Trade secrets are paramount to a company’s long-term success. Trusted employees are considered one of a company’s most important assets. In our new virtual environment, protecting valuable IP following the resignation or termination of an employee can present a variety of new challenges.
“Protecting your Assets” is a four-part discussion addressing a variety of concerns at the intersection of employee departures and protecting valuable company trade secrets. In part three of the series, Anita Spieth, a partner in Choate’s IP Litigation Group, and Greta Fails, a principal in Choate’s IP Litigation Group, focus on employee raiding and discuss potential litigation implications and best practices for limiting risk.
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“Protecting your Assets” is a four-part discussion which addresses a variety of concerns at the intersection of employee departures and protecting valuable company trade secrets. Topics covered will include navigating successful exit interviews, mitigating database damage and stolen property issues, assessing litigation implications from potential employee raids, and the handling of demand letters.
Greta Fails: Hi everyone I’m Greta Fails and I’m a principal in Choate’s IP Litigation Department and our podcast today is focused on employee raiding. We’ll talk about best practices for limiting risk when an employee raid is happening and we’ll also talk about some possible litigation implications. Anita, will you start out by explaining your experience with employee raiding issues?
Anita Spieth: Sure, thanks, Greta. I’m Anita Spieth and I’m a partner in the IP Litigation Department at Choate. An employee raid sounds like a pretty ominous thing and it can be. It’s when a company begins hiring its competitor’s employees and then there’s a cascade effect. So a lot of employees can end up heading out the door to a competitor. Choate represented a software and hardware technology company in litigation where close to a hundred employees left the company and joined the competitor. It’s probably one of the largest employee raiding cases that have been litigated across the country. The concern when one of these situations happens is, yes you’re losing a lot of important members of your workforce which can be very painful, but beyond that, confidential information including trade secrets could be headed out the door to your competitors.
GF: And Anita, employee raiding doesn’t just happen when large numbers of employees are poached by a competitor. For example, we’ve represented life sciences companies where just a handful of key scientists or several high-level executives left to go to a competitor. Those types of situations can pose similar and even at times more concerning challenges when highly valuable information is concentrated in those small groups of employees who leave.
AS: Absolutely. When a knowledge base walks out the door that can be extremely damaging. So, when a company is already in a situation where it’s being raided, its employees are either leaving en masse or a critical group of employees is going to join a competitor, there are some things that you can do both internally and externally at your company to try to reduce the risk of future harm to the company and also to position yourself for potential future litigation -- should it come to that. So, to start with some internal strategies and messaging, we’ll talk through a few ideas for best practices. One is to work with the departing employees. So, you know that one of your employees is leaving and going to a competitor. Take the opportunity to remind that departing employee of their contractual obligations to the company and this will depend on what kind of contractual obligations those employees have. And that’s when the employment agreements really become important. The legal department or the human resources department can meet with those departing employees and remind them of the contractual and other obligations they have to the company. So those might include non-solicitation agreements of customers and of other employees, non-competition agreements if you have one, and also the obligations to return company materials and the obligations to keep company information confidential -- and those are ongoing obligations. So it’s important to remind the parting employees that just because they’re leaving, doesn’t mean they’re free and clear of their contractual and other legal obligations. You can also send another message to the departing employees by asking them to sign a certificate or other type of undertaking that whereby they acknowledge that they have these ongoing obligations. So it’s almost like an additional contract that they’re entering into on their way out the door saying, yes, I agree, I do owe you these obligations and I’m going to comply by them.
Another sort of internal messaging approach that can be taken is to track where those people are going. If people are leaving in large numbers and you have a suspicion that there could be an employee raiding situation going on, you want to have a regimented process set up either through HR or through the legal department that tracks people. So ask them on their way out the door, where are you going? Or, ask them if you join a new company within the next year, will you please let us know what it is. If you don’t keep track in any formal way, an employee raid can really get going without you noticing that it’s happening. If you don’t have a regimented way of keeping track of where your employees are going, you can be in the position months or years later of tracking where people have gone by using public sources like LinkedIn, or word of mouth, internal company rumor and those sources can be both frustrating, wrong, and incomplete. So it’s better to have a formal reporting mechanism that can alert you of when an employee raid is happening. Another thing is to make sure you talk to departing employees about is the return of company property. And it’s not enough to just say please assure that you’ve returned your company property. You need to follow up with those individuals.
GF: Just to jump in here Anita, this is really important and has become particularly tricky in our digital, kind of remote pandemic age. Also, it’s helpful to talk with an employee’s supervisor about the return of company materials, because often employees who are caught taking documents or devices, when their leaving your company, claim that a former manager told them it was okay for them to do that. It’s really helpful to ensure that any such managerial communications are formalized and monitored.
AS: Yes, that’s a really good point, and once you do get those materials back, whether through the manager or directly from the departing employee, don’t just wipe the computer. If you think you have an employee raid situation going on, consider a forensic review of the departing employees’ computers and other devices. You can use a forensic review to confirm whether those employees have engaged in any unusual activity on their last few days. Like were they accessing files that they wouldn’t need given it’s their last day at work, were they emailing former colleagues that have gone to the competitor and are also potentially a part of the raid. You might have the capacity to do the forensic review in-house depending on what kind of company you are, but there’s also a lot of third-party vendors that can be of use.
GF: And the data analytics available these days are really informative and can provide a robust picture of an employee’s online and electronic activities. We actually had a case recently, where a client used both their internal tracking software as well as a third-party vendor and discovered that an employee, in just the last days of his employment with the client, went on the internet and searched for where to buy an external hard drive and then later that same day plugged the hard drive that he purchased into his company laptop and downloaded thousands of confidential materials. Because the client had access to and was armed with this forensic data, the client was able to stop the employee from starting to work at a competitor and ultimately using all that information that he improperly retained.
AS: That was a good catch.
GF: Now internal messaging for existing remaining employees is really important too. Those who are still at the company who haven’t been raided should be reminded that the company takes its policies very seriously and is willing to enforce them.
AS: So those are a handful of good tips for internal messaging at the company when you have an employee raiding situation going on. How about external messaging, Greta? If you’re being raided what should you do to send messages outside of your company to your competitor who’s hiring your employees?
GF: Definitely. Send a reminder letter to the employee but then also copy the new employer, the competitor. Describe the contractual obligations and the company policies that the employee remains subject to. When you do that, it puts both the employee and the competitor on notice of those ongoing contractual obligations. Anita, this is where those good employment agreements and policies really come into play. If you have strong contracts in place, then you’ll have the ability to defend against any kind of employee raiding situation. You can detail and quote strong contract language in your notice letter. You can even attach a full copy of the contract or the policy at issue which would give the employee and the competitor absolutely no ability to argue that they weren’t on notice of the employee’s ongoing obligations to you. But if the employee is not subject to strong or any ongoing contractual obligations, you’ll be stuck having to rely on just general common law principles against trade secret misappropriation and unfair competition and you might not have enough facts to make out those allegations at the start of an employee raid. Therefore, your notice letter might not be as forceful as if you had strong contracts in place.
AS: And if none of that works, if you send out your letter and you don’t get the result you want, the employee raid continues. If it comes to litigation, tell us what the litigation would look like.
GF: Sure, so litigation could be brought against the employee for violating a contract to you, but it could also be brought against the competitor as a defendant. The problem with “employee raiding” itself is that -- that alone doesn’t usually give rise to a claim. You’d instead have to show that the competitor did something wrong in how it went about hiring your employees. So, that could be a claim for, for example: tortious interference with your employee’s employment contracts or inducing one of your employees to breach their employment contract with you.
AS: But to make out those kinds of claims, you’d need to show that the competitor was on notice of the employment contract that they allegedly interfered with. Is that right, Greta?
GF: That’s exactly right and that’s what makes the notice letter that we just talked about potentially really important in these situations.
AS: And even without the employment contract-related claims, I guess there still could be claims against a competitor for trade secret misappropriation if you can show that the competitor got access to or used your confidential or trade secret information and maybe for unfair competition or unfair business practices if they’re hiring for the purpose of gaining access to your trade secret information. But those could be under a variety of state law theories.
GF: That’s exactly right. So take a step back and sum up some of the things we’ve been talking about -- one big takeaway I would say is the best way to prevent an employee raid is just to have a great place to work in the first place. So monitor employee satisfaction and be attuned and responsive to employee concerns. But of course, because turnover is inevitable, make sure you have strong protections and internal messaging in place to ensure that your employees can’t just walk your secrets over to a competitor. Be proactive in policing potential misconduct including by putting your competitors on notice of any raided employee’s ongoing contractual obligations and then I would just say, of course, please do not hesitate to contact us with any questions that you might have. We are always happy to discuss these issues in more detail and give you more targeted advice.
AS: Thank you Greta for talking to me today about best practices for handling employee departures.