Keeping Your Secrets Safe: Mitigating Risk When A Key Employee Leaves

Tuesday, November 2, 2010 - 01:00

Editor: Please describe your practice area and your experience with this type of case.

Johnston: I began my career as a prosecutor, a job that provided me with a lot of trial experience. In 1986, I received an LLM in labor and employment law from Georgetown. My practice has focused for the last 25 years primarily on employment litigation, including litigation related to employment contracts and restrictive covenants.

I have handled numerous cases representing companies seeking to enforce restrictive covenants and individuals and companies opposing the enforcement of such covenants. I have also provided counseling where a prior employer is concerned about potential disclosure of trade secrets or confidential information to the new employer. At King & Spalding, there are lawyers in both our intellectual property and employment litigation groups that do these kinds of cases.

In my experience, these cases arise with little or no notice and move very quickly. Early case assessment is critical. Typically, someone who has access to trade secrets or critical information leaves a company under circumstances that suggest he has taken intellectual property of the company that can and will be used by a competitor. Under these circumstances, the parties tend to become very emotional. The former employee is being accused of serious wrongdoing, and the company feels betrayed by someone it trusted and in whom the company invested a lot of time and resources.

It's important for the company to take a cold look at the facts early on to determine whether the real likelihood of damage to the company is as significant as it might initially appear. This must be weighed against the expense and disruption that is occasioned by the company's efforts to contain the damage. Filing a lawsuit to enforce restrictive covenants or rights under a trade secret statute may not only be costly, but also may divert the attention and time of key executives from more important tasks. Make that assessment early on in the case, because once you start down the litigation road, the parties become polarized and it's very hard to back off.

Notwithstanding the cost and disruption, a company may still feel that it is worthwhile to proceed with litigation against the employee to establish that it is not going to allow its executives or key employees to head to a competitor without having to comply with their obligations to the company.

Editor: What are the risks when a key employee or one with access to trade secrets or confidential information walks out the door with that information?

Johnston: The information and good will created by the employee at the expense of the company may be used to compete with the company. Another significant risk is that the employee has developed relationships with other key employees. If the employee goes to a competitor, he will know which of his former colleagues is vital to the business and would be vital to the new employer's business. So, he or she can start cherry-picking them.

Editor: What can a company do in advance to mitigate these risks?

Johnston: Prevention is always better than litigation. At the outset of employment, a company should anticipate the possibility that relationships may sour. There should be a careful consideration of the company's concerns if that employee leaves the company. The company should deal with those concerns upfront at a time when the individuals involved are cooperating with each other.

When a company hires a senior executive or key employee who will have access to confidential information or may build relationships with customers or others of value to the company, the employee should sign a well-thought-out agreement containing restrictive covenants. Depending on the nature of the employee's responsibilities, it might include a non-compete agreement or an agreement not to solicit customers or other contacts or employees or all of those. Every employee who will have access to trades secrets or confidential company information should sign a non-disclosure agreement.

A company should not rely only on such an agreement; it should also institute information security policies and procedures that allow it to track what employees are doing with its proprietary information. This will not only deter misuse of the information, but will also permit the company to determine what information may have been compromised if the employee defects to a competitor.

Editor: Do you have particular cautions for in-house counsel as to how those agreements are drafted?

Johnston: State law is very specific about what is and is not enforceable in restrictive covenants. Companies need to know the state law where the employee will be working so that the agreement can be tailored to that particular state's laws. The covenant also needs to be tailored based on what the employee is going to be doing for the company.

Editor: What should a company do to protect itself after a defection occurs?

Johnston: Time is of the essence. The longer you delay in taking action, the greater the damage and the less likely a court will grant preliminary injunctive relief. An early assessment of what actually has happened is the first step. Is the employee going to a competitor where he or she is going to be harmful to the company's business? Did this employee have access to trade secrets and confidential information that the company is concerned about having that competitor possess? Did he or she have valuable relationships with customers or other contacts that can be used by a competitor or otherwise be used to damage the company?

Assuming that the answer to any of these questions is "yes," there are a number of things that the company needs to do quickly. It needs to find and protect critical evidence. The employee's access to the company's premises and electronic data systems needs to be cut off, including his or her ability to sign into the data systems remotely. The company should try to recover any computers, personal data devices, cell phones and any other kind of electronic storage devices to which he or she had access - and, don't recycle his or her computer to some other employee. If you have reason to believe that he or she has taken trade secrets and confidential information out of his or her office, photograph and take an inventory of the executive's work space. Those sorts of things must be done immediately.

Collect and review all the documents that might impose some obligation on the employee to protect information not to compete with the employer or solicit employees or customers.

Obviously, there needs to be an assessment made as to what rights the company has. Does the employee have a contractual obligation to return all of the information that he or she has? Are there restrictive covenants that can be enforced? If they are not enforceable under the law of one state, is there some basis for enforcing them in another state where the law is more favorable? Where there are indications that confidential information or trade secrets may have been taken either physically or electronically, go to the building superintendent and secure any evidence that exists regarding security videos, access card records and parking access records that might show the employee coming in and out of his or her office or office space during non-business hours.

Editor: Does the former employee's new employer bear any risks in employing the defecting employee? If so, what are they? How can the new employer mitigate them?

Johnston: In most states, if the new employer is put on notice that the new employee has a contractual obligation to his or her prior employer in the form of a non-compete or non-solicitation of clients provision, and the new employer permits the employee to work in violation of those agreements, the new employer could be liable for tortious interference with those contractual relationships and obligations. Also, in most states there is a statutory obligation for employees to protect trade secrets of their employer, and the new employer can be liable for misappropriation of trade secrets if it knowingly permits the employee to use the trade secrets. The new employer can mitigate some of those risks - especially in the area of soliciting customers and using trade secrets - by making it clear (in writing) to the new employee that it expects the new employee to comply with all contractual obligations he or she has with the prior employer. The new employer should also tell the new employee not to use any of the old employer's confidential information or trade secrets. Lastly, the new employee should be advised that he or she will be subject to discipline if he or she violates any legal obligation to the old employer.

Editor: What is the effect of notification of the new employer of the employee's obligations to the old employer?

Johnston: By putting the new employer on notice of the employee's contractual obligations the company puts the new employer at risk for liability for tortious interference as discussed above and provides greater incentives for the new employer to not allow the employee to violate his obligations to his former employer.

Editor: In the absence of an agreement, what value does the inevitable disclosure doctrine have?

Johnston: The inevitable disclosure doctrine, which is an implied non-compete agreement, can be very valuable in the absence of an agreement. It can result in an employee being prohibited from working for the new employer either in any or in some specific capacity in which the employee inevitably would have to disclose his old employer's trade secrets to do his or her job new job. This theory has not, however, been accepted by many courts.

Editor: How can the new employer mitigate the risks?

Johnston: The principle behind the inevitable disclosure theory is that the position for which the new employer is hiring the employee is going to place that employee in circumstances in which he or she inevitably, consciously or subconsciously, will use trade secrets belonging to the old employer, and that he can't possibly do what the new employer's job calls for him or her to do without using those trade secrets. If that is true, the new employer can mitigate its risk only by moving the employee to another job or not employing him at all.

Please email the interviewee at mjohnston@kslaw.com with questions about this interview.