of employees, customers, and critical business information, hiring becomes more difficult. Consequently, it’s more important than ever to use best practices when hiring new employees, particularly senior level employees hired away from competitors. Below are three basic steps your company can take to reduce the chances of a lawsuit from a competitor, or at least put you in a favorable position if litigation is threatened.

Three Steps to Take When Hiring an Employee from a Competitor

1) Ask Questions Right Up Front Some employers take a “hear no evil, see no evil” approach with respect to the type and scope of restrictions incoming employees may be subject to by their former employers. While this can serve as a technical defense to a tortious interference claim, it’s not a good overall legal strategy for several reasons.

• First, many courts will conclude that you should have asked questions about restrictive covenants right up front and your failure to do so was nothing more than willful blindness.
• Second, no matter how talented your new hire, the company will not be better off if it hires someone who is served with a court injunction shortly after joining your company. That injunction is likely to prevent him or her from working for you, and even if it doesn’t, such an injunction casts a huge pall over the entire organization and drains time, money and energy from you work force.

The lost training time, cost of finding a replacement, and the reputational effects of being defeated by a competitor outweigh the value of sticking your head in the sand and avoiding a problem until it becomes a problem. Additionally, the information your company can gain by asking questions during the recruiting process may help you develop effective legal strategies. You might learn that the restrictive covenant itself, or the facts and circumstances surrounding an employee’s work and departure from a former employer, can create legal defenses. This is especially true given that state laws vary significantly with respect to restrictive covenants, some of which limit the enforceability and scope of them. Some common examples:

• Did the former employer terminate the employee without cause or demote the employee before departure?
• Did the former employer engage in some form of illegal or unethical behavior that could form the basis of an unclean hands defense?
• Has the former employer allowed other employees to leave and violate agreements without taking steps to enforce its contractual rights?

Uncovering this type of information helps you create legal defenses or, at a minimum, establish leverage if you need to negotiate with a competitor regarding the employee’s move to your company. 2) Structure the Job Up Front to Ensure Compliance The two most basic questions when considering hiring an employee subject to contractual limitations are:

• Is the agreement enforceable, either as written or in a form in which a court is likely to modify?
• Can you hire the employee in a way that will comply with the covenants?

You can get answers to the first question by working with your lawyer to develop a list of probing questions to ask up front, as described above. You can get answers to the second question, and ensure compliance with any relevant restrictions, by structuring the incoming employee’s position in a thoughtful way. You should balance the demands imposed by any valid restrictive covenant with your business needs to avoid a lawsuit and improve the chances you receive maximum value and productivity from the new employee. Some basic ways to address restrictive covenant issues when crafting a position for a new employee include

• • changing the employee’s duties and territory so they are not engaging in the same tasks or working the same area as they did for their former employer,
  • restricting the employee from soliciting clients with whom they were in contact on behalf of a former employer,
  • having the employee sell or provide products or services that are not competitive with those offered by a former employer, and
  • ensuring the employee has not taken any trade secrets or confidential business information from its former employer.

It’s important to bear in mind that some restrictions are temporary, lasting only a year or two. If you expect your new employee will be a benefit to the organization and will spend a long time with your company, one or two years of restrictions is a reasonable price to pay to acquire a talented, hard-working person. This is a situation where long-term thinking is often rewarded. 3) Emphasize the Importance of Purging All Former Employer Materials In an era where a thumb drive can contain the equivalent of dozens of bankers boxes of documents, and the cloud allows for virtually limitless data storage, it is easy for employees to walk out the door with a massive amount of a former employer’s materials. Employees sometimes do so intentionally, but more often than not, the retention of materials is accidental. Nevertheless, it is easy work for computer forensic experts to find evidence that such materials were taken, so even inadvertent misappropriation can be costly. Accordingly, it’s critical that you emphasize to incoming employees – both in writing and verbally – that they are to complete a thorough review of their possessions and return all such materials to their former employer. The review should include their home computer, external hard drives, thumb drives, cloud-based accounts (such as contacts and documents in iCloud, Dropbox and other similar services), and the proverbial box of documents in the garage. Employees often have a limited sense of what belongs to their former employers and commonly make the “I-made-it-therefore-it-belongs-to-me” mistake. You should quickly educate incoming employees about this because retention of former employer materials can create expensive lawsuits and accompanying headaches.