Slumping Economy Drives Employee Defection Business

Competition to obtain more business, sell more products and make more profits is a motivating factor that drives every business. With new sales hard to find in the present economy, retaining the jobs you do have or that you have lined up in the pipeline is at a premium. In a situation like this, the ramifications from employee defections can be crippling; i.e., years of hard work and “fair competition” can be quickly undone by a former employee who takes the benefits of those efforts to a competitor. Now is the time to make sure that you have maximized all means of protecting your client relationships and confidential information.No employer wants to invest time and money in hiring, training and developing an employee only to have that employee quit, taking with him/her valuable information and contacts which allow a competitor to, in effect, steal customers and hire away the employer’s workforce. Even in this economy, and arguably because of this economy, lawyers across the country are receiving calls from panicked clients when employees depart and begin working for a competitor. More often than not, the call goes something like this:

From the owner of ABC Construction, Inc., “My best salesperson, Darrell Departed, was recently recruited away by my competitor, Construction For Less. I just learned five minutes ago that our best account Darrell had been assigned to is leaving us and going to the competitor. I’ve heard through the grapevine that Darrell went to the customer offering lower pricing and bad-mouthing us. I just checked Darrell’s former office. Confidential files and documents are missing. After looking at his old computer, I’m also concerned that he copied some of our databases with customer information before he left. Something I found on his computer also suggests that he was diverting business away from my company to the competitor months before he resigned. I want Darrell arrested, and I want to go after Construction For Less too. What do we do next?”

While the “arrest Darrell” demand is rarely a realistic option, there are many potential avenues to pursue against Darrell and Construction For Less. The starting point for determining exactly what step to take is usually tied to whether or not Darrell had signed any type of contract with ABC Construction restricting his post-employment competitive activities. Some of the more common provisions include non-competition, non-solicitation of customers, non-recruitment of employees, confidentiality and return of property. These protections are generally referred to as “restrictive covenants.”

The laws in virtually every state have long provided limited protection for companies against theft and acts which amount to conversion of corporate property and proprietary information. That focus has expanded somewhat as the result of technological advances which have made theft of much information virtually undetectable. For example, a disgruntled employee may abscond with a company’s confidential information simply by downloading them onto a disk or e-mailing the information to a competitor. Employees and competitors may also compromise competitive information by gaining unauthorized access to computer systems, deleting data or releasing a computer virus into an employer’s operating system. Fortunately, recent federal and state laws have been enacted to address this growing problem.

Even with growing statutory protection available, simple contracts remain an invaluable tool for companies to use to protect their corporate assets in today’s business climate. As noted above, there are a variety of basic types of restrictive covenants that a business can use to protect its interests. The different types of covenants may appear together in one document, or they may appear in any combination.

In its purest sense, a non-competition provision prohibits a departing employee from competing with the former employer for a period of time after termination. The goal of this type of covenant is generally to prevent the former employee from working for a competing business even if the new company does not necessarily injure the business of the former employer. Since this is the most restrictive type of contract, it is also the one that courts most strictly scrutinize.

Non-solicitation provisions do not prevent the employee from working for a competitive business; rather, they prohibit the solicitation of specific customers. The employee is free to compete and is free to work in whatever territory he or she desires, so long as the employee does not solicit business from a specific group of customers.

A non-recruitment (or no-raiding) clause is designed to protect your employees from being raided by former employees. Your former employees know the strengths and weaknesses of your workforce. Non-recruitment covenants restrict departing employees from trying to take others with them.

A confidentially (or non-disclosure) provision usually limits the employee’s ability to disclose information learned about customers, suppliers or the employer’s operations. While non-disclosure agreements often include the term “trade secrets,” most states have a trade secrets statute that prohibits misappropriation of such information even without a contract. Because only certain types of information rise to the level of a “trade secret,” prudent companies are advised to define and protect confidential information contractually.

A return of property agreement typically states that the employee must return all company property and all documents related to the company upon termination of employment. While all employers expect their employees to return company property upon termination of employment, there is oftentimes a dispute as to what is company property and what is the employee’s property. For example, many employees may claim that their rolodex or list of business prospects is their “property,” despite the fact that such information was assembled on company time and with company resources. A return of property agreement may help an employer avoid such disputes by defining via contract what the company considers to be its property rather than the employee’s.

Unfortunately, there is no uniform federal law governing restrictive covenants. Rather, because these are contractual issues, the validity of such agreements is determined by state law. Nearly every state has unique and distinct requirements for restrictive covenants. Accordingly, a contract that is lawful in one state may be completely unlawful in a neighboring state. For a company operating in multiple states, the differences in state laws can make drafting and enforcement of restrictive covenants a challenge. Regardless of whether you operate in one state or multiple states, care must be taken to draft these agreements so they will hold up in court if challenged.

So back to the frantic call from fictional ABC Construction. What should be done next? If Darrell Departed had signed an agreement that included a non-compete or a non-solicit provision, filing a lawsuit in court asking for an injunction preventing further conduct in violation of the contractual restraints is an option. In addition to claims against Darrell, Construction For Less could be joined in the lawsuit.

Before rushing to court, many lawyers encourage their clients to write a “cease and desist” letter to see if Darrell Departed and Construction For Less will voluntarily comply with the restrictions. Oftentimes the warning letter will prompt settlement talks between the parties. A negotiated settlement might be an attractive option, particularly where the contractual provisions that would be scrutinized by the court have potential flaws. The cost-savings of avoiding a protracted legal battle are another positive factor to securing settlement terms that may be short of a homerun, but still offer sufficient protection.

What about the employee defection scenario where there are no post-employment restrictive covenants in place or where you discover that the ones in place are clearly unenforceable? The Darrell Departed hypothetical above includes other potential causes of action.

Darrell’s “bad-mouthing” to the customer might give rise to a claim for slander/defamation depending on what exactly he said. If Darrell had diverted business from ABC Construction to Construction For Less prior to his resignation, ABC Construction could pursue a claim for something called breach of duty of loyalty. If Construction For Less was involved in such misconduct, the company could be sued for tortious inducement of Darrell’ s misconduct.

Any misuse of the company’s computer system or theft of information from the computer might give rise to federal and state statutory claims for computer abuse. Taking documents and hard copy files could constitute common law conversion (basically the civil claim for theft). Use of confidential/proprietary information would support a breach of contract claim if Darrell had signed a confidentiality agreement. It is also possible that the information taken could rise to the level of a trade secret under state statutory law, which in turn would support a misappropriation of trade secrets claim.

The list could go on. The main point is that employers are not without protections when departing employees leave in a cloud of smoke and do not behave themselves after they are gone, good economy or bad. Before you find yourself in a situation like this, it would be prudent to review your existing agreements to make sure they still comply with governing law. And if you do not currently use restrictive covenants, you should consider it time to do so.

Construction Business Owner, June 2009