My post in August on the “7 Deadly Sins of Departing Employees” was well received, so for the sake of balance, I thought a post detailing the 7 deadly sins of former employers (and their attorneys) was in order. Like the list that I complied in my earlier post, this list is composed of what I see as the same mistakes that former employers make time and time and time again in covenant not to compete and trade secret litigation.
1. Letting Your Emotions Dominate Your Decision-Making. Trade secret and non-compete disputes are notoriously emotional affairs. Fear, feelings of betrayal, uncertainty about whether a valuable technology or invention has been taken, all of these emotions and more come into play. Employee departure and especially employee defection cases (i.e., mass exodus of employees to a competitor) can be a lot like business divorces.
There has been an uptick in noteworthy “bad faith” cases (American Chemical Society v. Leadscope, SASCO v. Rosendin Electric), each of which involved an employer who appeared to allow its anger cloud its decision-making and who appeared to be using litigation either maliciously or in a retaliatory fashion. Employers need to acknowledge that these emotions exist, to recognize that while they are understandable, they need to be controlled, and then to resolve to not let them dominate the decision-making process.
2. Failing to Update Your Written Agreements. All too often, employers fail to update or double-check their agreements with their employees. Sometimes the agreements are not with the right party (i.e., an employee has been transferred to a subsidiary or worked for another affiliate). Sometimes the agreements fail to include language permitting their assignment or address what happens in the event of a merger or acquisition (see Acordia of Ohio v. Fishel here and here). Sometimes the employee simply avoids or fails to sign the agreement (see the infamous IBM v. Johnson case, where an executive dodged a non-compete by putting off signing it at every turn).
If an employer wants to enforce its agreements, it needs to regularly check them, preferably on a semi-annual or annual basis. This should ensure that these problems are addressed before litigation.
3. Fumbling the Exit Interview Process. Make sure you have all electronic devices returned. Make sure you copy the personal electronic devices of your employees for potential litigation. Make sure you document the exit process: Where are they going? Have they been reminded of their contractual obligations? Have they certified that they have returned all company property and confidential information? All of these things may help you avoid litigation, or if litigation is inevitable, they will help you strengthen your hand.
4. Failing to Get Your Electronic Ducks in a Row. Make sure your investigation is as thorough and complete as it can be before you pull the trigger on a lawsuit. Ensure that you have segregated any potentially relevant information and instituted the appropriate chain of custody over that information. If you are going to litigate, make sure that you have a litigation hold in place and avoid any actions that may result in inadvertent spoliation of evidence. Given the importance of forensic and electronic discovery in trade secret cases, this is an important step for every employer to remember.
5. Overselling Your Case at the TRO Stage. Given the emotion and compression of time for gathering information and decision-making, there is frequently a tendency by both employers and their counsel to overstate the facts giving rise to their claims. Make sure that you can factually back up what you are claiming because if you make a mistake or oversell, you know your opponent will point it out at the preliminary injunction hearing.
6. Dithering on Whether to Follow Up. It is genuinely surprising how many former employers will procrastinate making a decision after learning of a potential breach of a non-compete or misappropriation of trade secrets. While it is important to make sure that you are prepared, waiting several weeks can cause a court to question whether in fact you have been irreparably harmed and make your request for an injunction all the more challenging.
Not every dispute requires a lawsuit. Some situations only require a cease and desist letter. Others may threaten the viability of a company or business line, and litigation may be the only option. Confer with your inside and outside counsel and make sure that you determine the right approach, one that fits within your budget, and is consistent with your strategic business considerations, but do it promptly.
7. Overreaching in Your Demands to a Court. Having decided to litigate, be reasonable in your demands. TROs and preliminary injunctions have become tougher and tougher to get. Courts are all too willing to deny an injunctive request that seems unreasonable on its facts. It is important to recognize that courts strive to balance the legitimate needs of the employer and employee in every injunction and courts will naturally gravitate to the party that appears to be the most reasonable at this stage.
Moreover, as noted above, if you are unsuccessful in your trade secret or non-compete claim, you run the risk that your former employee may claim that you filed your case in bad faith. The American Chemical Society and SASCO cases are two high profile examples where former employees have prevailed by demonstrating that their employers set out to use the trade secrets case maliciously. Therefore, keep it simple and keep it narrow at the outset; as the case unfolds and as the evidence supports your claims, then you can then be more aggressive.
Stay tuned for the next installment in my “7 Deadly Sins” Series, the 7 Deadly Sins of Hiring Employers.