Strategies for the Employer Losing the High Valued Employee to an On-Boarding Competitor
In most instances, when an employer loses a high-value employee to an On-Boarding competitor, they have little to no time to complete an in-depth investigation, prior to an employee’s departure. As a result, the employer can be seriously harmed, as trade secrets can be distributed to the On-Boarding company, and their product or service can be subsequently destroyed.
The following steps are offered to combat the distribution of trade secrets and minimize the risks in both the short and long term. Also included, are ideas of how to examine the departing employees’ Electronic Storage Device (ESD) and determine if there was suspicious activity prior to their departure.
Typically, high-value employees do not leave one company for another without a significant period of negotiation with the hiring employer, prior to their departure. Consequently, it is in the former employer’s best interest to search the high-valued employee as much as six months to one year, prior to their departure.
We advise, at the outset, to conduct an exit interview. Here, you should review any employment and confidentiality agreements you had with the employee. Have them sign a termination certificate to reaffirm their prior agreement and certify they have nothing in their possession.
Next, be sure to identify and collect all Electronic Storage Devices. Remember, this information may be located off-site, in the cloud, or simply being carried around in the trunk of their car. If at all possible, take a snapshot of all Electronic Storage Devices for later examination. It would be advisable that the initial employment agreement provides that the departing employee must submit any Electronic Storage Devices for examination upon departure.
The full examination should specifically include, but is not limited to, submitting all ESD’s for examination, utilizing source or document codes. Be sure to look for unusual access to hard drives, downloads and copying of documents close to departure. Review email communications between group members. If any group members are still employed, secure their ESD for examination. Also, do not forget to look beyond the devices and search the networks connected with that employee.
A final essential step is to communicate with the new employer. Send a letter to the On-Boarding company, advising them of the employee’s confidentiality agreement (provide them a copy), and a request that all ESD’s be secured for examination.
If, after taking all these steps and your trade secrets are still disseminated, there are certain claims that can be pleaded and types of relief that can be obtained.
When thinking about claims, consider the following: misappropriation of trade secrets; breach of contract; termination of employment; confidentiality; solicitation; breach of covenant of good faith; breach of fiduciary duty; unfair competition; interference with contract or prospective business advantage; theft of corporate opportunity; conversion and declaratory relief.
Whichever action you choose, focus only on the trade secret(s) you believe have been divulged. Describe the trade secret generally, and persuasively. Be sure to describe the importance of it to your business and know that the contract issues are supplementary.
During this time, for organizational purposes, it is best to compile a detailed timeline, including coordination with other employees and the employee’s departure. Upon organizing this information, you may want to consider suing other departed employees, as well. Again, show their importance and their access to trade secrets. Remember, these cases are not “inevitable disclosure” cases. You must show there is a clear and present theft of trade secrets.
When your trade secrets are exposed, be sure to act quickly; there is a limited time to argue. First, determine if the harm is irreparable. If there is, demonstrate that there is a sense of urgency and be sure to show evidence of the harm. If there are any public statements made by the competitor, use them, along with any past history of divulging trade secrets.
Next, determine your likelihood of success. It is better to not even try, than lose, in these types of cases. If you decide to move forward, show key pieces of evidence of the competitor’s bad intentions and do not focus on the employee’s leaving, but how they departed. Look at key factors; for instance, was there evidence of plans to pilfer, was there clandestine activity, is there evidence of destruction, or have inflammatory statements been made?
When reviewing all of this information determine what is obtainable. Can you prevent the employee from working with the competitor, prevent use of specified data and compel the employees return, prevent the employee’s work on competing products, expedite discovery, or compel third-party oversight?
Another alternative to consider is making a criminal complaint. Be careful though, as it is against the law to threaten a criminal action in a civil matter. The downside of moving forward criminally is that you can lose control of the case, the costs can increase and there could be a lack of cooperation amongst lawyers.
Last, after considering your claims and moving forward with your pleadings, you should also consider the different types of relief available, such as, damages, unjust enrichment, declaratory relief, and injunctive relief.
If, after reading this, you have any specific questions, would like help implementing these steps, or want to move forward with legal action, do not hesitate to contact usRead More
Forensic Investigation and Strategies for Lawfully “On-Boarding” a Competitor’s Employee
Recently, our Partner, Charles Spagnola, attended a symposium on trade secret litigation. The symposium concentrated on emerging trends in trade secret litigation regarding the loss of key personnel to a competing company. It is well settled that an employee has the absolute right to leave an employer, at any time, so long as they are not bound by contract. Likewise, it is not unlawful for an employer to offer an employee, from a competing company, higher pay or benefits, in order to attract high quality personnel to their company.
Problems arise when the company hiring a competitor’s employee fails to implement a check list of action items to reduce risks, as a result of “On Boarding” a competitor’s high-value employee (HVE). Trade secret litigation is governed, in California, by the Uniform Trade Secrets Act (UTSA). A trade secret is defined, as information which has independent economic value that is not readily ascertainable to others, and reasonable steps were made to maintain the information in secrecy. This is a very broad definition, which can lead to a great deal of litigation. Trade secrets can be as simple as a client list, and as complex as the formula for Coca-Cola. Please note that a patented item can never be a trade secret because the patent process, by definition, makes the secret information public.
Since none of our clients would ever hire a competitor’s high-value employee for the specific purpose of transferring trade secrets, this article will describe our recommendations of the investigation required upon hiring a new high-value employee. In addition, in our next blog, we will examine strategies for the employer losing the high-value employee to protect against the transfer of trade secrets.
Initially, a cost-benefit analysis should be conducted to determine to what extent the On-Boarding employer wishes to employ and bear the costs of a forensic investigation. Under the Uniform Trade Secrets Act, the measure of damages includes lost profits, unjust enrichment, injunctive relief, and an award of attorney fees, which could easily be in the millions of dollars. Should the hiring company fail to take all reasonable steps, even some extraordinary steps, to protect against the transfer of trade secrets, the new employer runs the risk of incurring substantial damages. For example, in a recent case, the subject employee was responsible for developing a cancer treatment drug which was estimated to generate over $10 billion in revenue over the next two years. The following represents the aforementioned steps to prevent liability on your part.
First, determine whether the employee meets the criteria as a “High Valued Employee.” Ask yourself, did the employee report to executive management (CEO, President, Executive, Vice President or Board of Directors)? Was the Employee an Officer of the corporation? Did the Employee have a seat on the Board of Directors? Did the employee occupy a position in which a fiduciary duty was owed to the corporation? Did the employee Head the Department in which Trade Secrets were developed?
Once you have determined that the new employee meets the criteria of a “High Value Employee,” Human Resources and Counsel should meet with the new employee to begin the vetting process. Counsel must be involved in the initial meeting to insure that no information contains Trade Secrets and is transferred to the company. Once they are in the hands of the company you will have a difficult time convincing anyone that the information was not viewed or disclosed. Consequently, counsel takes control of the suspect information and the threat is eliminated.
Next, any agreements from the HVE’s prior employment should be collected (i.e. non-compete, non-solicitation, confidentiality).
Upon obtaining their prior employment information, the new employee should sign a confidentiality agreement with the new “On-Boarding” company. The agreement should state that the new employee will not use or bring any confidential information from their prior employment; that they have not brought any confidential information from their employer; that the new employee will respect your confidential information; and counsel should fully explain the agreement – probe deeply into this agreement with the employee and have the new employee sign a separate acknowledgement that these issues were discussed. Be sure to keep your confidential agreement separate from all the other new hire documentation.
Additionally, be sure to identify all locations where confidential information may be stored; they may either be in a hard copy or electronic format (typically known as Electronic Storage Devices). Beware of spoliation. If litigation is reasonably anticipated, you may not destroy the information found on these devices.
Places to search would be the employee’s home office; home/personal computer; lap top computer or tablet, removable storage devices (USB drives, removable hard drives, flash drives, CD’s and DVD’s); backup drives, cloud based storage (Google docs, Drop Box, LinkedIn, other social media); personal email, skype attachments; mobile devices, shared computers on their home network (spouse or children’s computers; vacation home office; garage and storage boxes; automobiles, purses and briefcases.
If you find that the new hire has confidential information, tell the new employee to go home and not return until all the confidential information is returned to the prior employer or destroy it. Next, hire a reputable forensic expert to remediate the information. These experts typically identify any outsider confidential information; they preserve it and remove it from the new employee’s possession. Remember to always preserve the matter data (last accessed, last modified) for your protection. Using a forensic expert may be expensive but it preserves the evidence in the event of litigation; insures it is permanently deleted and not accessible by the employee or company.
The forensic investigation by the expert typically entails identifying all the possible locations where the confidential information has been stored, taking a snapshot of it, and storing it. Be sure the investigator searches for outside confidential information just as you did. Look for hash codes: contact the former employer to notify them that an ESD has been identified and secured. Request that they supply search terms and hash codes of specific documents which they believe constitute confidential or proprietary information. In this manner, the forensic examiner can search for specific information which can be preserved, segregated and examined by the former company or destroyed. An analysis should include matter data information, linked files, access to cloud based storage and removable storage devices. In the event that the new employee has utilized cloud based storage, have the employee provide you and counsel with the Passcode. Counsel should change the Passcode to restrict access of this information until such time as the forensic evaluation is completed.
By following the above steps, you have insulated your company to the greatest extent possible, from any allegations that they utilized confidential information of a former employer. The system is not failsafe. We can never be sure that the employee, in fact, did retain some information that was not disclosed. However, in the event that a trade secret misappropriation action is threatened or filed, the company will have taken all reasonable steps, possibly with the assistance of the former employer, to identify and segregate any questionable information which should provide a formidable defense that the company did not have access to nor did it utilize the confidential information alleged.
If you would like help in implementing these steps with one of our experienced attorneysRead More