Departing Employees and Corporate Raiding

How to Protect Your Business when a Key Employee Terminates & How to Minimize Risk when Hiring Your Competitor’s Key Employees

HOW TO PROTECT YOUR BUSINESS WHEN A KEY EMPLOYEE LEAVES

When a key employee terminates, the employer should take precautions to ensure that its trade secrets are protected. A business should always be concerned that the employee may be leaving your business to work for your competitor. Another concern is that the employee will assist his or her new employer in raiding your workforce and customer base.

EXIT INTERVIEWS

Exit interviews are a very helpful tool in managing the departing employee. In an exit interview, the employer should determine whether the former employee will be going to work in the same industry, and exactly where the employee plans to work. To determine whether your competitor is raiding your workforce, you should also ask the employee how he or she learned about the new position. During the exit interview, you will want to remind the employee about duties of loyalty, trade secrets issues, and any confidentiality or non-competition agreements the employee may be subject to.

POST-TERMINATION

After the employee is gone, you may wish to ask key employees to inform you if they are contacted by the former employee or a competitor. You also may want to let good customers know that the employee no longer works for you, and that you would appreciate it if they would call you if they are contacted by the former employee. Be careful about what you say, however, as certain actions may expose you to liability for defamation or interference with the employee’s prospective business relations. If you suspect that your competitor or former employee is raiding your work force, then you may want to conduct a formal investigation, make written demand on the former employee, or consider litigation. If you do an investigation, make sure it is well documented.

To further protect your business information, it is important that you take appropriate precautions to eliminate the former employee’s access. This may include changing the passwords on any confidential data, changing the keys to access the premises or important files, and notifying customers, vendors or others that the employee no longer works for you. Although you will want to get all of the company property that may be in the hands of the employee, be careful not to hold back the employee’s final paycheck pending return of this information.

As a practical matter, it is very difficult to get any information from the employee that the employee may have taken home. Therefore, it is best not to let the employee obtain this information and take it home in the first place.

HIRING YOUR COMPETITOR’S EMPLOYEES

A business that hires its competitor’s former employees faces a variety of risks and benefits. On one hand, the new employee is likely to have skills and abilities that are beneficial to your company. The employee also has established relationships that will give the employee a great advantage in dealing with your customers and vendors. In addition, the employee is likely to have inside information about your competitor’s business that you would really like to know.

Along with these advantages, however, are great risks. A company must be very careful to avoid seeking trade secrets or confidential information, encouraging an employee to violate his or her contract or duties of loyalty, or engaging in other conduct that may be considered to be “corporate raiding.”

Therefore, when hiring a new employee, it is important to verify that the employee is not subject to any non-competition or confidentiality agreements with the former employer. In the interview process, you should have a specific conversation about the employee’s duties to the former employer. This conversation should be well documented. In addition, you must get the employee’s written commitment that he or she is not subject to any agreements with the former employer.

If the employee does have an agreement with the former employer, you must obtain a copy of it, and have the company’s attorney evaluate its scope. In many cases, the agreement may not be enforceable, because it is it too broad or lacked sufficient consideration. Your attorney can advise you as to the risks of proceeding.

If the employee had been exposed to your competitor’s trade secrets, and could use that information in the new job for your company, it is very important that you establish well documented procedures to insulate the employee from any use or disclosure of that information. The key is to make it clear that the company is not trying to induce the employee to breach its duties of loyalty or disclose trade secrets. You want to be able to show a jury that you did everything possible to avoid any misappropriation.

In hiring a new employee, keep in mind that a judge or jury may someday scrutinize your actions. Therefore, you should approach the matter with due care. If you do not feel right about your decisions, are advancing an argument that you can’t make with a straight face, question whether your conduct is ethical, or secretly hope to benefit from the inside information that the employee has a duty not to reveal, a jury will sniff this out and question your motives and credibility.

Assuming that the new employee is not bringing any confidential information from the former employer, you must document this in writing. The documentation should indicate that the new employee has not retained any of the documents, data, customer lists, or any other information of the former employer. To the extent that the employee may remember some of this information, the documentation should also indicate that the employee should not use any of the memorized information.

This kind of documentation is helpful at trial, because it shows that you were attempting to act in good faith and were not seeking to misappropriate your competitor’s trade secrets. On the conservative side, you may wish to temporarily assign the new employee to a part of your business operation where the employee would not be required to use any of the information gained at the former employer’s company. If the employee works in a different job for a period of several months, and then goes to work in a key position with your company, any information that the employee has will be older, and therefore less valuable.