04172018

WHEN YOUR EMPLOYEE BECOMES YOUR COMPETITOR: FOUR QUESTIONS TO ASK BEFORE FILING SUIT

It just takes one thumb-drive and a few keystrokes.

Theft of trade secrets by employees is a virtually idiot-proof endeavor, especially if, like most employers, your budget for cybersecurity is limited. Every employee who has access to your systems has the potential to quickly and quietly spirit away your confidential information and either use it to his or her own benefit or hand it over to a competitor. As a result, there has been a proliferation of lawsuits by employers seeking to restrain or get damages from former employees whom they perceive as a threat.

Unfortunately, litigation involving misappropriation of trade secrets, enforcement of non-competition agreements, or related claims usually burns fast and hot. By seeking injunctive relief, an employer can find itself compressing months or years of litigation into a few short weeks, burning through attorney’s fees at a frightening pace.

When an employer is faced with the prospect of a former employee joining or becoming a competitor, there are a few questions that should be considered before unleashing the dogs of war through litigation:

1. How much has the former employee actually hurt you–or can hurt you?

The first thing I usually ask my clients in one of these scenarios is, “Has anyone drawn blood?” What I mean by that is, are we facing actual damage or a bogeyman? Are customers fleeing like rats on a sinking ship, or is the former employer just a noisy nuisance? Oftentimes, a former employee may be contacting your customers, but has had no success in taking away your business or does not have the actual capacity to do so. (My clients will sometimes tell me in the same breath that someone was the lousiest salesman they have ever met, but that he poses a dire threat working for a competitor). An employer should act when it needs to act, not when it is angry and wants to put a trophy on the wall.

The first thing I usually ask my clients in one of these scenarios is, “Has anyone drawn blood?” What I mean by that is, are we facing actual damage or a bogeyman? Are customers fleeing like rats on a sinking ship, or is the former employee just a noisy nuisance? Oftentimes, a former employee may be contacting your customers, but has no success in taking away your business or does not have the actual capacity to do so. (My clients will sometimes tell me in the same breath that someone was the lousiest salesman they have ever met, but he poses a dire threat working for a competitor). An employer should act when need to act, not when angry and wanting to put a trophy on the wall.

This does not mean you should always wait to be a hemorrhaging business before you take action. Sometimes a departing employee is stepping into a similar role with a competitor or has a well-financed business opportunity of his or her own that makes unfair competition or use of your confidential information so likely that you have to take action quickly. A 5% chance of taking $1M worth of business needs to be looked at more closely than a 90% chance of taking $1000 worth of business. An employer should weigh the very real costs of litigation against the actual threat of doing nothing. Sometimes, going after a former employee–even a sneaky one–is more trouble than it is worth.

2. Is your house in order for a lawsuit?

Too often, employers are more anxious to go after a former employee than they were about ensuring the employee couldn’t hurt them in the first place. What that means is that if you have not taken steps to protect your confidential information, you might be in an awkward position when your first effort to do so is a lawsuit.

Courts protect confidential information and trade secrets, but they require a showing that the information really is confidential or proprietary. One of the ways to make that decision is to examine how the employer has treated such information itself. If the information was not password protected, if it was left openly visible in the office, or if employees were allowed to keep it on their personal laptops or iPads without assurances that the information would remain confidential, a court is less likely to consider after-the-fact protection necessary. Similarly, if other employees left with sensitive information in the past, and the Company did nothing about it, a court might infer that whatever is motivating your lawsuit today, it isn’t the sanctity of the information. Make sure that if you are going to tell the story of an employee absconding with state secrets, you have a good story to tell.

3. What is the narrative you want to sell to your other employees?

Every time an employer addresses an issue with an employee or former employee, that employer is speaking to two audiences. The first is the person whose misconduct is at issue. The second audience is all of the other employees who may put themselves in the same situation down the road. From that perspective, what message do you want to send to employees who are pondering their own malfeasance? Reducing future problems by deterring potential wrongdoers can be an absolutely legitimate basis for taking legal action. An employer who threatens fiery hailstones, but never follows through on it, may be painting a target on his own back.

4. Have you explored and exhausted your other options?

I’ve litigated more of these cases (on both sides) than I care to remember, and almost all of them have resulted in some kind of agreed injunction at the end of the day, where the employee agrees to avoid a narrow list of objectionable activities. But frequently that only happens after significant attorney fees have been incurred. Sometimes the better approach is to start with the conclusion. Early negotiation with a former employee (who often has little money to throw at litigation) or his or her new employer (who often has bought trouble without realizing it and who doesn’t want to add $30,000 to its recruiting fees), can sometimes get the dispute where it needs to be quickly and less expensively. Even early mediation can be a less costly alternative.

The challenge to early settlement is that everyone’s blood is hot soon after the perceived misconduct. Early settlement discussions require everyone to behave like well-mannered adults, and that can be a challenge for anyone who truly feels aggrieved. On one side, the employer considers the employee a thief, a saboteur, a traitor. (“I know it was you, Fredo. You broke my heart.”) The employee feels like he is being bullied and that his livelihood is being threatened. But if calmer voices can prevail, you might be surprised at what can be accomplished.

Litigation is a business tool. But it is only one tool in the box. Before using it in the case of departing employees attempting to compete with you, an employer should give careful consideration as to whether it is the appropriate tool in the box. As Abraham Maslow observed, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” In business and in law, that is a mistake that you may not be able to afford.