Handling The Competition Of Departing Employees (neal)

Handling the Competitio n of Departing Employees Presented By

Kathy Neal Labor & Employment Attorney [email protected]

Case Study A John worked for WidgetMart in Tulsa as a salesman for 20 years and for the past 5 years served as National Sales Manager. He knows the widget business inside and out. He resigned his employment unexpectedly and immediately opened a new business called Widgets-R-Us – in direct competition with WidgetMart. Several key accounts of WidgetMart have already started buying widgets from Widgets-R-Us. Two years ago, the Human Resources Manager of WidgetMart decided that all management-level employees needed to sign a confidentiality and non-compete agreement. John signed the confidentiality agreement and the non-compete agreement in which, following his separation from employment, he agreed that he would not compete directly or indirectly with WidgetMart for two years in a 50-mile radius of Tulsa.

General Rules on Restraints of Trade •

Every contract by which any one is restrained from exercising a lawful profession, trade or business of any kind is void unless: –

If the restraint is in connection with the sale of the goodwill of a business, then a non-compete within a specified county and any contiguous counties, or a specified town or any part of the town, is valid as long as the buyer is carrying on a “like” business

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Upon dissolution of a partnership, partners may agree that none of them will carry on a similar business within a specified county or any contiguous counties, or a specified town or any part of the town

15 O.S. § 217, 218, and 219

What is Allowed is a Non-Solicitation Clause: •

A former employee can compete in the same business as that conducted by the former employer or in a similar business as that conducted by the former employee as long as he does not directly solicit the sale of goods and/or services from the established customers of the former employer - 15 O.S. § 219A –

Can prohibit “active” solicitation

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Cannot prohibit acceptance of unsolicited business - Bayly, Martin & Fay, Inc. v. Pickard, 1989 OK 122, 780 P.2d 1168.

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Two-year non-solicitation agreement was held enforceable in Inergy Propane, LLC v. Lundy, 2009 CIV APP 8

Non-Solicitation Clauses • Provisions that require a former employee to maintain a “hands-off” policy as to the employer’s customers have been upheld - Tatum v. Colonial Life & Accident Ins. Co., 465 P.2d 448, 451 (Okla. 1970) – A provision that required a “hands-off” policy as to the employer’s existing or established customers solicited or sold to by the ex-employee during the last 12 months of her employment was upheld in Drummond American LLC v. Share Corp., 29 IER Cases 1482 (W.D. Okla. 2009)

• Customer information and customer relationships are protectable interests that justify reasonable restraint

Non-Solicitation Clauses Cont. • Continuation of employment is not sufficient consideration to support a nonsolicitation agreement

Case Study B John worked for WidgetMart in Tulsa as a salesman for 20 years and for the past 5 years served as National Sales Manager. He knows the widget business inside and out. He resigned his employment unexpectedly and immediately opened a new business called Widgets-R-Us – in direct competition with WidgetMart. WidgetMart is a manufacturer and distributor of widgets. Several key accounts of WidgetMart have already started buying widgets from Widgets-R-Us. The Human Resources Manager of WidgetMart pushed for several years to have John sign a confidentiality and non-solicitation agreement but it was just one of those things that never got done. John did sign a Conflicts of Interest policy acknowledging that he understood that outside business interests could be in conflict with the company.

Case Study B, con’t After John left, you learned that he used his company computer and cell phone to make the business arrangements necessary to get his business off the ground. You learned that, while still an employee and on company time, John met with leasing agents, bankers, and accountants. While allegedly on paid vacation in Mexico, it appears he really flew to China where he cut a deal with a Chinese widget maker to distribute its widgets and his prices are lower than those of WidgetMart. When you got his laptop back after he resigned, you had it examined by a forensic specialist. John used a erasure program in an effort to delete the information on its hard drive. You have reason to believe that John accessed WidgetMart’s master client database with his laptop before he resigned.

Your Potential Remedies • • • • •

1. 2. 3. 4. 5.

The Uniform Trade Secrets Act The Computer Fraud and Abuse Act Breach of common law duty of loyalty Breach of contract Tortious interference with contractual relationships • 6. Oklahoma Deceptive Trade Practices Act.

The Uniform Trade Secrets Act • 78 O.S. § 85 et seq. • A “trade secret” means information, including a formula, pattern, compilation, program, device, method, technique or process that: – Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and – Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

The Uniform Trade Secrets Act: •

Prohibits the acquisition of a trade secret of another or the acquisition by someone who has reason to know that the trade secret was obtained by improper means; or

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Prohibits the disclosure of a trade secret without express or implied consent by a person who: – Used improper means to acquire knowledge of the trade secret; or

The Uniform Trade Secrets Act: –

At the time of the disclosure or use, knew or had reason to know that his knowledge of the trade secret was: • • •

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Derived from or through a person who had utilized improper means; or Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limits its use; or Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake

Can get an injunction, damages, a royalty for use

Effective November 1st There are Criminal Penalties (Amending 21 O.S. §1732) •

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Depending on the value of the trade secret, it is either petit larceny or grand larceny if: –

A person steals or embezzles an article representing a trade secret; or

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Makes a copy of an article representing a trade secret without authority

“Article” means any object, material, device, customer list, business records, or substance of copy thereof, including any writing, record, recording, drawing, sample specimen, prototype, model, photograph, microorganism, blueprint, information stored in any computerrelated format, or map

Effective November 1st There are Criminal Penalties (Amending 21 O.S. §1732) •

“Trade secret” now includes customer lists and business records

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“Copy” includes transferring and e-mailing of computer data

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It is no defense that the person charged returned or intended to return the article stolen, embezzled or copied

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“The provisions of this section shall not apply if the person acted in accordance with a written agreement with the person’s employer that specified the manner in which disputes involving clients are to be resolved upon termination of the employeremployee relationship”

Computer Fraud and Abuse Act • The Computer Fraud and Abuse Act, 18 U.S.C. §1030, prohibits fraud in connection with computers and provides for criminal fines and imprisonment with respect to persons: – Who intentionally access a computer without authorization or exceeds authorized access, and thereby obtains information from any protected computer, or – Who knowingly cause the transmission of a program, information, code, or command, and as a result of such conduct, intentionally cause damage without authorization to a protected computer; or

Computer Fraud and Abuse Act –

Who intentionally access a protected computer without authorization, and as a result of such conduct, recklessly causes damage; or

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Who intentionally access a protected computer without authorization, and as a result of such conduct, causes damage and loss

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“Protected computer” includes a computer which is used in or affecting interstate or foreign commerce or communication

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A civil action may be filed for compensatory damages and injunctive relief

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There is a two-year statute of limitations

Court Decisions

International Airport Centers v. Chin, 440 F.3d 418 (7th Cir. 2006)

Former employee in competition with his former employer violated the CFAA when, before returning his laptop, loaded secureerasure program into it to prevent recovery of deleted files that his employer had no other copies of. His authorization to access the laptop ended when he violated his duty of loyalty to the business.

Mintel Int’l Group Ltd. V. Neergheen, 27 IER Cases 1876 (N.D. Ill. 2008)

Employer showed likelihood of success on the merits in an action for an injunction with respect to a violation of the CFAA where the employee copied, emailed to his personal email address and/or printed confidential and proprietary information form his work computer, including client accounts and budgets, potential client lists, vendor lists, marketing strategies and overall objectives, and individual client cost data. These actions “exceeded his authorized access.”

Del Monte Fresh Produce N.A. v. Chiquita Brands Int’l Inc., 616 F.Supp.2d 805 (N.D.Ill. 2009)

Copying electronic files from a computer database – even when the ex-employee emails those files to a competitor – is not enough to satisfy the damage requirement of the CFAA. There must be destruction or impairment to the integrity of the underlying data.

Breach of Fiduciary Duty • Employees occupying positions of trust and confidence owe a duty of loyalty to their employer and must protect the interests of the employer • Even in the absence of an express agreement, a key employee or management or executive employee is barred from actively competing with his employer during the tenure of his employment – Damages are available and the equitable remedy of disgorgement of salary during the period of competition

Tortious Interference with Contractual Relationships • For a claim of tortious interference with contractual relations, the plaintiff must show: • 1. That he had a business or a contractual right that was interfered with. • 2. That the interference was malicious and wrongful, and that such interference was neither justified, privileged nor excusable. • 3. That damage was proximately sustained as a result of the complained of interference.

Oklahoma Deceptive Trade Practices Act • 78 O.S. § 51 et seq. • Prohibits a wide variety of anti-competitive acts having to do with misrepresentations of quality, source, and condition of goods. • Prohibits false or misleading statements in connection with advertising. • Prohibits the disparagement of the goods, services, or business of another by false or misleading representation of fact.

Oklahoma Deceptive Trade Practices Act • Remedies: 1. Injunction without proof of monetary damage. 2. Damages, including punitive damages.

Considerations for Your Protection • Consider having key employees sign employment agreements with confidentiality and non-solicitation agreements • Consider adopting a Conflicts of Interest policy in which periodically employees disclose outside interests and business interests; get them signed

Considerations for Your Protection, con’t •

Update your policies and procedures and employee handbooks Think about a policy telling employees that theft and embezzlement of customer lists and business records is larceny and that use of unauthorized use of company computers may subject them to prosecution under the CFAA

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Adopt a computer usage policy that makes clear what an employee’s authorization for use of the computer is; If you have a “trade secret,” make sure you take steps to treat it confidentially Use levels of security for computer processes; security to entry to building; confidentiality policies; restrict access to the trade secret

Questions? Kathy R. Neal McAfee & Taft A Professional Corporation www.mcafeetaft.com

500 ONEOK Plaza 100 West 5th Street Tulsa, OK 74103

Phone: (918) 574-3020 Fax: (918) 574-3120 [email protected]