By Brian D. Kaider, Esq.
You’ve been in business for several years and have a dozen hard-working, dedicated employees working for your company, or so you think. Out of the blue, a new competitor enters the market and the next thing you know, all 12 of your employees have jumped ship to join the new firm. With them, they have taken company records and customer lists. What do you do? Do you have any legal recourse against the poaching company? Against your former employees? How could you have prevented this?
Can a Competitor “Poach” Your Employees?
In most states, yes. Many people are surprised to learn that, generally, poaching is a perfectly valid and legal way to find new employees. There are exceptions and limitations, of course, but the overall policy favoring poachers is that courts do not want to unduly restrict a person’s ability to seek employment in a competitive marketplace.
An Ounce of Prevention is Worth a Pound of Cure
The best defense against poachers is to create an environment in which your employees are happy and will be reluctant to leave. That does not necessarily mean having the highest salaries in your business, though compensation is certainly one factor. More important, though, is creating a culture of inclusion, where employees feel that they are valued members of a team, where they are challenged and know they will be rewarded for excellent performance.
There are many types of agreements that can help prevent poaching, but they generally fall into two broad categories; non-compete agreements and non-disclosure agreements. These may be stand-alone contracts, or may be integrated as clauses in an employment agreement.
- Non-Compete Agreements: Can be a valuable asset in protecting your workforce, because if certain conditions are met, a poaching company may be liable for “tortious interference of contract” between you and your employee. But, the first element of that legal claim is the existence of a valid contract. There’s the rub. Many states, California in particular, disfavor non-compete agreements as an undue restriction on someone’s freedom to seek employment. So, these contracts must be drafted carefully and narrowly tailored to your company’s specific circumstances so as not to create an unfair burden on the employee.
For instance, if you are in an industry where you have dozens of competitors within 20 miles of your business, then a restriction in your employment agreement prohibiting a departing employee from working for a competitor within 5 miles of your business might be considered reasonable. But, if you have only one competitor in your state, and that competitor is 10 miles away, then a restriction in your employment agreement prohibiting a departing employee from working for a competitor within 20 miles would almost certainly be deemed unreasonable by the court.
- Non-Solicitation Agreements: One form of non-compete agreement, however, is much more readily enforced; a non-solicitation agreement. This contract prohibits a departed employee from attempting to convince other employees to leave. While this can be very helpful in preventing a mass exodus, here too, the restrictions must be reasonable. A prohibition from contacting other employees for six months following termination would more likely be enforced than such a prohibition for five years. Note, however, that this agreement applies only to the departing employee; it does nothing to prevent the competitor from contacting more of your employees directly.
Even in the absence of a written non-solicitation agreement, in most jurisdictions, a current employee has a duty of loyalty to his/her employer. This duty prohibits an employee who plans to leave from soliciting co-workers to leave at the same time. The employee may, however, announce his departure and if co-workers approach him to inquire about the new employer, that is not a violation of the employee’s duty.
- Non-Disclosure Agreements: While it may be difficult to prevent an employee from going to a competitor, often it isn’t the departure of the employee itself that is of concern to the employer, it’s the risk that the departing employee will provide confidential or trade secret information to the competitor. Fortunately, non-disclosure agreements are very common and widely enforceable.
There are many types of confidential and trade secret information, such as client lists, marketing and distribution plans, growth strategies, pricing structures, recipes, business methods, etc. These are all valuable assets that should be protected by non-disclosure agreements with your employees. The key to successful enforcement of these agreements, however, is that you yourself must treat the information as confidential and secret. This means limiting distribution of the information within your organization to only those who need it to perform their jobs and not disclosing the information to anyone outside the organization (except lawyers, accountants, and other service professionals you have hired to support your business). Further, you should ensure that hard copies of confidential information is kept under lock and key and electronic records are password protected with as few employees having access as is practical.
What Can You Do?
One or more of your employees has left for a competitor; what do you do? First, take a breath. You can’t keep all of your employees forever, people will come and go. So take stock: how much does this departure hurt your business? Did the employee have access to confidential or trade secret information? Was the employee close friends with any of their coworkers in your employ?
If the employee has given you notice, but not left yet, meet with them. Let them know they will be missed, but remind them of their duty of loyalty while they remain with you. Identify the confidential information they have been privy to and discuss what may and may not be communicated to their new employer. If the employee received hard copies or electronic files that you consider confidential or secret, ask the employee to sign a sworn statement that they will return or destroy all copies. If the employee is unwilling to sign such a statement or gives you indicia of hostility toward you or your company, consider terminating them on the spot. Depending on the circumstances, you may have to pay their salary if you have a contractual notice period for termination, but at least they will have no further access to your confidential information or direct communication with your other employees.
If the employee has already left and you believe that they have taken confidential or trade secret documents and/or provided such information to their new employers, you must act quickly in order to protect your rights. Below are some examples of legal actions to take.
Breach of Contract
If you and your employee had a written contract (non-compete or non-disclosure) you can take legal action against the employee for breach of contract. You will need to demonstrate three elements: the existence of a valid contract, that the terms of the contract were violated by the former employee, and that the breach caused or will cause economic harm. As discussed above, particularly for non-compete agreements, the contract must be reasonably drafted for the court to consider it valid.
Tortious Interference with Contract
If there is a valid contract with the employee, you may also be able to take action against the competitor for tortious interference with the contract. This cause of action has five elements that must be satisfied: 1) the contract must be valid, 2) the competitor must have knowledge of the contract, 3) the competitor must intend for the new employee to breach the contract, 4) the terms of the contract must actually be breached, and 5) you must be damaged by the breach.
The second element, requiring actual knowledge of the contract by the competitor may seem a little tricky. As a first step before filing a legal action, you can send the competitor a cease and desist letter describing the nature of the contract (non-compete, non-disclosure, etc.) and how you believe that contract will be violated by the competitor’s continued behavior. If the competitor continues, then you can proceed with the legal action and your letter will provide proof of actual knowledge of the contract.
The most difficult element of the claim is that of damages. In cases where you can directly tie the breach to a loss in sales, economic damages may be easy to define. That is seldom the case, however, so seeking equitable remedies such as preventing the employee from working for the competitor may be a better approach.
Breach of Duty of Loyalty
In the absence of a non-compete/non-solicitation agreement your employees still owe you a duty of loyalty. While the language may vary state to state, essentially the employee owes a duty to act with good faith in the furtherance of the employer’s interests If a departing employee actively solicits others to join the new company, copies files to bring to the new company, deletes or sabotages data to inhibit your business operations, or otherwise acts in a manner that is hostile to your company, they violate this duty. Damages may include lost profits and also punitive damages if you can demonstrate that the breach of duty was willful.
Misappropriation of Trade Secrets
Though the language of what constitutes a trade secret varies state-to-state, it is generally information that 1) is not known to the public, 2) derives independent economic value, and 3) is subject to secrecy, meaning that you have to actively maintain its secrecy. The classic example of a trade secret is a recipe, such as the formula for Coca-Cola® or the Kentucky Fried Chicken® secret blend of 11 herbs and spices. But, the general skills, knowledge and expertise an employee acquires through experience in the field, even while working for you, are the employee’s assets, not yours. So, pricing information committed to their memory through servicing your clients is not protectable. But, if they access and download a password protected pricing strategy on the company’s server and bring that information to a competitor, that would be a misappropriation.
Although poaching employees is generally a legitimate and legal business practice, there are limitations. For example, except in very specific and highly skilled fields, it is uncommon for one company to employ all of the competent people in the field. So, while it is not per se illegal to recruit more than one employee from a competitor, engaging in a pattern of solicitation of a single company’s employees may be evidence of intent to destroy the competitor’s business or a crucial department thereof and may be actionable unfair competition. To prevail on an unfair competition claim, you must demonstrate that the loss of key personnel will harm the company and that the competitor intended to drive you out of business. For example, if the competitor offers salaries to your entire sales team that are well-above market rate, that may be evidence of a bad faith attempt to cripple your business.
The law generally favors a person’s freedom to seek employment and is skeptical of efforts to restrict that freedom. Nevertheless, an employer has the right to loyalty from current employees and is protected from efforts to unfairly undermine its business by stealing secret information or luring away its entire workforce. Whether concerned with protecting trade secret information from departing employees or exposure to legal liability when recruiting a competitor’s workers, early consultation with an attorney is always a wise approach.
Brian Kaider is a principal of KaiderLaw, an intellectual property law firm with extensive experience in the craft beverage industry. He has represented clients from the smallest of start-up breweries to Fortune 500 corporations in the navigation of regulatory requirements, drafting and negotiating contracts, prosecuting trademark and patent applications, and complex commercial litigation.