Risks of Hiring Employees from Another Firm

The scenario is a familiar one: An individual decides to leave his current employment and accept employment with a new employer. As it turns out, the employee has signed an agreement with the former employer restricting his or her right to compete with the former employer (non-compete agreement), prohibiting him or her from soliciting employees or customers of the former employer (non-solicitation agreement) and/or requiring him or her to maintain the confidentiality of the former employer's trade secret and/or proprietary information (confidentiality agreement). This article focuses on the risks faced by the new employer in hiring such an individual.

In most jurisdictions (California being a prominent exception), courts will enforce non-compete and non-solicitation agreements if the employee received adequate consideration for the commitments made (which can include new employment) and the restrictions contained in the non-compete and/or non-solicitation agreements are both temporally and spatially reasonable. An employer aggrieved by the former employee's violation of his or her non-compete, non-solicitation and/or confidentiality agreement may seek injunctive relief to prevent violation of the agreements made, as well as seek and recover damages caused by the violation. There has been significant litigation addressing the respective rights of the former employer and former employee and this article is not intended to address those issues.

Ex-employers' Rights

An issue that is often not addressed in litigation is the potential liability of the new employer for impinging on the rights of the former employer. Where the new employer hires the former employee of a competitor and is aware of the existence of an enforceable non-competition agreement, it runs the significant risk that it will be sued for tortiously interfering with the former employer's protected contractual relationship with its former employee. These claims are relatively common, and relief generally is granted against the new employer if there is proof of awareness of the existence of the non-compete agreement and a violation by the former employee. A less commonly litigated issue is whether the new employer can be held liable for use of the former employer's confidential information through its employment of the new employee who brought that confidential information with him or her from the former employer.

In order to illustrate the potential for liability, consider the following: An employee who has signed a confidentiality agreement, but not a non-compete or non-solicitation agreement, decides to leave his current employer and go to work for a new employer. The individual occupied a position with the former employer where he had access to confidential, proprietary information of that em-ployer, eg, confidential customer information ' marketing information unique to the former employer's business. Knowing that he would be leaving his current employer, and in advance of actually resigning his job, the employee copied files and removed them from his employer's work site and downloaded some or all of the confidential information from his former employer's database and sent it to his home computer. In seeking his new employment opportunity, he was asked by his prospective new employer if he had signed any non-compete or non-solicitation agreements to which he honestly answered 'no.' As soon as the individual accepts employment with the new employer and begins employment, he brings the copied file to his new work site and sends his former employer's confidential information from his home computer to his work computer. The information is then incorporated into his new employer's database and is used by the new employee as well as other individuals employed by the new employer.

Through various sources, including a review of the former employee's office computer by the ex-employer's IT department or a forensic computer expert, the ex-employer learns of the transmission of its information by the former employee to his home computer. It also learns from other individuals who worked with the former employee that they were aware that he was copying files, but that they thought nothing of it as 'everyone made copies of files to work on them at home.' Further, the ex-employer notices a sudden and precipitous loss of customer/clients ' or opportunities to acquire new customer/clients ' to the business that the former employee has joined. While not aware of any 'direct evidence' that the former employee or his new employer are using its confidential information, the former employer is 'convinced' that improper use is being made of that information.

It is clear that the ex-employer may have claims against the former employee based on his appropriation of the ex-employer's confidential information. These claims can include breach of the confidentiality agreement, tortuous misappropriation of trade secrets, violation of state or local trade secret statutes and breaches of fiduciary duties and duties of loyalty. See, eg, Augat v. Aegis, Inc., 409 Mass. 165, 565 N.E. 2d 415 (1991). While those claims may stop the former employee from using the inappropriately gained confidential information, where that information has been incorporated into the new employer's database, a claim against the former employee may not be sufficient to provide the relief need by the ex-employer. Requiring the former employee to return all confidential information, especially where it has been incorporated into the new employer's database, would provide only a partial remedy.

It is under these circumstances where employers should carefully consider seeking relief against the new employer. Depending on the circumstance of a particular case, courts are willing to recognize these claims. In Newport News Industrial v. Dynamic Testing, 130 F. Supp. 2d 745 (E.D. Va. 2001), for example, the district court refused to dismiss a complaint that had been brought against the new employer under the Virginia Uniform Trade Secrets Act in a situation where a former employee of Newport had taken proprietary information developed while employed at Newport and used it for his new employer's benefit. The defendant had argued that it could not be held responsible for the employee's misappropriation of his former employer's confidential information ' a position rejected by the court. Recognizing that the new employer could be held liable, the court stated: 'It is perfectly consistent to hold the employer liable for the infringing acts of its employee committed within the employee's scope of employment. The employer reaps the benefit of the employee's misconduct and therefore should be liable for the harm that conduct causes.'

Similarly, the United States District Court for the Northern District of Illinois held that a new employer could be held liable for misappropriation of a competitor's confidential information and trade secrets when it 'hired the employee of a competitor, who knew [the competitor's] trade secrets and placed [the employee] in a job with similar or identical duties to those performed while working for the competitor,' and where the employee 'used the [competitor's] data to 'steal' customers away from [the competitor].' RKI, Inc. v. Grimes and Chicago Roll Co, Inc., 200 F. Supp 2d 916, 922 (N.D. Ill. 2002).

Make It Policy

It appears inevitable that the trend of litigation by a former employer against its former employees and the business entities that hire those individuals when confidential, proprietary and/or trade secret information is transferred to the competitor will only increase. Those claims will be asserted not only against the former employees, as has been the case for years, but will also include claims against the competitive entity that is perceived to have taken unfair advantage of the confidential information developed by the employer and entrusted to its employees.

Litigation in this area can be im-mensely time consuming and expensive. Because most new employers are not principally interested in acquiring confidential information of their competitors in surreptitious ways, but instead are interested in hiring individuals with skills and experience that can be utilized by the new organization, employers should take steps to prevent new employees from bringing confidential information of competitors with them to work. Every employer should consider implementing policies and procedures advising applicants and new employees that it would be inappropriate to do so. Thus, employers should consider adopting a policy statement, to be discussed with applicants and made a part of any employee handbook and training, which advises:

'You will neither take with you or bring into the premises of the Company, either in hard copy or electronically, any proprietary or confidential information from a previous employer or trade secrets belonging to any such employer, person or entity unless consented to in writing by such employer, person or entity.'

In addition, to the extent that the company asks employees to sign a confidentiality agreement at the time of employment (to protect the confidentiality of its information and data), it should consider the inclusion of language making clear that it does not want the applicant or employee to violate any obligations he or she has to a former employer. Alternative language putting the applicant or new employee on notice of the importance of this policy could state:

'I will not disclose to Company or use for its benefit any information that, to my knowledge, is confidential or proprietary to any of my former employers, without proper consent. I have not sign-ed any contract or agreement that prohibits me from becoming employed by Company or using my skills and experience of behalf of Company.'

Finally, don't be so quick to agree to indemnify applicants or new em-ployees in the event that there is a lawsuit initiated by a former employer regarding breach of the confidentiality agreement. While a new employer might be tempted to use indemnification as a tool to lure individuals to work without threat of
significant legal fees and potential damages, evidence of the indemnification could be used as evidence that the new employer knew that the new employee had done something wrong and that, by agreeing to an indemnification, it was aiding or abetting the wrongful conduct. Similarly, an employer might want to resist seeking an indemnity from the new employee as a shield in the event that it is enmeshed in litigation as a result of the new employee's misappropriation of confidential information. The fact that the new employer, after reading the agreement that its new employee had signed with his or her former employer, had required its new employee to 'sign an employment agreement consisting of an indemnity agreement protecting themselves in the event [the competitor] initiated legal action against it' was another reason why the court in RKI determined that the new employer was liable for the misappropriation of its competitor's confidential information by its new employee.

Employers are becoming more vigilant in protecting their intellectual property assets. Courts are taking a close look at the conduct of both employees and competitors in order to provide protection for these assets. It is imperative that employers be aware of these claims and take preventive measures to protect themselves from unintended negative consequences.

The scenario is a familiar one: An individual decides to leave his current employment and accept employment with a new employer. As it turns out, the employee has signed an agreement with the former employer restricting his or her right to compete with the former employer (non-compete agreement), prohibiting him or her from soliciting employees or customers of the former employer (non-solicitation agreement) and/or requiring him or her to maintain the confidentiality of the former employer's trade secret and/or proprietary information (confidentiality agreement). This article focuses on the risks faced by the new employer in hiring such an individual.

In most jurisdictions (California being a prominent exception), courts will enforce non-compete and non-solicitation agreements if the employee received adequate consideration for the commitments made (which can include new employment) and the restrictions contained in the non-compete and/or non-solicitation agreements are both temporally and spatially reasonable. An employer aggrieved by the former employee's violation of his or her non-compete, non-solicitation and/or confidentiality agreement may seek injunctive relief to prevent violation of the agreements made, as well as seek and recover damages caused by the violation. There has been significant litigation addressing the respective rights of the former employer and former employee and this article is not intended to address those issues.

Ex-employers' Rights

An issue that is often not addressed in litigation is the potential liability of the new employer for impinging on the rights of the former employer. Where the new employer hires the former employee of a competitor and is aware of the existence of an enforceable non-competition agreement, it runs the significant risk that it will be sued for tortiously interfering with the former employer's protected contractual relationship with its former employee. These claims are relatively common, and relief generally is granted against the new employer if there is proof of awareness of the existence of the non-compete agreement and a violation by the former employee. A less commonly litigated issue is whether the new employer can be held liable for use of the former employer's confidential information through its employment of the new employee who brought that confidential information with him or her from the former employer.

In order to illustrate the potential for liability, consider the following: An employee who has signed a confidentiality agreement, but not a non-compete or non-solicitation agreement, decides to leave his current employer and go to work for a new employer. The individual occupied a position with the former employer where he had access to confidential, proprietary information of that em-ployer, eg, confidential customer information ' marketing information unique to the former employer's business. Knowing that he would be leaving his current employer, and in advance of actually resigning his job, the employee copied files and removed them from his employer's work site and downloaded some or all of the confidential information from his former employer's database and sent it to his home computer. In seeking his new employment opportunity, he was asked by his prospective new employer if he had signed any non-compete or non-solicitation agreements to which he honestly answered 'no.' As soon as the individual accepts employment with the new employer and begins employment, he brings the copied file to his new work site and sends his former employer's confidential information from his home computer to his work computer. The information is then incorporated into his new employer's database and is used by the new employee as well as other individuals employed by the new employer.

Through various sources, including a review of the former employee's office computer by the ex-employer's IT department or a forensic computer expert, the ex-employer learns of the transmission of its information by the former employee to his home computer. It also learns from other individuals who worked with the former employee that they were aware that he was copying files, but that they thought nothing of it as 'everyone made copies of files to work on them at home.' Further, the ex-employer notices a sudden and precipitous loss of customer/clients ' or opportunities to acquire new customer/clients ' to the business that the former employee has joined. While not aware of any 'direct evidence' that the former employee or his new employer are using its confidential information, the former employer is 'convinced' that improper use is being made of that information.

It is clear that the ex-employer may have claims against the former employee based on his appropriation of the ex-employer's confidential information. These claims can include breach of the confidentiality agreement, tortuous misappropriation of trade secrets, violation of state or local trade secret statutes and breaches of fiduciary duties and duties of loyalty. See, eg, Augat v. Aegis, Inc. , 409 Mass. 165, 565 N.E. 2d 415 (1991) . While those claims may stop the former employee from using the inappropriately gained confidential information, where that information has been incorporated into the new employer's database, a claim against the former employee may not be sufficient to provide the relief need by the ex-employer. Requiring the former employee to return all confidential information, especially where it has been incorporated into the new employer's database, would provide only a partial remedy.

It is under these circumstances where employers should carefully consider seeking relief against the new employer. Depending on the circumstance of a particular case, courts are willing to recognize these claims. In Newport News Industrial v. Dynamic Testing , 130 F. Supp. 2d 745 (E.D. Va. 2001), for example, the district court refused to dismiss a complaint that had been brought against the new employer under the Virginia Uniform Trade Secrets Act in a situation where a former employee of Newport had taken proprietary information developed while employed at Newport and used it for his new employer's benefit. The defendant had argued that it could not be held responsible for the employee's misappropriation of his former employer's confidential information ' a position rejected by the court. Recognizing that the new employer could be held liable, the court stated: 'It is perfectly consistent to hold the employer liable for the infringing acts of its employee committed within the employee's scope of employment. The employer reaps the benefit of the employee's misconduct and therefore should be liable for the harm that conduct causes.'

Similarly, the United States District Court for the Northern District of Illinois held that a new employer could be held liable for misappropriation of a competitor's confidential information and trade secrets when it 'hired the employee of a competitor, who knew [the competitor's] trade secrets and placed [the employee] in a job with similar or identical duties to those performed while working for the competitor,' and where the employee 'used the [competitor's] data to 'steal' customers away from [the competitor].' RKI, Inc. v. Grimes and Chicago Roll Co, Inc. , 200 F. Supp 2d 916, 922 (N.D. Ill. 2002) .

Make It Policy

It appears inevitable that the trend of litigation by a former employer against its former employees and the business entities that hire those individuals when confidential, proprietary and/or trade secret information is transferred to the competitor will only increase. Those claims will be asserted not only against the former employees, as has been the case for years, but will also include claims against the competitive entity that is perceived to have taken unfair advantage of the confidential information developed by the employer and entrusted to its employees.

Litigation in this area can be im-mensely time consuming and expensive. Because most new employers are not principally interested in acquiring confidential information of their competitors in surreptitious ways, but instead are interested in hiring individuals with skills and experience that can be utilized by the new organization, employers should take steps to prevent new employees from bringing confidential information of competitors with them to work. Every employer should consider implementing policies and procedures advising applicants and new employees that it would be inappropriate to do so. Thus, employers should consider adopting a policy statement, to be discussed with applicants and made a part of any employee handbook and training, which advises:

'You will neither take with you or bring into the premises of the Company, either in hard copy or electronically, any proprietary or confidential information from a previous employer or trade secrets belonging to any such employer, person or entity unless consented to in writing by such employer, person or entity.'

In addition, to the extent that the company asks employees to sign a confidentiality agreement at the time of employment (to protect the confidentiality of its information and data), it should consider the inclusion of language making clear that it does not want the applicant or employee to violate any obligations he or she has to a former employer. Alternative language putting the applicant or new employee on notice of the importance of this policy could state:

'I will not disclose to Company or use for its benefit any information that, to my knowledge, is confidential or proprietary to any of my former employers, without proper consent. I have not sign-ed any contract or agreement that prohibits me from becoming employed by Company or using my skills and experience of behalf of Company.'

Finally, don't be so quick to agree to indemnify applicants or new em-ployees in the event that there is a lawsuit initiated by a former employer regarding breach of the confidentiality agreement. While a new employer might be tempted to use indemnification as a tool to lure individuals to work without threat of
significant legal fees and potential damages, evidence of the indemnification could be used as evidence that the new employer knew that the new employee had done something wrong and that, by agreeing to an indemnification, it was aiding or abetting the wrongful conduct. Similarly, an employer might want to resist seeking an indemnity from the new employee as a shield in the event that it is enmeshed in litigation as a result of the new employee's misappropriation of confidential information. The fact that the new employer, after reading the agreement that its new employee had signed with his or her former employer, had required its new employee to 'sign an employment agreement consisting of an indemnity agreement protecting themselves in the event [the competitor] initiated legal action against it' was another reason why the court in RKI determined that the new employer was liable for the misappropriation of its competitor's confidential information by its new employee.

Employers are becoming more vigilant in protecting their intellectual property assets. Courts are taking a close look at the conduct of both employees and competitors in order to provide protection for these assets. It is imperative that employers be aware of these claims and take preventive measures to protect themselves from unintended negative consequences.