The huge trade secret lawsuit that Borland International filed against Microsoft in the first week of May is part of a trend that is not likely to end soon. According to published reports, Borland claims Microsoft offered huge incentives to dozens of Borland employees to come to work for Microsoft, and to bring important information about Borland products and plans with them. Informix Software Inc. made very similar charges against Oracle Corporation in a lawsuit filed in Oregon earlier this year – that Oracle hired away 11 employees from the Informix product development lab not just for their know-how but also for what they knew about Informix products.
Even among high-tech companies, these cases are not limited to disputes over employees involved in research and development. In a case I handled last year, for example, our client was sued after it hired away a marketing executive from a competitor. The charge, which we were able to convince a judge to reject, was that the executive would bring marketing and other secrets and use them to promote competing products.
Like all legal trends, this one is really a symptom of something more basic. One of the most significant developments in business in the past twenty years has been the tremendous mobility that executives and experienced management employees enjoy, not just within their own companies, but within an entire industry. Where once an employee patiently climbed the corporate ladder to success, today he or she will leap from ladder to ladder, hoping the lateral move will provide a slightly higher foothold. As a result, in highly competitive industries, competition for trained talent is as fierce as it is for customers.
The typical response to the loss of a key employee today is the one adopted by Borland and Informix: accuse the new employer of stealing not just a worker but also confidential information. And in all those cases, the former employers sought immediate injunctions prohibiting the employees from going to work.
Just as statutes and legal doctrines have developed over the years to govern competition for customers, lawmakers and the courts are now developing ground rules for this competition for talent – rules that balance conflicting interests. On one side of this balance are an employer's interests in protecting trade secrets and investment in research and training; on the other side are the individual employee's right to choose his or her employer and to get ahead professionally, a prospective employer's interest in obtaining the best workers, and the marketplace's interest in competition generally. All employers should be interested in striking a fair balance of these interests, because the company hiring away a great prospect today may find its own employee ranks being raided tomorrow.
Competing Laws on Competition
The law in this area is far from uniform. For example, Illinois law allows an employer to enforce a "covenant not to compete" – an agreement in the employment contract that the employee will not leave and go into competition with the employer. Thus, the federal appellate court in Chicago upheld an injunction barring a high ranking PepsiCo executive from going to work for Quaker. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). The executive, who had "detailed" and "intimate" knowledge about PepsiCo's marketing plans for its sports drink product, was recruited by Quaker to oversee sales efforts for its competing sports drink product. Quaker's marketing plans were not yet finalized, and the trial court found that it was "inevitable" that the executive's work at Quaker would be influenced by his knowledge of PepsiCo's trade secret marketing information.
On the other hand, California law favors free competition and prohibits covenants not to compete, and no California case has ever embraced the "inevitable disclosure" doctrine. Cal. Bus. & Prof. Code § 16600; Continental Car-Na-Var v. Moseley, 24 Cal. 104 (1944). The California courts have granted only limited injunctive relief to former employers and only where there has been a concrete showing that such relief is absolutely necessary to protect the immediate disclosure of specific trade secret information. See, e.g., Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853, 860-63 (1994); American Paper & Packaging Products, Inc. v. Kirgan, 183 Cal. App. 3d 1318, 1326 (1986).
Whatever jurisdiction a company does business in, however, there are steps it should take to protect its interests in the wild and wooly world of lateral hiring. On the one hand, a company can protect itself against employee raids and safeguard its trade secrets. On the other, a company making a lateral hire can keep everything above-board and forestall PepsiCo-style litigation. Finally, there are tactics that each side can use should litigation ensue.
Protecting What You Have
A company being raided cannot do much to protect the "secrets" it claims to be losing – unless those secrets qualify legally as "trade secrets." But the company can take steps beforehand to meet that legal test.
For example, part of the definition of a trade secret is that the owner made an effort to keep the information confidential. Thus, companies should make clear to their employees – both early and often – that the work they are doing is confidential. Employee manuals should include statements about the confidentiality of information exchanged on the job, as should any written employment agreements. In addition, employment contracts should place specific limitations on what an employee leaving the company may do. Even in jurisdictions that do not allow blanket prohibitions against going to work for a competitor, an employer can limit what the employee may take from the workplace, and can also restrict the employee from soliciting co-workers to move to the new company.
Key to the success of these efforts is that the employees themselves accept the terms being imposed. Thus, employers should educate the workforce about the value to the company – and therefore to the employees – of maintaining confidentiality. If the principles of confidentiality and non-solicitation have been consistently advanced by the employer, an employee responding to a competitor's courtship will be more likely to honor them. Indeed, when an employer hears that an employee is leaving, the employer should remind that employee of these obligations. The company also should immediately find out what work the employee was doing and with whom.
One caveat applies to this advice: Because the company being raided today may find itself on the other side of the fence tomorrow, employers should avoid overly restrictive agreements and policies, even if such policies might be legal. For example, a company that makes its employees agree not to discuss their work for five years after going to work for a competitor may have to argue that such a policy is onerous when it is resisting an injunction against one of its new workers.
Finally, because of the potential for litigation over a departing employee's taking trade secrets, all companies should document ideas and innovations they are discussing. This is important for the company losing the employee, both because it will make it possible to be specific about what ideas are being "stolen" and because policies and practices that maintain the confidentiality of such documentation will support the claim that the ideas under discussion were trade secrets. Documentation may also prove important for the company making the lateral hire, since it may be able to show it already was developing the idea before it even began discussions with the individual.
Making A Clean Hire
While the preventive steps discussed above are based on the ever present possibility that a key employee will leave, a company hiring a prospect away from a competitor is dealing with more than a possibility. The new employer must carefully document that it is hiring the person for his or her talent, not for information about the old employer's business.
The first question affected by these concerns is, who at the new company is going to interview the lateral candidate? From a business perspective, it obviously makes most sense for the interview to be conducted by someone who will be working closely with the new employee – someone who understands what the candidate did at the old job and what he or she will be doing for the new employer. From the legal perspective, however, the new company may want an interviewer unfamiliar with matters that may be the basis of a trade-secret claim. The dilemma, then, is to pick someone who knows enough to evaluate the candidate's abilities and qualifications for the new job, but who is not in a position to profit from trade secret information that the candidate picked up at the old job.
This dilemma is made even trickier by the need to know if a candidate will be able to do the work the new employer expects without violating the former employer's confidences. Thus, a company making a lateral hire should consider engaging a neutral third party to evaluate the risk that a trade secret might be revealed. In addition to showing good faith and that the new employer is not trying to steal information, hiring someone like an outside attorney to assess the trade secrets issues has at least two other advantages.
First, if a lawyer from within the hiring company or from the company's retained law firm analyzes the issues, that attorney may be disqualified from representing the company in litigation over the hiring, or even in negotiations with the prospective employee. Second, the outside counsel can recommend ways to build an ethical wall between the new employee and the rest of the company, if that is warranted or necessary, which would allow the new employee to begin working.
The next question for the new employer is what advice to give the employee about how to deal with the old employer. Once it is clear that a job offer is likely to be forthcoming, full disclosure should be the rule.
Don't lie. The new employer must advise the employee to be candid and up-front with the old employer. Dishonesty will only damage the employee's credibility if there is litigation. Indeed, nothing is more persuasive to a court weighing the equities of a situation than a record of complete candor from one of the parties. Thus, the employee should be scrupulously honest in answering any questions the old employer may ask about the timing of the hiring process and whom the employee has talked to. The employee should also show the old employer what files he or she is taking, if any, and ask permission before doing anything that might appear fishy, such as going to the office at night or on the weekend.
Don't puff the resume. Although there isn't a lot a new employer can do about it, some of the most damaging evidence in these cases comes from the employee's resume. If it exaggerates the employee's value to the old employer – as resumes sometimes do – it not only undermines the employee's credibility, it also suggests the employee was in a position to know sensitive information that he or she is now claiming never to have heard.
Don't solicit co-workers. The new employee also should avoid even the appearance of soliciting his or her former co-workers to jump to the new company. Of course, the fact that a former colleague now has a higher salary at a better company may encourage others to seek employment with the new company, but that encouragement should come from the facts and not from the former employee who agreed to refrain from soliciting co-workers.
Finally, the letter in which the new company makes the job offer needs to indicate that the company is hiring a person, not buying another company's secrets. The letter should include a complete job description, clearly outlining responsibilities and to whom the new employee will be reporting. The salary offered must reflect the market for those responsibilities. Thus, it may be better to offer a bonus at the end of the first year of employment based on performance, rather than a "signing bonus" that might be interpreted as purchasing information, not talent.
When The Litigation Hits The Fan
Once the former employer's complaint seeking an injunction against the theft of trade secrets is filed, the chess game begins. One key conflict between the parties is that the former employer wants everything to move quickly, while the new employer wants to draw out the legal process and allow the employee to begin working at the new job. Thus, the former employer should immediately request a temporary restraining order pending a full hearing on the application for an injunction, and should request expedited discovery, in which the parties exchange information on a shortened schedule.
The demand for speed on the part of the former employer is motivated by litigation concerns as well as by practical interests. To obtain a restraining order or preliminary injunction, a party must show that it would otherwise suffer "immediate and irreparable harm." Thus, the party seeking the injunction must argue that the employee cannot attend even one meeting at the new job where confidential information might come up.
One particularly expeditious approach is for the former employer to demand that the other company agree to a temporary restraining order voluntarily. After all, the argument would go, if they are not trying to gain an unfair competitive advantage, how could a week's delay hurt? Indeed, it may be a good idea for the new employer to participate in some form of negotiation. For one thing, good-faith negotiations over the scope of an employee's job takes time, and time is on the new employer's side. The longer the new employer can delay implementation of any kind of injunction or restraining order, the weaker the argument for such an order becomes: if "irreparable harm" has not resulted after a week on the job, what makes the threat "immediate"?
A key point in any negotiations about the scope of employment or job responsibilities is identifying exactly what "trade secrets" the former employer is worried about losing. This puts it in somewhat of a bind: If it describes the information too generally, it allows the other side to drag the process out by seeking specifics; but if it provides too much information, it reveals precisely the secrets it is trying to keep.
Once again, this problem can be ameliorated somewhat by retaining a neutral third party to evaluate the trade secrets issues. Both sides should be ready to provide whatever information this neutral outside counsel requests to make the evaluation. Indeed, both sides should have been preparing that information and otherwise marshaling their evidence – in the form of declarations and identification of key witnesses – before the negotiations even began.
In general, such careful preparation will work to a company's advantage in litigation, whether it is the old or new employer. Because loyalty may be too much to ask even of key management employees in today's business environment, the odds that the preparation will come in handy increase every day.