November 21, 2014 Articles

Protecting Your Business Against Rogue Employees

How can you limit the damages of a former worker?

by Aaron Krauss

The call comes in, usually on a Friday afternoon. A client says that a key employee just resigned, with no notice. When your client tells the IT department to shut down the (now former) employee's computer access, the IT department says it was shut down the day before when the now-former employee reported that her company-issued laptop had been stolen out of her car. Aside from canceling your weekend plans (and asking your client to forward a large retainer), what can you do?

Hopefully, your client will have followed your earlier advice to have the key employee sign a restrictive covenant. If your client has done so, you at least have a decent chance (depending, of course, on the facts and circumstances and the jurisdiction in which you find yourself) of being able to buy your client some time before it must compete with its former employee. Even more hopefully, your client will have taken steps to protect its trade secrets. If you can prove that the now-former employee took trade secrets with her, you should be in a position to obtain an injunction and possibly money damages. Although the lack of a restrictive covenant or a misappropriated trade secret will make it much harder to protect your client, it is possible that you will be able to assert an unfair competition or tortious interference claim. In any of these events, you will have a great deal of work to do.

Restrictive Covenants
Restrictive covenants, as the name suggests, restrict an employee's ability to compete after he or she quits. Restrictive covenants fall into two general categories: noncompetes and nonsolicits. Noncompetes must be reasonably limited in both time and geographic scope. See Nordetek Envtl., Inc. v. RDP Techs., Inc., 677 F. Supp. 2d 825, 839 (E.D. Pa. 2010). They must also be limited as to industry.

Noncompetes. There is no hard-and-fast rule as to how long a noncompete can last. Most courts seem to accept noncompetes lasting a year. Unless the noncompete was imposed in connection with the sale of a business (in which case courts tend to enforce noncompetes for longer periods of time, especially if the consideration for the sale of the business is being paid out over time), few—if any—courts will enforce a noncompete beyond five years. The "sweet spot" is probably between one and two years, but the length of time a court will find reasonable for a noncompete is often dependent on the level (and salary) of the former employee. A court will be loath to enforce a noncompete that would likely result in an employee's family being "out on the street." A court is therefore more likely to enforce a noncompete—and for a longer period of time—against a highly paid, high-ranking employee. Although the court will almost certainly phrase its decision in terms of protecting the "legitimate interests of the company," the (former) employee's resources undoubtedly come into play.

Why, you ask, should you be worried about how long a noncompete will last when you are "only" trying to get your client immediate injunctive relief? Because some courts will refuse to enforce a noncompete if the court thinks the duration of the noncompete is excessive. Although courts can "blue pencil" a noncompete, and only enforce it for the length of time the court believes is necessary to protect the former employer's legitimate interests, see, e.g., WellSpan Health v. Bayliss, 869 A.2d 990, 996 n.2 (Pa. Super. Ct. 2005), no client wants to seek an injunction knowing that it will have to throw itself on the mercy of the court to "reign in" an otherwise unenforceable provision.

In contrast to the length of a noncompete (as to which the duration enforced by courts seems to have decreased), decisions in the "Internet age" seem to be more accepting of broad geographic scopes. A portion of this willingness to accept nationwide noncompetes is undoubtedly a recognition that business is not as local as it once was, and that customers now place orders from far-flung providers without giving the question much thought. A portion may also be a "trade off" against the shorter duration of a noncompete. If a court is only going to require a former employee to "sit on the bench" for a relatively short period of time, the court is more likely to make the employee actually sit on the bench.

Although a former employee will often claim that he or she is not competing (but instead is working in a new industry, or is doing something else within the same industry), as a practical matter, few employers will spend the money to file and pursue a lawsuit absent an honest belief that the former employee is competing. Similarly, employers rarely (if ever) attempt to enforce noncompetes if an employee quits to take a job with a client. Instead of suing, employers usually "wine and dine" former employees who go "in house" in an effort to get additional business.

The jurisdiction in which you find yourself has a tremendous bearing on your ability to enforce a noncompete. For example, California has a broad public policy against noncompetes. See Cal. Bus. & Prof. Code § 16600 ("[E]very contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."); Kelton v. Stravinski, 41 Cal. Rptr. 3d 877, 881 (Ct. App. 2006). That public policy loses force as the activities to be enjoined move further away from the California border, even if the former employee's new company is incorporated in California. See Bioquell, Inc. v. Feinstein, No. 10-2205, 2001 WL 673746, at *7 (E.D. Pa. Feb. 16, 2011). Pennsylvania requires that an employee receive new consideration when signing a noncompete; consideration substitutes or the continuation of at-will employment do not suffice. See Socko v. Mid-Atlantic Sys. of CPA, Inc., 2014 PA Super. 103 (2014). New Jersey and Ohio, on the other hand, permit the continued employment of an at-will employee to serve as consideration supporting a noncompete. See Hogan v. Bergen Brunswig Corp., 378 A.2d 1164 (N.J. Super. Ct. App. Div. 1977); Lake Land Emp't Grp., LLC v. Columber, 804 N.E.2d 27, 31–32 (Ohio 2004).

Nonsolicits. In contrast to noncompetes (which preclude a former employee from working for a competitor), nonsolicits permit a former employee to work for a competitor, but preclude that employee from soliciting either customers or employees of the former employer. Although disputes over the scope of a prohibition on soliciting former coworkers are rare (after all, it is easy to tell who someone works for), a former employee does not always know all of the former employer's customers. Courts are often reluctant to preclude a former employee from soliciting customers that he or she did not realize did business with the former employer. Courts are even more reluctant to preclude a former employee from soliciting the former employer's potential customers. Leaving aside the fact that it is often even harder to know who a potential customer might be, most sales-driven organizations take an incredibly broad view of who is likely to become a customer within the near future.

At first blush nonsolicitation agreements might seem to afford greater protection than noncompetes because a court is likely to be less reluctant to enforce an agreement that would allow an employee to continue to make a living so long as he or she did not solicit former customers. But former employees usually deny that they were the ones to solicit their former customers. Instead, former employees claim that the customers (or the other employees) approached them. Leaving aside the fact that this situation often creates a "swearing contest," customers caught in the crossfire of a nonsolicitation claim usually have a common sense solution. Rather than allow themselves to be drawn into litigation, they stop doing business with both parties. Although that might hurt the former employee, it is not ideal for either party.

Trade Secrets
Even if the former employee did not sign an enforceable noncompete, a court may grant an injunction against a former employee to protect your client's trade secrets. This assumes, of course, that your client has trade secrets. Not only must a trade secret be something that is not readily or easily known or discovered by others, your client also must have made reasonable efforts to protect its secrecy. See, e.g., 12 Pa. Cons. Stat. § 5302. For example, every business claims that its customer list is a trade secret. There must, however, be an actual list. See Ozburn-Hessey Logistics, LLC v. 721 Logistics, LLC, No. 12-0864, 2014 WL 4055826 (E.D. Pa. Aug. 15, 2014). If that list can be generated through Internet searches (or by "letting your fingers do the walking" through the phone book, assuming anyone still has such a thing), it will not qualify for trade secret protection. See Ozburn-Hessey, 2014 WL 4055826; Ride the Ducks, LLC v. Duck Boat Tours, Inc., No. 04-CV-5595, 2005 WL 670302 (E.D. Pa. Mar. 21, 2005). Similarly, "an employee's personal business contacts, although made while in plaintiff's employ, are not plaintiff's trade secrets." BIEC Int'l, Inc. v Global Steel Servs., Ltd., 791 F. Supp. 489, 546 (E.D. Pa. 1992).

Courts are sometimes willing to protect trade secrets even if they are not taken in written form, and even if the former employee swears he or she will not use any of the former employer's secrets. For example, in Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 110–12 (3d Cir. 2010), the Third Circuit held that, even if he did not physically take anything with him, a high-level executive would "inevitably disclose" the secret to making the "nooks and crannies" in Thomas' English Muffins if he were allowed to work for Hostess Brands. Given that Botticella was one of only seven people who knew this secret, the courts were quick to conclude that it really was a trade secret and was deserving of protection.

This contrasted with the situation in Ozburn-Hessey, in which the court found that the customer contact information the plaintiff wished to protect was not a trade secret, and was instead in the public domain. Your ability to protect your client's trade secrets will therefore depend to a great extent on how good a job your client has done protecting its trade secrets during the ordinary course of its business.

Unfair Competition and Tortious Interference
If your client's former employee was not bound by a noncompete and did not take (or your client did not really have) any trade secrets, is there anything you can do? Perhaps. If a rogue employee acts in such a way (especially by trying to hire away other key employees) as to try and hurt his or her former employer, courts may act to prevent unfair competition or tortious interference. Before trying to bring unfair competition or tortious interference claims, however, you should keep in mind that courts generally wish to promote competition. Offering someone a better job (absent a nonsolicit or "nonraiding" clause) is generally considered proper behavior. As a result, you will have to prove that the rogue employee was trying to hurt the former employer, rather than advantage himself or herself or the new employer, by trying to lure away other employees. Courts have split on whether the rogue employee's sole motive must be to harm his or her former employer, or whether a "mixed motive" is sufficient to support a cause of action. See, e.g., Ozburn-Hessey, 2014 WL 4055826, at *12. Unfair competition or tortious interference claims are therefore usually the last resort, because they are often difficult to prove.

The (Happy?) Ending
No one—especially not your clients—wants to see an employee go rogue. There are, however, ways to try and "rein in" a rogue employee. Perhaps more importantly, using the appropriate noncompete and trade secret protections can make an employee less likely to go rogue for two reasons. First, they will give an employee a reason to pause and think before acting and may for that reason dissuade the employee from doing something improper. Perhaps more importantly, appropriate noncompete and trade secret protections will make a competitor less likely to hire a (former) employee. While that may not stop an employee from going rogue, it will limit the damage the rogue employee can do. And sometimes limiting the damage to your client is all you can do.

Keywords: commercial, business, litigation, rogue, covenants, noncompete, geographic scope, solicit, nonsolicit, trade secrets, former employee, unfair competition, tortious interference

Copyright © 2014, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).