Hiring Employees Who May Be Bound by Post-Employment Restrictive Covenants? Caution, Restrictions May Apply

Employers frequently want to hire talented employees who are bound by post-employment restrictive covenants (e.g., non-competes, or customer/employee non-solicitation covenants).  Often, a plain reading of the prospective hire’s agreement raises questions about whether joining your company would violate the agreement.  This requires strategic, and sometimes creative, planning.  Depending on your jurisdiction, deciding to hire an employee despite their post-employment restrictive covenants may involve taking a calculated risk that some parts of the post-employment restrictions are not enforceable, while deciding that there are some aspects your company can live with and that you expect the new employee to follow.  The following provides some basic guidance.

1.  Assess the business impact of the restrictions by determining the precise scope and duties of the prospective job.  Even though the individual may be subject to post-employment restrictive covenants, the job for which you intend to hire him/her may not fall within the restrictions.  Or, inasmuch as most restrictive covenants will expire — sometimes in a matter of months — you may decide that the company can tailor the scope of the intended position so that the new employee can still add value, but not perform work that would violate the individual’s obligations to his/her former employer.  Can the person be employed in a capacity that does not violate the restrictions until they lapse?  Can the person be employed outside the geographically restricted area or assigned to existing customers different from those of the former employer?

2.  Review and analyze the legal risk.  Analyze the true legal risk of proceeding.  By “true” legal risk, I mean the likelihood that the former employer will succeed if it takes legal action, as well as the likelihood the former employer will actually take legal action.  This should include an analysis of the scope of the restrictions and their enforceability given the applicable state law, whether the action will be brought in federal or state court, as well as an assessment of the likelihood that a court will enforce the restrictions.  This will vary according to the applicable state law and circumstances.  You should also consider more practical issues such as the former employer’s litigation history, the importance of the potential hire to the former employer, and the extent to which employment with your company differs from the prior employment.  Other practical considerations should include a review of the industry and whether post-employment restrictions are commonplace, whether the two companies compete for the same customers, and a frank review of your company’s flexibility in defining the scope of the intended position.

3.  Hire away, or don’t, but proceed with caution.  Having analyzed the legal risk and business impact of the restrictive covenants on your proposed hire, determine whether you are comfortable proceeding with the hire in the intended position, or if there is a different, or modified position, that would still suit the company’s needs while lessening the legal risk.  Analyze and take available appropriate steps to minimize the risk of being sued, or, if sued, the risk of a lengthy or costly suit.  Communicate, in writing, what you expect of the new employee.  For instance, you and counsel may reach the conclusion that the prospect’s non-competition restrictions are overly broad and will not be enforced under the circumstances, but that a court is likely to enforce a customer non-solicitation covenant.  Accordingly, you may decide to move ahead with the hire, and plan to keep the new employee away from former customers.

Typically, the  company’s offer letter is a good place to memorialize such expectations.  In our scenario, the offer letter should state, as a condition of employment, that the new employee does not possess and/or will not use his former employer’s confidential information and that the employee will not solicit former clients (as well as any other restrictions that your company expects to be followed).  The employee, especially if sophisticated or if represented by an attorney, may seek indemnification for any legal action taken by his former employer.  Determine whether you are willing to entertain such a request.  Consider also what type of an “out” you have, both of the employment relationship and/or indemnification, i.e., what recourse does the company have if ensuing litigation is going badly or you find the new employee was not truthful about not taking any confidential information from the former employer?

4.  Protect your company from the beginning.  Companies often get into trouble when recruiting a prospective employee long before the actual hire.  Employees may pitch their importance by showing you their customer list or sales volume, but these items are likely to be considered confidential by their employer, if not trade secrets.  Further, the employee may offer to bring with them a junior colleague and provide you with confidential information about the employee or may start contacting customers about his or her intentions.  Those actions may have already violated the person’s restrictive covenants.  Ground rules for such activity should be established during the interview process, in writing, if possible.  Also obtain written confirmation that the potential hire is not under any undisclosed restrictions and communicate, in writing, that the prospective employee is not to disclose or use confidential information or trade secrets and is not to take or bring any property or information belonging to the employer.  Follow through and make sure the person complies fully with those requirements.

Although there is no way to prevent a suspicious former employer from challenging your company’s hire of one of its employees, following this guidance will place your company in a better position in the event of such a challenge.

Practical Tips for “Bring Your Own Devices” (BYOD) Policies and Practices

Editor’s Note: The following post by San Francisco Partner Cheryl Orr appears in the latest issue of the California HR Newsletter.  To view the entire newsletter click here.   To sign-up to receive the California HR Newsletter click here.

Practical Tips for “Bring Your Own Devices” (BYOD) Policies and Practices

The Issue: What do employers need to do to minimize risks (privacy, security, safety and wage and hour) caused by use of personal smart phones and tablets in the workplace?

The Solution:
Employers can minimize their risks by:

  • Drafting clear and consistent policies that cover all technologies and servers used;
  • Having employees sign requests granting them access to the company’s systems and acknowledging when they can be wiped;
  • Confirming in writing that all information accessed through the company’s systems is confidential and company property and can be wiped if lost or stolen;
  • Ensuring compliance with the company’s codes of legal and ethical business conduct; and
  • Addressing when employees can use their devices for work and how they will be paid for this time and any associated reimbursable expenses.

Analysis: Employees can inadvertently expose their employers to loss of confidential or trade secret information, create liabilities when inappropriate material on their devices is shared and blur the lines between work and personal time in a way that could be compensable. By following the above practical tips, employers can protect both themselves and their employees. Our team regularly assists with developing BYOD policies and/or training personnel on how to implement should you need further guidance.

FTC Approves Settlement of Noncompetition Case Against Renown Health Voiding Ten Physicians’ Noncompetition Agreements

On November 30, 2012, the Federal Trade Commission voted 5-0 to approve the settlement of a complaint it filed against Renown Health on August 3, 2012.  A settlement was promptly reached between the FTC and Renown Health avoiding the unwinding of two acquisitions made by Renown Health of two independent local cardiology groups.

The complaint alleged that Renown Health’s acquisition of competitor cardiology groups in Reno, Nevada, Sierra Nevada Cardiology Associates, Inc. (“NCA”) and Reno Heart Physicians, Inc. (“RHP”), and the employment of the 32 physicians employed by these entities, “is likely to lead to anticompetitive effects including increased prices and reduced non-price competition.”  The acquisitions resulted in Renown Health employing approximately 97% of the cardiologists serving private patients in the Reno area.  The FTC complaint focused on the fact that all of the employed physicians were subject to employment agreements containing noncompetition and non-solicitation provisions prohibiting them from practicing medicine or soliciting former patients for two years in the Reno area after termination of their employment.  As a result of the noncompetition and non-solicitation agreements, competition for cardiology services would have to come from without, which the complaint alleged to be unlikely because of certain barriers to market entry.  The State of Nevada, through its attorney general, worked with the FTC in investigating and resolving the matter.  The Nevada AG filed a similar complaint and entered into an agreement with Renown Health similar to the FTC consent decree.

The parties reached a settlement this fall through an agreed consent decree that would avoid having to unravel the mergers.  The FTC has now approved the consent decree under which Renown Health released up to ten cardiologists previously employed by NCA or RHP from their noncompetition and non-solicitation restrictions.

This result signals a cautionary note for those hospitals and health care systems with an overly large market share in a geographical market who seek to further expand their employed physicians in a given practice area.  In this case, the 88% market share for the cardiologists was a daunting statistic for Renown Health to overcome.  Going forward, this is just one more potential road block that health care providers must consider before acquiring additional physician practices and increasing its employed physician roles.


A Litigator’s Perspective on Trade Secret Protection Programs: How to Protect Your Valuable Information Against Rogue Employees

Mark E. Terman, a partner in the Los Angeles office and a member of the Competitive Advantage practice team, authoried the article “A Litigator’s Perspective on Trade Secret Protection Programs:  How to Protect Your Valuable Information Against Rogue Employees,” which was recently published on InsideCounsel.com.  Mark’s article discusses the Uniform Trade Secrets Act and its variations, as well as questions companies should consider when developing their own trade secret program.  Mark also emphasizes that companies should have a program to deter and limit trade secret misappropriation.  “A seeming axiom of trade secret and unfair competition litigation is that the more brazen and dishonest the behavior of the former employee (and perhaps their new employer), the more accommodating a court may be to a company whose proof is less than perfect. By contrast, the thinner a company plaintiff’s proof is, the more a court may accept a former employee’s argument that there is nothing secret, nor valuable in the assets even if their theft can be proven” he says.

To read the entire article click here.

Recent Fee Shifting Cases Caution Against Diving into Non-Compete/Trade Secret Litigation Where the Facts Supporting a Violation are Unknown or Questionable

Two recent cases highlight the down side of running into court with guns blazing but without the horses to prevail, or at least without the facts sufficient to survive the bad faith standard of the Uniform Trade Secret Act.  In Sasco v Rosendin Electric, Inc., 143 Cal.Rptr.3d 828 (July 11, 2012), the Appellate Court affirmed the lower court’s judgment of $ 484,943.46 in attorneys’ fees and costs pursuant to California’s Uniform Trade Secrets Act, observing:

Speculation that the individual employees must have taken trade secrets from SASCO based on their decision to change employers does not constitute evidence of misappropriation.  Nor does speculation that Rosendin’s success in obtaining the Verizon Tustin contract was based on the theft of trade secrets constitute evidence of misappropriation.…..Having reviewed the parties’ respective papers, the court found there was no evidence of trade secret misappropriation.

In Loparex, LLC v. MPI Release, LLC, 2012 WL 3065428 (S.D. Ind., July 27, 2012) the District Court was even more direct in awarding the prevailing party, MPI,  $475,000 in attorneys fees and nearly $29,000 in costs under the Illinois Uniform Trade Secret Act.  The Court found that Loparex pursued the trade secret misappropriation claims in “bad faith.”  The Court also determined there was no evidence that the employees had misappropriated any trade secrets in its diversion of a former Loparex customer.  The Court went on to award fees against Loparex’s former lead counsel as well, under 28 U.S.C § 1927, for bad faith prosecution of the case.

These cases do not mean that attorneys’ fees will be shifted where a plaintiff can show that trade secrets are at issue and the plaintiff has a good faith factual basis to conclude that those trade secrets were being misappropriated or there was a threatened misappropriation.  The plaintiff bringing a trade secrets action does not get assessed the other party’s attorneys fees by losing, but only when the plaintiff loses and a claim of misappropriation is made in bad faith.  In these two cases, there was no reasonable basis for bringing the claims, let alone continuing to pursue the litigation after it was clear to everyone that the plaintiffs’ claims were meritless.

In addition to a statutory basis for attorneys fees under the Uniform Trade Secrets Acts adopted in many states, there are  other statutory fee shifting statutes that may apply.  For instance, Montana’s Declaratory Judgment Act, § 27–8–313, may provide a statutory basis for awarding attorneys’ fees as supplemental relief if such an award is determined to be necessary and proper.  See, e.g., Mungas v. Great Falls Clinic, LLP. 354 Mont. 50, 221 P.3d 1230 (2009)(fees not awarded because the facts not deemed to warrant it).  More frequently, however, fee shifting awards come from a well drafted employment agreement.  Ohio Learning Centers, LLC v. Sylvan Learning, Inc.,  2012 WL 1067668 (D. Md., March 27, 2012).  The Sylvan Court quoted the relevant contract language:

[I]n the event either [SLI] or [OLC] institutes a suit or action to enforce any term or provision of [the License] Agreement, the most prevailing party in the suit or action, or on appeal, shall be entitled to recover from the losing party a reasonable attorney fee to be set by the trial or appellate court in addition to costs or disbursements provided by law.

At the summary judgment phase the Court found the fee award premature because “ at this stage in the litigation it is not yet clear that the Defendants will be ‘the most prevailing party’ in this case.”  Note that the Court is enforcing the parties’ agreement as written.  The Court also noted that the fee-shifting provision in the License Agreement only provides for an award of “reasonable” fees.  And since evidence of the reasonableness of the fees had not yet been submitted by the putative prevailing party, the Court stated that it could not conduct the requisite analysis.

The take away:  make sure you have the horses before filing suit, or at least be reasonably assured you will have those horses harnessed by the time the smoke of your rush to court clears.