Protect Your Business from Corporate Raiding by Key Employees

Protect Your Business from Corporate Raiding by Key Employees

By Randall Sutton

Trust in your key employees is critical to business success. In a closely held business, an employee’s disloyalty can bring even the most successful business to the brink of bankruptcy.

Over the years, I have handled many “corporate raiding” cases, where a highly trusted key employee or group of employees decided to unexpectedly quit the business and attempt to step into the shoes of the former employer. In many of these cases, the owner had stepped away from daily management and oversight of the business and left most business operations to the key employees. In other cases, key sales or management employees were given great latitude to promote the business, but greed and a desire to “call the shots” led to sabotage and direct competition with the employer while still on the company payroll.

Corporate raiding cases typically have several factors in common:

  1. Absentee or hands-off supervision of the employee, which gives the employee freedom to engage in competitive efforts without close scrutiny;
  2. The employee is highly motivated, successful and usually a top performer. The employee is confident that the company’s success rests primarily on the employee’s own excellence;
  3. The employee is unhappy with management and feels he or she has been treated unfairly, which allows the employee to justify the betrayal; and
  4. The employee is not bound by any express noncompete or nonpiracy agreement, so the employee seeks legal counsel, and is erroneously advised that he or she can freely compete.

Under Oregon law, key employees have a fiduciary duty not to directly compete with their employer. Until the employee terminates employment, the employee cannot take any action to advance the employee’s interests in competition with the employer. Once the employment relationship terminates, absent a valid noncompete or nonpiracy agreement, competition is fair game. However, even then, courts will sometimes impose restrictions out of fairness on an employee who engaged in acts of sabotage or competition while he or she was employed. Courts will also restrict former employees from using trade secrets that were obtained while working for the former employer.

In cases involving sabotage, theft of trade secrets, or breach of the duty of loyalty, we have been successful in obtaining court orders restraining the former employee from competing and using trade secret information. In especially egregious cases, we have obtained ex parte court orders.  These orders allow us to surprise the former employee by conducting an onsite examination of documents and computer data at the former employee’s new place of business, without prior notice, and with the assistance of the local sheriff.

Without question, the most effective way to protect your business is through execution of valid and enforceable noncompetition or nonpiracy agreements. A “noncompetition agreement” restricts your former employee from competing with your business in any manner within a limited geographic or trade area for an agreed period of time.  A “nonpiracy agreement” restricts your former employee from soliciting or transacting business with your customers and from soliciting your employees.  These restrictive covenants have a bad reputation.  Many claim that restrictions of this nature are not enforceable.  The reality is that a court will not go out of its way to make a bad agreement enforceable. Because Oregon imposes strict rules on when these agreements will be enforced, many agreements get signed without strictly following the rules, and the court then refuses to enforce the agreement. For this reason, it is critical that restrictive covenants are drafted and reviewed by qualified legal counsel.  When the agreement has been properly drafted and executed, we have successfully enforced restrictive covenants against former employees.

With a valid noncompetition or nonpiracy agreement in place, the task of enforcing competitive restrictions on a former employee is greatly simplified. A noncompetition agreement is not valid unless presented at the job offer stage and signed upon hire.  Such an agreement is sometimes enforceable when executed in conjunction with a significant promotion. The laws regulating nonpiracy agreements are more flexible and these agreements can be valid even when signed by a current employee in many cases.

In cases of sabotage and unlawful competition by key employees, the impact on the former employer can be devastating. Fast legal action is required to restrain the employee. When possible, preventative action, with valid and enforceable restrictive covenants in place, is an effective deterrent and powerful tool in avoiding corporate raiding by your key employees.  If you would like assistance in analyzing these issues in your business, or have any other employment-related questions, please contact an attorney on our Employment Law Group.