Loss of Multiple Key Employees - Prevention and Remedies

1. Loss of Multiple Key Employees - Prevention and Remedies Robert J. Wood, Jr. Tuesday, October 7, 2008

2. THE PROBLEM: MULTIPLE EMPLOYEES LEAVING FOR COMPETITOR • Possible legal remedies against ex-employee and new employer • Preventive measures • DISCLAIMER: State laws vary greatly (must know which law governs your situation)

3. PREDATORY HIRING CLAIMS • Violation of Sherman Antitrust Act • Actual Monopolization (Actual Harm) • Attempted Monopolization (Potential Harm)

4. ACTUAL MONOPOLIZATION ELEMENTS • D’s possession of monopoly power in relevant market • Willful acquisition of such power • Causation

5. UNIVERSAL ANALYTICS CASE (9th Cir. 1990) • Plaintiff and Defendant in aerospace technology field • Defendant had 90% of market • Plaintiff had 5% of market • Defendant hired 5 of Plaintiff's key employees • Employees difficult to replace; required two years to train • Court assumed first prong (possession of monopoly power) met

6. UNIVERSAL ANALYTICS CASE – Cont. • Second prong: Whether talent hired not for using it but to deprive competitor • Must prove subjective intent to engage in exclusionary conduct • The "we wound UAI again" memo • Court = primary motivation was to obtain productive employee • Defendant put the employees to work

7. ATTEMPTED MONOPOLIZATION ELEMENTS • Predatory or exclusionary conduct • Specific intent to monopolize • Dangerous probability of achieving monopoly power

8. AMERICAN PROFESSIONAL TESTING CASE (9th Cir. 1997) • Defendant offered BAR/BRI in 46 states • Plaintiff competed in 4 states • Defendant hired Plaintiff's instructor, "crippled [plaintiff's] effort to compete in Florida" • Monopoly Power = new rivals can't enter market, existing competitors can't expand • Plaintiff = Defendant's high-quality courses = entry barrier • Court = not enough

9. EMPLOYEE RAIDING • Claim not widely accepted • Hiring to cripple competition rather than to obtain services

10. BREACH OF FIDUCIARY DUTY (DUTY OF LOYALTY) • Competing while still employed (bad) • Preparing to compete (okay) • Possibility of obtaining injunctive relief

11. ABETTER CASE (Tex. App. 2003) • Plaintiff owned trucking fleet; Defendant was key employee • Defendant prepared to start competing company • Defendant mentioned his plans to Plaintiff's customer • Defendant told Plaintiff about his plans; Plaintiff's other employees inquired • Defendant left; followed by 12 of Plaintiff's other employees • No breach of fiduciary duty

12. GRESHAM CASE (Ga. App. 2004) • Defendant revealed plans to start new company to co-employees • Arranged for new employee's 401(k) loan to be re-paid • Other employees simultaneously resigned • Breach of fiduciary duty

13. MISAPPROPRIATION OF TRADE SECRETS • Must tighten security/treat information as secret • Secret = not in public domain • Secret = not in public domain • Customer and pricing information • General knowledge • Specific knowledge • Employee may use general skills and knowledge • Inevitable versus threatened disclosure

14. TORTIOUS INTERFERENCE VS. NEW EMPLOYER • Departed employee bound by non-compete agreement • Inducing versus merely hiring (with knowledge of non-compete) • Claim based upon hiring at-will employee

15. TORTIOUS INTERFERENCE VS. DEPARTED EMPLOYEE • Based upon solicitation of employer’s customers/employees • Difference between tortious interference and fair competition?

16. REEVES CASE (Cal. 2004) • Senior partners in law firm • Abruptly resigned, left no status reports • Destroyed client computer files and documents • Misappropriated confidential information • Solicited law firm's clients • Cultivated employee discontent • Offered jobs to law firm's at-will employees • Tortious interference

17. FOOT LOCKER CASE (S.D. Ind. 2006) • Defendant systematically hired Plaintiff's employees • Needed the employees • "Hit the competition where it hurts" memo • Court: "Offhand remarks" • No tortious interference

18. MEMORIAL GARDENS CASE (Colo. 1984) • Plaintiff and Defendant sold preneed funeral contracts • Defendant made random telephone calls • Defendant told Plaintiff's customers they could cancel contracts • Defendant completed and mailed cancellation forms • Tortious interference • Customers not at-will

19. CONSTRUCTION MANAGEMENT (8th Cir. 2002) • Defendant = long distance telephone company • Plaintiff = cable inspector for Defendant • Defendant sought bids for cable services • Plaintiff chose difference vendor • Plaintiff  Defendant's inspectors: Seek employment with other companies • No tortious interference

20. NON-COMPETE AGREEMENTS • Consideration required • Reasonableness of scope • Judicial modification • No “one size fits all” agreements • Need to update agreements • Binding incumbent and departing employees • Providing (creating) new confidential information • "Stale" information not confidential • Choice of Law/Forum Selection provisions • California

21. NON-SOLICITATION AND NON-DISCLOSURE AGREEMENTS • Non-solicitation versus non-compete agreements • Difficulty of proving "solicitation“ • Use of broader terms (e.g., "communication") • Non-disclosure agreements = more enforceable

22. PRACTICAL TIPS WHEN EMPLOYEES LEAVE • Exit interviews to determine their intentions • Remind of obligations • Confiscate company property • Search emails

23. AVOIDING RAIDING ACCUSATION • Use job postings • Headhunters • Obtain copies of agreements signed by prospective employees • Prevent employees bound by non-solicitation provisions from recruiting • Direct new employees to comply with agreements and not disclose information

24. DISCLAIMER • State laws vary greatly • Must determine law applicable to your situation