Protect Trade Secrets From a Corporate Raid

It could be that your employees are just too good. Or it could be the economy is just too good. Either way, corporate raiding has become a mainstream business practice--and your organization may be feeling the drain.

Still, attracting employees away from a company using sheer competitive advantage is a far cry from breaking restrictive covenants or hiring to gain trade secrets. There's little to be done about the former. As for the latter, you can help prevent illegal pilfering of your employees. Louis A. Karasik of Los Angeles-based law firm Weston, Benshoof, Rochefort, Rubalcava and MacCuish LLP, explains how.

Where should human resources begin to protect against illegal corporate raiding?

First ask: Are you trying to protect people, or are you trying to protect information? Because in a corporate-raiding scenario, generally speaking you have two different issues that you face as a company. Is the other side simply taking good employees that you wish they didn't take because they're valuable people and it will hurt you competitively not to have them? Or is what you're trying to protect the information in the people's heads: company secrets, confidential, proprietary, customer information and vendor lists and those kinds of things?

Under the law you have better chances to protect the latter than the former in terms of things you can do.

On the people side, how do you stop a company from taking your good employees, assuming trade secrets aren't an issue?

That's a tough one for an employer, to keep somebody from taking people. One of the tried and true ways of protecting your people is having them sign a contract that says they agree not to go work for a competitor.

But that doesn't work in states like California and others in which these agreements, called restrictive covenants, are not enforceable. In that case, the most direct way of keeping people from going to work for a competitor is not really available.

But if an employer's state recognizes a restrictive covenant, HR should have higher-level employees sign one?

Definitely. But keep in mind it won't necessarily be in effect outside your state. Say you sign a key employee to a restrictive covenant in New York, agreeing the employee won't work for a competitor for two years. Then he or she moves to California, and in a year decides to work for a competitor. The California courts most likely won't enforce that restrictive covenant, even though it was lawful in New York.

So it's kind of buyer beware to states that have restrictive covenants: You may think you have something enforceable, but not if your employees head out to the sunny shores of California.

What should a restrictive covenant cover?

Most jurisdictions will enforce a restrictive covenant that's restricted by a reasonable time period--one or two years--and geography. You can't force a person to agree not to work for a competitor anywhere in the world--that's too broad. But a reasonable area, like the western United States, or Missouri, or Chicago, those are more like it.

You can get the employee to agree not to compete directly or indirectly in the same line of business for a specific period of time in a specific area.

What else can be done?

The other thing you can do that's generally enforceable is to have a non-solicitation clause. Ask the employee to agree that even if he should jump ship to someone else, that he will not solicit any of your employees. This is because one of the techniques of corporate raiding is to start by hiring one person, and have that person be the inside guy to recruit everyone else.

Non-solicitation clauses are enforceable. You can legally have employees agree that they will not for a period of time try to solicit other employees. As far as time period, one to two years is probably acceptable. One year for sure; two years maybe; three years is probably too much.

And always put in the contracts that your intent is for the non-solicitation agreement to be enforced to the maximum extent the court will permit. So if you have a court that will only enforce it for six months, you agree to that. That way it doesn't get thrown out entirely because the court thinks it covers too long of a time period.

If these precautions don't work, what kind of suits can be tiled?

The traditional theory raised is interference with contract. That's one of the best ones to assert: For example, if I have an employee, and we have an existing contractual relationship, you can't take actions that disrupt or interfere with my contractual relationship with my employee. You can offer him or her a job; that's OK. You can offer him or her more money; that's OK. But you can't do things that are illegal to try to disrupt the relationship. You can't tell lies; you can't create misinformation.

In one case, a competitor got hands on a company's corporate directory, and they got some information they shouldn't have had, and then they were just cherry picking; the phones were ringing down the line.

That's not acceptable?

That stuff is starting to sound more like unfair competition, unfair business practices, interfering with a contractual relationship. Those are the theories a company can assert when trying to stop corporate raiding. But it's tough. If competition is fair, and they offer an employee more money and the employee is otherwise free to go, a corporate-raiding scenario is a difficult one to litigate.

Anything else to be aware of in this area?

In one recent case, a company brought a suit against a headhunter. The company claimed the headhunter had induced an executive to break his restrictive covenant. The suit said the headhunter interfered with a contract by knowingly causing this executive to breach his contract.

That's an unusual circumstance--usually the suit is filed against the employee or the hiring company for breaching the covenant. So now it's touching the recruiter; people assisting the corporate raiding can be hit with suits, too. What's suggested by this case is these recruiters need to look at the contracts of people they're assisting and not advise them to break a contract. It's telling the recruiting market to slow down and examine their actions.

What about protecting trade secrets?

When you hire the employee, you should be thinking about things to put in the contract to protect the company from corporate raiding as much as possible. Restrictive covenants are one. But the other thing you can put in is the tradesecrets protection.

Trade secrets are always protectable. You can always keep an employee from jumping to your competitor under circumstances in which he or she has tradesecret information that he or she would be giving to your competitor. That's how Wal-Mart was able to successfully prevent corporate raiding.

What was that case about?

In the Wal-Mart vs. Amazon. corn case, Internet e-tailer Amazon.com was accused of stealing Wal-Mart's inventory system. Amazon was hiring away the people at Wal-Mart, who had sophisticated information about Wal-Mart's very good inventory controls. That's what Amazon was trying to get. Wal-Mart prevented it by presenting a case focusing more on protecting trade secrets than just employees. [Note: The suit was filed in October 1998, but the two companies settled the dispute in April 1999.]

What's an example of a good trade-secret agreement?

Be very clear that this employee is aware of trade-secret information: business strategies, customer lists, software programs. Be very comprehensive in your contract about the things you're trying to keep a trade secret.

As a company, do the things that are necessary to keep trade secrets. You have to keep them confidential; you have to instruct employees that these are trade secrets. Then you put language in your contract that if the employee should attempt to work for a company that would inevitably require him or her to give a trade secret to the competitor, that that would violate his obligation to keep your trade secrets.

These are proactive things you can do when you hire the employee to make it more difficult for him to be subject to corporate raiding later--using what is a very enforceable trade-secret protection.

What if an employee leaves anyway?

When you have an employee who leaves you to work for your competitor, and you worry about trade-secret issues, you can promptly send a letter to the new employer that says:

Dear New Employer: We understand you just hired Joe. He a wonderful fellow, but we think you should know when Joe was working for us, he was privy to trade secrets, and he made an agreement not to disclose them. Our expectation of you is that you won't do anything to put Joe in a position where he might have to divulge trade secrets to you. If that happened, we'd consider that as an improper attempt to obtain our trade secrets.

So you put pressure on that employer. You only want to stay what's true, but if you have a trade-secret protection with that employee, you've got to get that new employer on notice right away. Sometimes that will scare them off. They don't want to buy a lawsuit; they may not hire the employee after all if it's an issue. And if they do, they at least are warned about the trade secrets.

Those steps are relatively common. It's a good proactive measure.

This article is intended to provide useful information on the topic covered, but should not be construed as legal advice or legal opinion.

Gillian Flynn is the editor-at-large for WORKFORCE.

COPYRIGHT 2000 ACC Communications Inc.
COPYRIGHT 2001 Gale Group