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

1 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)

2 PREDATORY HIRING CLAIMS  Violation of Sherman Antitrust Act  Actual Monopolization (Actual Harm)  Attempted Monopolization (Potential Harm)

3 ACTUAL MONOPOLIZATION ELEMENTS  D’s possession of monopoly power in relevant market  Willful acquisition of such power  Causation

4 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

5 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

6 ATTEMPTED MONOPOLIZATION ELEMENTS  Predatory or exclusionary conduct  Specific intent to monopolize  Dangerous probability of achieving monopoly power

7 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

8 EMPLOYEE RAIDING  Claim not widely accepted  Hiring to cripple competition rather than to obtain services

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

10 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

11 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

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

13 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

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

15 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

16 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

17 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

18 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

19 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

20 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

21 PRACTICAL TIPS WHEN EMPLOYEES LEAVE  Exit interviews to determine their intentions  Remind of obligations  Confiscate company property  Search s

22 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

23 DISCLAIMER  State laws vary greatly  Must determine law applicable to your situation