As employers continue to sort out the legal implications of social media in the context of restrictive covenants, a Massachusetts court has recently held that the mere posting of a former employee's new position on a LinkedIn profile does not qualify as a solicitation under her agreement with her former employer. The former employer, KNF&T Staffing Resources, had complained that the change in her profile resulted in a solicitation that was sent to her more than 500 contacts, including customers. (A hat tip to Sheri Qualters who has a fine summary of the case for The National Law Journal).In KNF&T Inc. v. Muller, KNF&T filed an action in Suffolk Superior Court against its former vice president Charlotte Muller and her new employer, claiming Muller violated her one-year non-compete agreement in various ways. On October 24, 2013, Associate Justice Thomas P. Billings denied KNF&T’s bid for a preliminary injunction, finding that she was not directly competing with her former employer in her new position and that evidence of any violation was "between weak and non-existent." As for KNF&T's claim regarding the LinkedIn profile, Justice Billings found that Muller’s update about her new job was full of generic terms like “Staffing Services” and “Recruiting.” “So long as Muller has not and does not, prior to April 12, 2014, solicit or accept business in the Fields of Placement for herself or others (including her new employer), she will not have violated the covenant not to compete,” Billings wrote. (A PDF of the opinion can be found below).The Takeaway: First, Justice Billings' holding is consistent with other recent social media rulings that require some overt act that is directed or targeted to particular customers. A mere update in a profile that reflects a change in employment, with generic terms describing that employment, that is sent to all contacts in LinkedIn (which would likely include former classmates, competitors as well as customers) is simply not enough. On the other hand, targeted communications or emails to particular customers through LinkedIn could qualify as a solicitation. Whether a communication qualifies as a solicitation generally depends on the context and circumstances of the communication, as Ken Vanko's excellent discussion of the recent opinion out of the U.S. Court of Appeals Court of Appeals, Corporate Technologies v. Hartnett, illustrates.Second, the opinion reinforces the importance of employment agreements that address the ownership of social media and profiles or contacts that might be found in LinkedIn. If these are indeed important to an employer, they should be addressed in the employment agreement.
KNF&T v Muller - Order.pdf (4.49 mb)
Non-Compete Enforceability | Restrictive Covenants
Today's post wraps up the Trade Secret Litigator's Five Golden Rules for on-boarding a new employee and, fittingly, falls on Halloween. Today’s remaining Golden Rules primarily address the steps an employer needs to take in managing the employee who has been hired, and, as the case law reveals, may prevent various tricks (and rarely treats) to the new employer.
Golden Rule No. 3. The Visentin Rule: Protect the Legitimate Business Interests of the Former Employer. Having taken the steps to avoid or minimize risk during the hiring process, an employer still has to properly manage the employee once he/she joins the company, especially if that employee has a non-compete or non-solicitation agreement with his/her former employer. Fortunately, one of the leading cases on managing an employee with a covenant not to compete provides a textbook example of how to handle this situation. That case, IBM v. Visentin, came out of the U.S. District Court for the Southern District of New York and was affirmed by the U.S. Court of Appeals for the Second Circuit in 2012. In Visentin, the new employer, Hewlett-Packard undertook a number of affirmative steps to ensure that IBM's trade secrets were protected and agreed that the new employee would not solicit his former customers for the remainder of the term of the non-compete.
The Southern District and Second Circuit approved of these efforts and refused to enjoin the employee - a mid-level manager - from working at HP. In the absence of any proof of misconduct by the employee, those courts found that this was a proper way to protect IBM's trade secret and customer relationship interests while balancing the former employee's right to find proper gainful employment.
The Visentin approach was also applied effectively by Google earlier this year in a high-profile dispute over its hiring of a cloud computing services manager who had worked previously for Amazon.com and was subject to a non-compete. As in Visentin, the Washington district court found that in the absence of evidence of misconduct by the former employee, Amazon.com's interests were adequately protected by the safeguards put in place by Google to protect its trade secrets.
Of course, this approach is not foolproof, as the holding in a recent Massachusetts case, Aspect Software v. Barnett, unfortunately demonstrates. In that case, despite similar good faith efforts by the new employer and former employee, the court still enforced the non-compete at issue, although it commended the new employer and former employee for their efforts.
At the end of the day, an employer will increase its odds of avoiding litigation or minimizing its risk in that litigation by taking affirmative steps to prevent the use or disclosure of the competitor's trade secrets and minimize intrusion into legitimately protected customer relationships. I have found that these steps are particularly effective in the “cease and desist” letter stage because they serve to put the former employer on notice that it may not have a basis for a lawsuit and can effectively give that employer pause before initiating litigation.
Golden Rule No. 4: If Litigation is Possible, Preserve, Preserve, Preserve. Given the reality of BYOD and the overlap between work and personal time, it is practically inevitable that some confidential information will make its way onto an employee's personal computer or devices. This sometimes puts an employee between the proverbial rock and a hard place: if the employee deletes the information, there may be a claim of spoliation of evidence or a claim of some nefarious purpose behind the deletion. Alternatively, if the employee does not remove or delete the confidential information, he or she will almost certainly be accused of having improperly used or taken it.
As a result, if there is a chance of litigation, it is critical to preserve what was on the devices before deleting it. This means that forensic computer consultant will need to be engaged and likely image all devices before the information is removed and the devices sanitized under the guidance of counsel and that consultant. The images will then need to be kept by outside counsel so that they can be produced in litigation, if necessary.
Golden Rule No. 5: Keep a Close Eye on Mass Hirings. As readers of this blog know, cases involving the hiring of a team of people from a competitor (especially a sales team) generate the greatest waves and present the greatest risk of trade secret litigation by a former employer. The group dynamics in these situations also seem to foster greater opportunities for mischief -- i.e., more pressure on business units and new hires to perform, the fact that the team may have been hired for a specific product, client or opportunity, etc. This means that in-house counsel and HR administrators need to monitor, follow up on, and continue to train these teams on the importance of preserving the confidentiality of the legitimate trade secrets of their former employer.
Last year’s Allergan v. Merz case out of the U.S. District Court for the Central District of California illustrates the special dangers associated with hiring teams of people. In that case, a federal judge issued a permanent injunction enjoining the rollout of the cosmetic drug Xeomin for 10 months because he found that a sales team hired from Allergan had improperly used confidential marketing and customer information for Botox in connection with the prospective launch of Xeomin. Based on statements made at an early hearing, the outside and in-house counsel did not know about communications between the new sales team and its managers disseminating that confidential information and argued that Merz had no intention of using Allergan’s trade secrets. However, a year after defeating a TRO, Merz’s counsel produced documents that were contrary to those representations.
How can in-house counsel and outside counsel avoid this disaster? It starts with a culture of security and responsibility. Both in-house and outside counsel need to know that their business people have their back and that a culture respecting the rules outlined above will be enforced. In the Allergan v. Merz case, the disconnect between what was apparently going on at the Merz business level and what the lawyers understood was going on is striking. This suggests, at least to me, that the appropriate follow up was not done to ensure that counsel’s representations about not using Allergan’s trade secrets would be followed.
The best way to ensure new teams are following the rules of their new employer includes: (1) an emphatic initial face-to-face meeting communicating the importance of leaving the prior employer’s trade secrets behind, preferably chaired by the head of the business group, (2) periodic follow up, certifications and acknowledgements that no trade secrets or confidential information are being used or retained, and (3) training to reinforce those principles. However, all of the follow up in the world will be ineffective if managers and supervisors have not bought into these principles and do not enforce them among their team.
In sum, as these cases illustrate, courts will generally reward the employer who imposes safeguards and acts responsibly; conversely, the failure to on-board properly can be catastrophic.
Inevitable Disclosure | Non-Compete Enforceability | Non-Disclosure Agreements | Non-Solicitation Agreements | Restrictive Covenants | Trade Secrets
When hiring an employee away from a competitor, one of the last things a company wants is to be embroiled in litigation with that competitor over accusations that it hired the employee for the purpose of stealing that competitor's trade secrets. Consequently, the process of "on-boarding" a new employee -- taking steps to make sure that the employee is properly and lawfully brought aboard a company to minimize risk of litigation by the former employer -- is proving to be an increasingly important one and needs to be part of every trade secret lawyer, in-house lawyer and HR administrator's trade secrets toolkit.
On-boarding is becoming a bigger and bigger issue, and was a topic of much discussion at the recent AIPLA Trade Secret Summit, as both in-house counsel and outside counsel noted that on-boarding was increasing as a part of their practice (I have noticed an uptick in this area as well in my practice this year). There have also been a number of recent articles on the topic of on-boarding (Seyfarth Shaw has two entertaining YouTube videos on best and worst on-boarding practices and Karin McGinnis wrote a fine post last month for Corporate Counsel).
Why this increase in concern over on-boarding? One reason is an improving economy that is in turn causing companies to increase their hiring from the ranks of their competitors. Another factor is the increase in non-compete and trade secret litigation generally, and companies' growing awareness of the risks of that litigation if they do not manage their hiring process correctly.
The process of on-boarding can be a challenging and delicate one. There are potential conflicts for the unwary, as the interests of the new employee and the new employer may not always be aligned and separate counsel may be required. In addition, those challenges are compounded by the prevalence of ESI, BYOD and other workplace technologies that serve to complicate the transition process. In short, in any important employee transition, in-house counsel, and frequently outside counsel, now need to be involved.
Despite these potential complexities, I believe there are five basic Golden Rules to remember. I will cover the first two Golden Rules today and wrap up with the remaining three rules tomorrow:
Rule No. 1: Ask for and Review All Employment Agreements. This the first and most important of the Golden Rules, because without it, you are almost certainly flying blind in the hiring process. Courts will no longer tolerate an employer turning a blind eye to an agreement and will hold it accountable if there is any trade secret misappropriation or improper breach of a restrictive covenant. Courts expect a new employer to conduct some analysis of the agreement and to have taken steps to protect the legitimate business interests of the former employer (to be addressed in tomorrow's post). You can't protect those interests if you don't know what the former employer and new employee agreed to during their relationship.
Don't confine your analysis to the most recent employment agreement as there may be previous ones that come into play if the last one is defective or unenforceable for some reason. And if you are concerned about confidentiality, arrange for counsel for the employee who can at least review it and advise the employee (be mindful of conflicts though). A prospective employee's claim that he does not remember any agreement or does not have a copy should be a red flag and, and perhaps even grounds for not hiring him/her.
Once you have and review the employee's agreement, your company may decide that the employee is still worth pursuing because the non-compete is too broad or unfair, or because you conclude that you can hire the person and still manage to protect the legitimate interests of a competitor (tomorrow's post). Given the increasing judicial ambivalence to restrictive covenants, that may be a risk worth taking. However, you cannot take any reasoned approach until you know what issues are presented under that agreement.
Rule No. 2: Leave All Former Employer's Trade Secrets Behind. It would be nice if you had a special hermetically-sealed chamber through which you could direct the new employee so that he/she could emerge on the first day of work completely sanitized of all his/her previous employer's trade secrets. Until that technology is available, however, a new employer has to clearly and emphatically prohibit the prospective employee from using or bringing his previous employer's trade secrets with him/her. This means copies of all customer lists, contact information, marketing and business strategies and other potentially proprietary information of the previous employer need to be returned to the former employer before the employee transitions.
Of course, it is not that simple anymore in the era of BYOD and the 24/7 work cycle. The reality is that we all work at home and that frequently digital or paper copies of confidential information sometimes make their way into personal devices or inadvertently find their way into a home office desk drawer. Consequently, not only should an employer instruct the new employee to leave everything behind but it should remind him/her to double-check personal devices and their desks and files at home. Finally, an employer needs to reinforce the consequences that might ensue (suspension, termination, etc.) should the employee bring or attempt to use his or her employer's trade secrets. All of this should be in writing and preferably a term in the new employee's agreement. This agreement will not only protect an employer but will also provide cover to the new employee in any subsequent litigation because it will be proof of the steps taken to protect the trade secrets of the former employer.
I remember an in-house speaker emphasizing that one of his former bosses used to send a polite but direct letter to each new employee that told them to leave everything behind because the confidential information of the competitor would no longer be needed. I thought this approach, a simple letter that only concerned this subject, was a very effective way of reinforcing the importance of a culture of integrity and responsibility in the trade secrets context. This approach may be particularly useful when hiring researchers, coders or others who might be involved in the development of products for a competitor.
Of course, the new employer and former employee may face a claim of inevitable disclosure -- i.e., that the employee simply cannot be trusted to not use or disclose those trade secrets in a competitive setting. However, as I have written before, courts have increasingly viewed this doctrine with disfavor and are requiring some evidence of misconduct before they are willing to enjoin an otherwise proper hire from going forward.
Stay tuned for tomorrow's post which will cover Golden Rules 3, 4 and 5.
I wanted to continue my wrap up of some of the other high points from the American Intellectual Property Law Association (AIPLA) Trade Secrets Summit on Tuesday but there was so much fine content that I could not do it justice in a single post. Consequently, I will follow up with a final post on the Summit as well as high points from the cybersecurity and trade secret presentations from the AIPLA Annual Meeting last week. Here are some additional highlights:In the litigation and procedure session, Russell Beck of Beck Reed Riden, Kenneth Vanko of Clingen Callow and Anthony Sammi of Skadden Arps covered the important issues to consider when bringing a TRO or injunction in a trade secrets case. Decline of the Inevitable Disclosure Doctrine? Russell noted the realities of the increasingly high standard for injunctions in state and federal courts. He also started an interesting conversation within the panel about the inevitable disclosure doctrine (a doctrine that holds that even the most conscientious employee may not be able to avoid using a former employer's trade secrets if he/she joins a competitor). Russell noted that the recent case in Washington involving Amazon.com and Google -- which rejected the inevitable disclosure doctrine -- is consistent with what he is seeing by courts. In short, if the employee is clean when he/she leaves, it is simply very difficult to restrain him or her from working for a competitor in the absence of a non-compete.The Increasing Importance of Trade Secret Identification. Kenneth Vanko outlined the trend of recent cases requiring plaintiffs to identify their trade secrets early in a case. This was a key theme at the Summit and at the AIPLA Annual Meeting as it seemed each speaker observed greater emphasis from courts requiring plaintiffs to identify their trade secrets at key junctures. Ken emphasized the importance of specificity and doing your best to focus on pursuing the best trade secrets at issue throughout the proceeding. Ken noted that other jurisdictions are following the lead of California, Delaware and Minnesota in requiring some degree of disclosure early in a proceeding. For those asserting trade secrets that involve some compilation of publicly known information, Ken noted that courts have imposed a higher burden on those types of trade secrets -- requiring plaintiffs not only to identify those trade secrets but to explain how those compilations qualify as a trade secret.The Importance of Selecting Your Best Witness Early. Tony Sammi's presentation focused on the special challenges of trade secrets in highly technical cases. Tony emphasized the importance of identifying the witness who could best explain the technology and trade secrets to a judge or jury. Tony noted that the most knowledgeable witnesses in his cases are generally not the managers but instead the coders themselves. Negative Use. The panel emphasized the importance of "negative use" in trade secrets cases -- the concept that a defendant doesn't have to necessarily use or incorporate a trade secret into its product to receive a benefit from that trade secret. They agreed that this concept can be a tricky one and often does not get the attention it deserves despite the fact that a defendant can benefit from avoiding the blind alleys and goose chases of the development process by finding out what hasn't worked.
In the afternoon, the Summit focused on the criminal trade secrets front. Gabriel Ramsey of Orrick, Eduardo Roy, and Michael Weil of Orrick provided plenty of war stories in their panel discussion about their experiences in advising clients who bring, or are on the receiving end of, a criminal trade secrets prosecution.Know Your Federal District. The panel agreed that knowing the dynamics of your local federal prosecutors and investigators' office was key to securing a criminal referral. They noted that you will likely have to package your trade secret claim to the duty agent for the FBI or other contact. The panel observed that these agents and officials are no different from those in the private sector and they are most interested in cases that will bring attention and favorable press to them and their offices. Also, the panel emphasized that you may find that your best contact is not necessarily a prosecutor but a secret service agent or FBI agent. Every district is different and relationships matter.Factors that may make a trade secret case more sexy for a criminal referral include the potential for a powerful press release, high dollar numbers, travel opportunities for the officer, the existence of a foreign national in the alleged theft, or the potential for a civil case that might bring big fines. The panel acknowledged that only the most egregious cases between domestic competitors will get a prosecutor or agent's attention. They noted that there is frequently a bias against trade secrets cases because of the existence of a civil remedy.The panel also emphasized the importance of the absence of skeletons in the client's closet and that the client should be clean. Otherwise, the client might find itself in a situation where the prosecutor turns the tables and prosecutes the client, as these cases frequently involve former employee who can be expected to throw dirt right back at their prior employer (accusing them of securities violations, whistleblower, etc.).Miscellaneous Points. The panel agreed that in concurrent civil and criminal investigations, that while the government can’t use a civil case as a stalking horse for its criminal case and for discovery, there is nothing wrong with a civil defendant bringing evidence to prosecutors. The risk of course is that whatever is given to the prosecutor will have to be shared with the defendants’ legal team. Another interesting issue that the panel raised involved the company’s obligations to a former employee charged with stealing from that company – namely, is there insurance coverage? As readers of this blog know, this question is now front and center in Sergey Aleynikov’s long-running dispute with Goldman Sachs and is the subject of a pending declaratory relief action in New Jersey. The panel could offer no clear answers on this question but advised that companies need to be aware of their potential coverage.One point of discussion was how best to defuse criminal proceeding when representing the company. Eduardo noted that it may be in the company’s interest to clean house and fire everybody that was involved to mitigate the company's damages and exposure. The panel emphasized the importance of having a full legal team given the range of important legal issues – i.e., counsel skilled in internal investigations, labor and employment counsel for possible terminations.Again, I will wrap up next with a discussion of the final session of the Summit that covered prosecuting trade secret claims before the International Trade Commission as well as the trade secrets and cybersecurity presentations at the AIPLA's Annual Meeting.
Criminal Proceedings | Inevitable Disclosure | Injunctions | Trade Secrets
Reports of the Trade Secret Litigator’s death have been greatly exaggerated and in fact, I was spotted on Tuesday at the American Intellectual Property Law Association’s Trade Secrets Summit in Washington, D.C. For those unable to attend, I thought a quick wrap up of the high points of the day's excellent content would be helpful.Seyfarth’s Robert Milligan, David Rikker of Raytheon, Mark Mermelstein of Orrick and Christian Scali of The Scali Firm started out the day addressing the dynamics of trade secret litigation, focusing on the key points in successfully managing the in-house/outside counsel relationship. The panel covered an awful lot of ground, but the high points included:Cease and Desist Letters: The consensus seemed to be that they may be more trouble than they are worth. Each of the outside counsel panelists emphasized the importance of accuracy and timing, as there is always the risk that a client’s investigation may not be complete at the time of drafting the letter. However, the letters can achieve their initial desired effect as David Rikker says Raytheon takes them seriously. Ex parte TROs: No surprise here, the panel agreed that they are rarely granted except for preservation orders where there are egregious facts giving rise to concerns over spoliation or destruction of evidence.Special Dangers of Motions to Seal: Protective orders are no longer perfunctory and the panel reported that they are increasingly seeing defendants oppose motions to place trade secrets under seal as defendants use the protective order as an opportunity to lay out their objections to the bona fides of those trade secrets. Robert Milligan said they have almost become the equivalent of summary judgment disputes in California. Of course, the consequences of denial of a motion can be catastrophic so the panel emphasized the importance of making your record for an appeal to preserve your trade secrets.Criminal Referral: Mark Mermelstein spoke about the advantages of initiating a criminal investigation as opposed to a civil claim. Those pros include the fact that the government can, among other things, use false identities to gather evidence from the potential defendant (civil lawyers are prohibited by the ethical rules from using those means), issue a 2703 order to secure the identities for an ISP address associated with misappropriation or cybertheft, and ultimately issue a search warrant if necessary. Mark also noted that the federal government also can rely on multi-lateral treaties to enlist the help of foreign law enforcement. Finally, Mark observed that a criminal proceeding can be the most effective way of collecting ill-gotten gains as the leverage of jail time may persuade potential defendants to repatriate those moneys.Mark did identify several reasons why a company may not want to pursue a criminal option. The law of unintended consequences may reign, particularly as the client will ultimately lose control of any criminal investigation to the prosecutors or federal authorities. Fall out could also include damage to customer relationships, since some of those customers could be ensnared as witnesses or even targets. Finally, for publicly-held companies, depending on the scope of the breach and the resulting publicity, a public investigation and prosecution could affect share price or lead to shareholder litigation.Best Practices for Keeping In-House Counsel Happy: David Rikker listed the following best practices for a healthy counsel relationship: clear and timely communication, helping in-house counsel get the business unit’s buy-in for any investigation or litigation, thorough early case assessment to help manage expectations, and, not surprisingly, no surprises! David emphasized the importance of an early case assessment that includes looking at the pros and cons of a prosecution or litigation. He acknowledged that in-house counsel appreciate that outside lawyers cannot anticipate every eventuality but a frank conversation of uncertainty is important, particularly for the business unit personnel.On-Boarding: The issue of on-boarding is growing in importance as more companies are hiring people with restrictive covenants or trying to mitigate their risk from trade secret fall out. Robert put together a highly entertaining video of what companies should not do (that video, along with one addressing best practices for on-boarding is available on Youtube and I will provide a link in a future post). All of the outside lawyers emphasized the importance of getting the prospective employee’s written employment agreements as part of the hiring process. From the in-house perspective, David Rikker emphasized the need for a culture of ethics and responsibility -- that a company has to make clear that it is not soliciting its competitors’ trade secrets when it hires new employees, and that after hiring, new employees need to understand that they have to keep those trade secrets out of the new employer’s environment.Off-Boarding: As time was winding down, the panel did not have the opportunity to comprehensively address best practices in the departing employee context. David noted the need for clear rules on, among other things, thumb drive use, third party storage and use of DropBox. Above all, he emphasized the importance of a culture of responsibility.I will follow up with another post summarizing the rest of the day’s discussions. The content and speakers were generally superb and a special shout out is warranted to Peter Torren of Weisbrod Matteis & Copley, Seth Hudson of Clements Bernard, Orrick’s Warrington Parker and Intel’s Janet Craycroft for their efforts in putting this together for the AIPLA’s Trade Secret Law Committee.
Cease and Desist Letters | Criminal Proceedings | Discovery Issues | Injunctions | Trade Secrets
Here are some noteworthy posts from the past week and some catch-up on other posts from the past couple of weeks: Trade Secret and Non-Compete Cases, Posts and Articles:
Cybersecurity Posts and Articles:
Computer Fraud & Abuse Act Posts and Articles:
California | Computer Fraud and Abuse Act (CFAA) | Criminal Proceedings | Cybersecurity | Economic Espionage Act | Georgia | Massachusetts | Non-Compete Enforceability | Restrictive Covenants | Trade Secrets | Uniform Trade Secrets Act (UTSA) | Weekly Wrap-Up Posts
Two apologies are in order. First, I have been on vacation, and swamped with a preliminary injunction and upcoming trial, and, as a result, I have not been able to keep up with the blog in the past two weeks. Second, as some of you may have noticed, we have had some delayed postings and graphics issues (including the absence of today's photo) and I apologize for any inconvenience. We have recently switched to a new web design and hosting company to provide a better user experience and have been working through some issues. Thanks for your patience during this transition.
Now, here are the noteworthy posts of the past week and some catch-up on posts from the past couple of weeks:
Trade Secret and Non-Compete Cases, Posts and Articles:
Weekly Wrap-Up Posts
Here are the noteworthy trade secret, non-compete and cybersecurity stories from the past week, as well as one or two that I missed over the past couple of weeks:
Trade Secret and Non-Compete Cases. Posts and Articles:
China | Computer Fraud and Abuse Act (CFAA) | Cybersecurity | Patents | Legislation | Massachusetts | New York | Non-Compete Enforceability | Restrictive Covenants | Texas | Trade Secrets | Weekly Wrap-Up Posts
A recent $6.9 million verdict by a Pennsylvania state court judge serves as a stark warning to employers that hire a group of employees who resign together en masse. The case, B.G. Balmer & Co. Inc. v. Frank Crystal & Co., out of Chester County in Pennsylvania arose out of claims that a group of insurance brokers violated the non-solicitation clause in their employment agreements with their former employer, B.G. Balmer.
These mass exodus cases happen frequently in the financial services industry and can be particularly dangerous cases, especially where the employees improperly solicit colleagues or clients to join them before leaving. These cases are notoriously contentious and emotional -- think about your standard non-compete case, throw in a cup of betrayal, shake well, and then add a healthy jolt of steroids. I have not yet been able to locate the trial court's opinion yet (I understand it may be filed under seal) but Gregory D. Hanscom has a fine post about the case in Fisher & Phillips ' Non-Compete and Trade Secrets Blog.
According to Gregory, the group of departing employees first began to consider switching insurance brokers from B.G. Balmer to Frank Crystal & Co. when they individually met with a recruiter in May 2003. Less than three months later, those employees all resigned from B.G. Balmer on the same day (never a great idea) and promptly started working for Crystal. After they left, about 20 of B.G. Balmer's clients switched their accounts to Crystal.
After B.G. Balmer secured a preliminary injunction restraining the employees (affirmed on appeal by the Pennsylvania Superior Court), the dispute proceeded to a bench trial to determine the ultimate issues of liability and damages. According to Gregory's account of the case, B.G. Balmer effectively painted a sinister picture of the employees’ actions. B.G. Balmer argued that the former employees engaged in a calculated and concerted effort to disrupt its business by resigning on the same day and attempting to induce a number of clients to switch insurance brokers. The trial court rejected the employees' argument that the clients chose to switch insurance brokers on their own volition, and not because of any improper solicitation.
The trial court awarded $2.4 million in compensatory and $4.5 million in punitive damages, an unusual ruling since judges are generally perceived as being less willing to award punitive damages than juries.
Watch Out for Breach of Fiduciary Duty Claims. In addition to claims of the breach of a non-compete or non-solicitation agreement, one of the common claims that arise in these mass exodus cases is whether the former employees breached their fiduciary duties to their former employer when they planned to leave. Many states, including Ohio, impose a fiduciary duty of loyalty on an employee not to compete or harm his or her employer while he/she is on that employer's payroll.
Most states do recognize that an employee has the right to prepare to leave his or her job. Consequently, routine preparations to compete -- interviewing, leasing office space, hiring an accountant, forming a company, issuing business cards -- are frequently permitted. So long as the employee takes those actions after hours and not at the office, those actions will generally found to be proper.
However, things can get more interesting when the employee recruits others to leave while they still share the same employer. In my experience, courts will tolerate 2 or 3 employees having conversations about leaving their job together. However, courts grow more suspicious as that number grows, particularly when the departures then appear timed to put the former employer in the lurch or cause it substantial damage. My experience and research indicate that the facts of each case dictate whether the employees acted inappropriately.
However, there is one line in the sand that will trigger a finding of a breach of the duty of loyalty: if the employee solicits a customer before leaving. In my experience, courts will tolerate some mistakes but it is the solicitation of clients before resigning, misconduct that is compounded exponentially in mass exodus cases, that sets courts off the deep end. The punitive award in the B.G. Balmer case is an important reminder of that fact.
Takeaways: For the employees looking to avoid a mass exodus claim against them, take heed of the Trade Secret Litigator's Seven Deadly Sins of Departing Employees. These rules are particularly important to follow in mass resignation cases because as the B.G. Balmer case makes clear, every action may take on a more sinister note when it is coupled with the actions of other co-workers who are planning on leaving. The cumulative effect of this evidence can be devastating.
For employers taking on a group of employees, make sure that they follow their non-solicitation agreements, if they have any. If they do not have those agreements, make certain that they also do not solicit co-workers or clients until after they leave. Make sure they keep it clean.
Non-Solicitation Agreements | Pennsylvania | Restrictive Covenants
California | Cybersecurity | Economic Espionage Act | Florida | International | Legislation | Massachusetts | Non-Compete Enforceability | Restrictive Covenants | Texas | Trade Secrets | Weekly Wrap-Up Posts
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