Tag Archives: Employee termination

Shark Tank and College Football Non-Competes

December 17, 2015 By in Florida Non-Compete Lawyer, Noncompete, Trade Secrets In the News, Uncategorized Tags: , , , , , , , , , , , , Leave a comment

Two recent stories show why all companies should at least consider implementing non-compete agreements or other restrictive covenants.

First, here’s a link to a short interview with Shark Tank’s Robert Herjavec, talking about his first company. Unbeknown to Robert, his sales manager had set up a side business, to which he funneled half of Robert’s customers. Robert only found out because another employee broke down and told him during her exit interview.

Robert finishes the interview with good advice: “The minute you hire the first employee, you have to be careful.”

We don’t know if the sales manager had signed a non-compete or non-solicitation agreement. Such an agreement could have given Robert far better legal options.

Also, Robert trusted that his employees would be loyal. While it’s obviously good to trust your employees, it’s far better to trust and also have them sign appropriate restrictive covenants.

I also read about how an assistant coach of the Arkansas Razorbacks football team left for the University of Georgia. Bret Bielema, Arkansas’ head coach, was not happy. Apparently, his recently hired coaches signed non-compete agreements that prohibited them for coaching for other SEC schools. But the coach who had left had been hired earlier, and he did not have a non-compete.

Of course, Arkansas should have had its coaches sign non-competes from the outset. And once they decided to require new coaches to sign one, they should have at least attempted to have the older coaches sign as well.

These stories show how non-compete agreements can have value across diverse industries. It’s worth speaking with an attorney to figure out whether your company can benefit from implementing restrictive covenants, or improving existing agreements.

 

Florida Loves Non-Compete Agreements

December 3, 2015 By in Advice, Case Summary, Noncompete, Trade secrets, Uncategorized Tags: , , , , , , , , , , , , , , Leave a comment

Florida’s restrictive-covenant statute, Section 542.335, is one of the most employer-friendly in the country. A recent case from Florida’s Fourth District Court of Appeal, Transunion Risk and Alternative Data Solutions, Inc. v. Reilly, shows how this statute favors an employer trying to enforce a restrictive covenant against a former employee. A copy of the opinion can be downloaded below.

This opinion is short on facts, but the plaintiff sued the defendant for violating a non-compete agreement and sought a temporary injunction. At the injunction hearing, the trial court ruled in the defendant’s favor after the plaintiff finished its case in chief, before the defendant put on any evidence.

The appellate court reversed. First, it looked at the likelihood of irreparable injury, citing the statute’s presumption of irreparable injury that arises when the plaintiff shows a violation of an enforceable restrictive covenant. Here, the appellate court reversed because the defendant did not present evidence:

As the trial court’s ruling was issued before Reilly presented any evidence, Reilly could not have met his burden of presenting evidence overcoming the presumption.

This doesn’t sound right. A defendant should have the right to rebut this presumption simply by cross-examining the plaintiff’s witnesses. That’s what the trial court apparently thought happened here. But the presumption so strongly favors the plaintiff that this appellate court was unwilling to allow the defendant to rebut it without putting on affirmative evidence.

The trial court also concluded that the plaintiff had an adequate remedy at law. But the appellate court reversed this finding, noting that even when a plaintiff has suffered actual money damages,

the continued breach of a non-compete agreement threatens a former employer’s goodwill and relationships with its customers, and nothing short of an injunction would prevent this loss.

This finding essentially eliminates the adequate-remedy-at-law prong of the injunction analysis in restrictive-covenant cases.

Finally, the appellate court reversed the trial court’s finding that the plaintiff had not demonstrated a substantial likelihood of success on the merits. On this point, the appellate court relied on the trial court’s “implied finding” that the defendant violated a restrictive covenant. So once a court finds that the defendant breached, the plaintiff has automatically shown a substantial likelihood of success.

This case shows how Florida’s restrictive-covenant statute provides employers with the upper hand in litigation. As a result, these agreements are a very effective tool for protecting proprietary information and trade secrets. All Florida companies should consult with an attorney to determine whether to implement these types of agreements.

Transunion Risk and Alternative Data Solutions, Inc. v. Reilly

“Just Doin Blow and Erasing Evidence”

November 20, 2015 By in Case Summary, Noncompete, Trade secrets, Trade Secrets In the News, Uncategorized Tags: , , , , , , , , , , , , , , Leave a comment

As the Defend Trade Secrets Act—which would create a federal cause of action for trade-secrets theft—makes its way through Congress, critics have focused on the proposed statute’s ex parte seizure provision. In a nutshell, the statute would allow for the entry of ex parte orders to seize specifically identified repositories of evidence that are at risk of destruction.

I’ve responded to these criticisms multiple times before (see here, here, and here). The statutory protections (e.g., the party subject to the order is entitled to a hearing within 7 days) combined with federal judges’ reluctance to issue ex parte orders are, in my view, sufficient to prevent abuse.

Meanwhile, the threat of evidence destruction is real. A recent case shows how far defendants can go to allegedly destroy evidence of trade-secrets theft.

As described in Law360, a radio-controlled-vehicle company sued several former employees for violating restrictive covenants and misappropriating trade secrets, among other claims. The plaintiff filed a motion seeking sanctions against the defendants for destroying evidence.

According to the plaintiff, the defendants destroyed “scores of emails, texts, and documents that described their scheme to start at least one rival toy car and boat business.”

One of the defendants—who sounds like a real winner—apparently sent a text message talking about how he expected to get served with the complaint, saying “That’s what I’m trying to deal with now so I can’t go out, just doin blow and erasing evidence.”

In misappropriation cases, the evidence is almost always in electronic form. And it’s way too easy for defendants to destroy this evidence. While a plaintiff could seek sanctions (as the plaintiff here is seeking against the guy “doin blow”), a plaintiff would almost always rather have the actual smoking gun proving misappropriation.

The ex parte seizure provision is a powerful tool that may allow companies to preserve critical evidence.

When It Comes to Trade Secrets, Ignorance Is Not Bliss

April 24, 2015 By in Advice, Trade secrets, Trade Secrets Best Practices Tags: , , , , , , , , , , Leave a comment

Trade-secret misappropriation cases often involve bad actors who deliberately steal trade secrets. But perhaps just as frequently, trade-secrets are misappropriated by people who simply don’t know better. Many don’t even understand what a trade secret is, let alone that there are laws or other obligations prohibiting inappropriate use or disclosure of trade secrets.

I’ve personally seen this happen over and over. An employee leaves one company to join another in the same industry. He takes many of the documents he created at his old job. These documents contain trade secrets. In his mind, they are his documents. He created them, after all! And at his new job, he uses those documents on behalf of his new employer.

Now both companies have a problem. The former employer’s trade secrets are in a competitor’s hands. And the new employer has unwittingly exposed itself to significant liability.

Both companies are to blame for their problems. The first company did not educate its employees about their responsibilities and legal obligations regarding trade secrets and proprietary information, both while working for the company and after they leave. The second company failed to make sure that the new employee did not bring his prior employer’s trade secrets with him.

There are three primary tools for preventing this situation: contracts, training, and exit/intake interviews. Employees with access to proprietary information should sign a non-disclosure agreement that requires them to keep the information confidential. The agreement should provide that all information belongs to the company even if created by the employee, and must be returned upon termination of employment. And the contract should acknowledge that the employee is not bringing any proprietary info or trade secrets from her prior job.

But employees too often don’t read contracts before signing them. That’s where training comes in. During the on-boarding process, and periodically thereafter, use training sessions to reiterate your trade-secret policy.

Finally, use exit interviews to again instruct the departing employee about his post-employment obligations. Consider having him sign an acknowledgement that he has returned all info and is aware of these obligations. When hiring a new employee, talk with them up front about what info they have from their prior employer. Be sure to consult with an attorney if that discussion raises concerns.

I really believe that many misappropriation cases can be avoided by simply making sure that employees understand these issues. Too often, they do not.

 

Trade Secrets Best Practices: Exit Interviews

January 12, 2015 By in Advice, Noncompete, Trade secrets, Trade Secrets Best Practices Tags: , , , , , , , , , , , , , , Leave a comment

This is the next in a series of posts addressing best practices for protecting trade secrets and proprietary information. Today’s topic: exit interviews, which can be a powerful tool to avoid, or at least anticipate, unwanted disclosure.

An exit interview is exactly what it sounds like. When an employee is leaving your company, you have someone meet with him to discuss various aspects of his departure. There are several goals: remind the employee of his legal obligations; make sure he has returned all company information, documents, and devices; and gather intelligence about his next job to determine the risk of unwanted disclosure.

The key is to have a set process that is automatically followed each time an employee leaves. Depending on the size and structure of your company, a single person or department should be responsible for conducting the interviews. That person should work from a checklist that includes all topics that must be discussed. To develop this process, consult with an attorney who specializes in trade-secrets issues who can help customize it to fit your company’s needs.

The checklist should include, at a minimum, the following:

Review of restrictive covenants and related agreements: Give the employee copies of any agreements he signed and remind him of specific noncompete, nonsolicitation, nondisclosure, and related obligations.

Review of non-contractual legal obligations: Remind the employee of his ongoing legal obligations to, for example, keep certain information confidential. The applicable laws vary state-by-state, so make sure to consult with an attorney familiar with your state’s laws.

Review inventory of all company devices: Hopefully, you are keeping an inventory of all company devices issued to the employee. Go through this inventory and make sure he has returned all of these devices.

Company information and documents: Ask whether the employee has any hard-copy documents or electronically stored information on his personal computer, devices, and storage medium. If he does, give a set date for him to return or destroy the documents/information.

Sign acknowledgment: Have the employee sign an acknowledgment form that confirms he is aware of his legal obligations, has returned all company devices, and returned or destroyed all company documents/information.

Gather information: Ask the employee where he will be working next, and in what capacity. Also make sure you have the employee’s updated contact information.

Additionally, prior to the interview, you should work with your IT department to see if the departing employee recently accessed or used trade-secret information, particularly in an out-of-the-ordinary manner. If so, consult with an attorney, since it may be advisable to address this issue with the employee during the exit interview.

Often, this process will allow you to handicap the risk that the departing employee will illegally use your trade secrets and proprietary information. For example, be wary of an employee who refuses to tell you where he will be working next. Or an employee who refuses to attend the exit interview. In cases where you suspect something is amiss, consult with an attorney right away, since time is of the essence in these cases.

Again, there is no one-size-fits-all approach to exit interviews. Speak with with an attorney to develop the process that best fits your company’s needs.

Best Practices for Protecting Trade Secrets: Categories of Employee Contracts

November 7, 2014 By in Advice, Noncompete, Trade secrets, Trade Secrets Best Practices Tags: , , , , , , , , , , , , Leave a comment

This is the first in a series of posts addressing best practices for protecting trade secrets. I’m starting with employee/independent contractor contracts, which are one of the most important and effective ways to protect proprietary information.

Contracts are critical for multiple reasons. First, they inform your employees of their legal responsibilities. Second, it’s generally easier to prosecute a breach-of-contract claim instead of relying solely on a trade-secrets misappropriation claim. Third, a competitor that hires your former employee may be more likely to cut ties with that employee when presented with a cease-and-desist letter attaching a contract. Finally, requiring these types of agreements can help you win a misappropriation case, since their existence bolsters the argument that you reasonably protected your trade secrets (a prerequisite to establishing a trade secret under the Uniform Trade Secrets Act).

There are three general categories of contractual protections: confidentiality/nondisclosure, nonsolicitation, and noncompete. Remember that the law applicable to these contracts varies widely from state-to-state, so you need to consult with an attorney who can make sure your agreements comply with and will be enforced under the applicable law.

Confidentiality/NDA

This is the lowest level of contractual protection. It’s also the easiest to implement, since employees are less likely to push back when asked to sign a NDA. From a best-practices perspective, it’s worth at least considering whether to require that all employees sign a NDA. Even low-level employees may have access to some proprietary information. The trick is drafting the language in a way that best defines what precisely needs to be kept confidential. In particular, you need to decide whether to define “confidential information” broadly vs. specifically. Each comes with benefits and risks. Speak with a lawyer who can learn about your unique situation to determine what language best suits your business.

Nonsolicitation Agreements

A nonsolicitation agreement prohibits your employee from soliciting some or all of your current or prospective customers and/or employees once she leaves your company, for a certain period of time. These contracts offer an intermediate level protection, more than a NDA but not as much as a noncompete. It’s best to have all employees with access to proprietary customer information, or who have relationships with prospective/actual customers, sign a nonsolicitation agreement. Again, consult with an attorney who can help craft the scope of the restrictions to your company, based on the applicable law.

Noncompete Agreements

These agreements offer the highest level of protection, since they prohibit your employee from working for your competitors or in your industry, within a certain area and for a certain amount of time. Recently, there has been media coverage of corporate overuse of noncompete agreements. For example, Jimmy Johns took a lot of heat for having its sandwich makers sign noncompete agreements. This type of practice can turn off a judge.

There’s no question that noncompete agreements can be a powerful tool for protecting your proprietary information. But you should consider only requiring that key employees sign a noncompete agreement. The other contracts above may be sufficient to protect against misappropriation by lower-level employees.

You also need to think about the noncompete’s temporal and geographic scope. Depending on the law in your state, an overbroad agreement may not be enforceable. In Florida, where judges are required to narrow an overbroad agreement, I’ve seen judges soured towards employers that overreached when drafting the agreement. Generally, it’s best to limit the agreement the area in which you can prove you compete. An attorney can work with you to determine the proper scope.

Procedure

Deciding to require some or all of the above agreements, and having an attorney draft the agreements, is only the first step. Next, you need to make sure the agreements are actually signed and dated. Then, you need to make sure the signed agreements are properly maintained. You would not believe how often companies forget to have an employee sign or date the agreement. Or how often I’ve seen a company struggle to find the signed agreement when it became necessary to enforce it.

The key is to develop a protocol that can be repeated for each new employee. When the decision is made to hire a new employee, a designated person should be responsible for creating a checklist of all documents that she needs to sign. Of course, the checklist may be different for each employee. Either the person who creates the checklist or another designated person needs to be responsible for making sure all items on the list are actually completed. I recommend including on the checklist the signing, dating, and filing of all required contracts. The responsible person should sign the checklist once everything has been completed, and the checklist should be filed along with the signed documents.

If the contracts are to be signed electronically, your IT people need to set up the software so it will not allow a signature unless all mandatory clickwrap “boxes” are checked. If you are old school and the contracts are manually signed, I recommend keeping an electronic copy along with the original.

In future posts, I’ll discuss specific contractual provisions that should be included in these agreements, as well as best practices for contractual protections when dealing with third parties, like vendors, consultants, and joint-venture partners.

 

The “George Costanza Defense” to Trade-Secrets Theft

July 29, 2014 By in Trade secrets, Trade Secrets In the News Tags: , , , , , Leave a comment

Costanza

Seinfeld fans will remember the episode where George Costanza’s boss caught him sleeping with a cleaning lady on his desk, leading to this memorable exchange:

Mr. Lippman: It’s come to my attention that you and the cleaning woman have engaged in sexual intercourse on the desk in your office. Is that correct?

George Costanza: Who said that?

Mr. Lippman: She did.

George Costanza: [pause] Was that wrong? Should I not have done that? I tell you, I gotta plead ignorance on this thing, because if anyone had said anything to me at all when I first started here that that sort of thing is frowned upon… you know, cause I’ve worked in a lot of offices, and I tell you, people do that all the time.

Mr. Lippman: You’re fired!

Funny stuff. Now, a former Ford employee is using a similar excuse to explain alleged trade-secrets theft.

According to this Detroit News article, the FBI is investigating a former Ford engineer who admitted planting listening devices in Ford’s meeting rooms. These devices recorded meetings, including ones not involving the engineer.

The engineer’s lawyer is quoted in the article. He essentially gives the Costanza defense, saying that his client used the devices to help her take notes. He’s pleading ignorance on his client’s behalf. She apparently did not know that it was improper to plant hidden recording devices in meeting rooms and leave them there to record meetings she did not attend.

We have no idea whether she is telling the truth. But just like George’s boss, the FBI seems skeptical.

There’s a lesson here. You need to let new employees know their obligations when it comes to protecting your confidential information. A written trade-secrets policy, as either a supplement to or part of an employee handbook, is a great start. The policy should prohibit recording meetings or other conversations without management’s approval.

Do Noncompetes Stifle or Encourage Innovation? Should you care?

June 9, 2014 By in Noncompete, Trade secrets, Trade Secrets In the News Tags: , , , , , , , , 4 Comments

The New York Times published an article yesterday discussing the increased use of noncompete agreements in nontraditional industries. The article starts by talking about a 19-year-old college student who had a job offer to work as a summer-camp counselor withdrawn as a result of a noncompete agreement she signed at another camp:

Colette Buser couldn’t understand why a summer camp withdrew its offer for her to work there this year.

After all, the 19-year-old college student had worked as a counselor the three previous summers at a nearby Linx-branded camp in Wellesley, Mass. But the company balked at hiring her because it feared that Linx would sue to enforce a noncompete clause tucked into Ms. Buser’s 2013 summer employment contract.

The article also talks about a lawn-maintenance person, an entry-level social-media marketer,  and a hairdresser, all of whom had to sign restrictive covenants.

As more and more employers require restrictive covenants, there has been increased push-back. Against the backdrop of Massachusetts’ proposed ban on noncompetes, the article goes on to discuss arguments for and against employee restrictive covenants. Some argue that noncompetes stifle innovation:

“Noncompetes are a dampener on innovation and economic development,” said Paul Maeder, co-founder and general partner of Highland Capital Partners, a venture capital firm with offices in both Boston and Silicon Valley. “They result in a lot of stillbirths of entrepreneurship — someone who wants to start a company, but can’t because of a noncompete.”

Employers argue that the opposite is true:

“Noncompetes reduce the potential for poaching,” said Mr. Hazen, whose company makes scratch lottery tickets and special packaging. “We consider them an important way to protect our business. As an entrepreneur who invests a lot of money in equipment, in intellectual property and in people, I’m worried about losing these people we’ve invested in.”

There has always been a dispute about restrictive covenants’ effect on macro-level economic health. From my perspective, I am more concerned about using restrictive covenants to my clients’ benefit, as opposed to resolving this dispute; the policy implications of restrictive-covenant law are irrelevant to companies trying to protect their proprietary information. But the article leaves out a real-world benefit: increased certainty for employers and employees.

When permitted to use restrictive covenants, employers and employees have a better understanding of what will happen when the employer/employee relationship terminates. Employers can more comfortably share proprietary information with their employees, knowing that the restrictive covenants protect the employers’ interests. And employees know the precise limitations on their future employment, which can better inform their employment-related decisions.

Regardless, as I’ve discussed over and over, companies seeking to protect their proprietary information need to consider whether to require restrictive covenants. As long as the applicable jurisdiction permits them, restrictive covenants are often a company’s most powerful weapon to prevent unwanted disclosure.

New Year, New Trade-Secrets Issues

January 8, 2014 By in General, Noncompete, Trade secrets, Uncategorized Tags: , , , , , , , Leave a comment

Now that New Year’s is behind us, companies face one of the riskiest times of the year for protecting their trade secrets and proprietary information.

As I’ve discussed in the past, employee departures present perhaps the greatest risk of unwanted trade-secret disclosure. And many employees who want to leave wait until after they receive their year-end bonus. With this increased employee movement comes an increased risk of misappropriation.

This is a great time of year to review employee intake and exit procedures. Departing employees need to be made aware of their legal obligations regarding the company’s proprietary or confidential information. This is best done through an exit interview. Whenever possible, a departing employee should sign an acknowledgement of her obligations.

During the exit interview, the company should learn as much as possible about where the employee will be working next. This helps identify situations where proprietary information is at risk. In such situations, an attorney should be consulted. For more details about exit interviews, see this prior post.

Similarly, when hiring new employees, companies need to make sure the new employees will not be violating any restrictive covenants signed with former employers. During the hiring process, potential new hires need to be asked directly whether they have signed any such agreements. And once hired, they should confirm this in writing. If a company wants to hire someone who signed a restrictive covenant with a former employer, the company must consult with an attorney first.

If the new employee will be bound by a restrictive covenant such as a noncompete, make sure it is actually signed. (This may seem obvious, but it’s not uncommon for a noncompete agreement to go unsigned.)

By improving employee intake and exit procedures, companies can significantly reduce the risk of trade-secret misappropriation and expensive litigation.

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