In a recent decision, the Supreme Court of New Jersey considered whether an employer has an independent duty to inquire into the source or ownership of a newly hired employee’s customer list.  Surprisingly, the answer is “no.” 

The case, Thomas Fox v. Millman, involves a sales representative, Jean Millman, who previously worked for Target Industries, an industrial plastic bag company.  Millman signed a confidentiality agreement when she began working for Target.  She was subsequently fired because Target’s CEO believed that she was disparaging the company and selling products on behalf of Target’s competitors.  Four days later, Millman began working for Polymer Packing Inc., which was also engaged in the industrial plastic bag industry.

When Polymer hired Millman, it asked her whether she was subject to any confidentiality agreements or non-compete clauses.  Millman assured Polymer that she was not.  Millman also provided Polymer with a customer list and implied that she had generated the list on her own over the years.  The list did not identify Target, nor did it bear any indication that it was not Millman’s own list.  Polymer knew, however, that Millman had previously worked for Target and that Target was the only other plastics company for which Millman had ever worked.  Polymer required all of its employees, including Millman, to sign a confidentiality agreement and admitted that it generally considered customer information to be proprietary.  But Polymer did not do anything to verify Millman’s representation that she was not subject to any confidentiality agreement or non-compete clause.  After joining Polymer, Millman generated substantial sales on behalf of Polymer to former Target customers.

Three and a half years later, Target sued Polymer, asserting claims for misappropriation of proprietary and confidential information, tortious interference with business relations and prospective economic advantage, unfair competition, and conversion.  The trial court dismissed Target’s claims, concluding that Polymer had no way of knowing that Millman’s customer list did not belong to her.  The Appellate Division affirmed.  On appeal, the Supreme Court of New Jersey refused to impose an affirmative duty on Polymer to undertake an independent inquiry into the source of the customer list in Millman’s possession.

The opinion, devoted primarily to a discussion of whether the doctrine of laches was properly applied to the case (the court found that it was not and reversed and remanded on that basis), rather tersely stated the Court’s conclusion that there was “no ground on which to impose a duty of independent inquiry upon an employer, like Polymer, faced with an otherwise unremarkable representation by a prospective employee, like Millman, that a list of contacts is her own.” 

Whether you are the employer whose former employee has recently joined a competitor company or the hiring employer who is bringing a new employee on board, the Fox v. Millman case does not clearly specify what is required.  (See fellow blogger John Marsh's thoughts on the case.)

Employers should take steps to protect their trade secrets and protect them vigorously.  (See Top Ten Things To Do When an Employee Resigns to Join a Competitor).  Notably, it took Target three and a half years to initiate legal action against Polymer.  Target apparently had been involved in litigation involving its former CEO and needed Millman to assist with that litigation.  As part of its defense that Target had unfairly delayed in pursuing its claims, Polymer argued that Target made a conscious and strategic decision not to pursue litigation against Polymer because it wanted to ensure it had Millman’s assistance, to the unfair prejudice of Polymer.  Although the Supreme Court ultimately did not affirm the application of laches, Target made a risky and expensive decision when it decided to wait to bring suit against Polymer.

Furthermore, employers should exercise reasonable diligence when hiring any individual – but particularly an individual who has previously been employed in the same industry, by a known competitor, and who is in possession of information that the employer itself would consider to be proprietary.  (See Top Ten Mistakes Made by Departing Employees). The New Jersey trial and appellate courts uniformly agreed that Polymer did not have an independent duty to inquire into the source of Millman’s customer list.  Still, hiring employers should not think that this gives them free license to ignore “unremarkable” clues that an employee may be, in fact, be subject to post-employment restrictions by their former employers.  In fact, Polymer is still not in the clear – after more than eight years of litigation, it is now heading back to trial. 

Twas the night before Christmas, when all through the company;
A disgruntled employee kept saying “please jump with me.”
She was trying to line up a grand, mass departure;
Of which she was certain no one could outsmart her.

Her files had been copied, her clients all contacted;
She’d consulted a lawyer ‘bout things she had contracted.
He said that her covenants were quite overbroad;
Of this she was certain, they’d all be deemed flawed.

She proceeded to upload the secrets she’d learned;
On to flash drives, and emails and discs she had burned.
With not one regret, she reamed out her boss;
Quite sure she’d not erred, it would soon be his loss.

With eyes all upon her, out the door she receded;
Two colleagues joined with her, at least that's what she tweeted.
The office was stunned, and management surprised;
No one had foreseen that they’d soon be downsized.

“Let’s call up the lawyers. What options have we?
We’ll file a lawsuit, and then she will see!
Without our permission, our computers she hacked!
This must run afoul of the Computer Fraud & Abuse Act.”

“We must stop her now, her acts are illicit.
Without an injunction, our clients she’ll solicit.
And don’t forget the others who joined her, you see;
Together they formed a civil conspiracy.”

“Hold your horses," say the lawyers, "don’t get carried away.
Let’s pull out their contracts and see what they say.
But where are they kept? We’ve got piles and piles.
For sure they’ll be found in personnel files.”

“Let’s draft the complaint, and seek an injunction.
The defendants, you see, acted without compunction.”
The Court set a hearing, the plaintiff went first.
“Your Honor, it’s horrible, obscene and the worst!!”

“She’s taken our staff, our trade secrets, purloined;
She must be shut down, she must be enjoined!
In her contract she promised, she swore, she agreed.
The protections we seek are all guaranteed.”

“She may not solicit. It’s in simple prose.
She may not take secrets, or use or disclose.
But even without the help of contract;
Her conduct defies the trade secrets act.”

The lawyer sat down, feeling smart, feeling pleased;
The defense will be begging, they’ll get down on their knees.
So the court turned to the left where defense counsel sat;
And asked, “My dear sir, what do you say to that?”

“Your Honor, you see, they’ve got it all wrong.
Just hear me out, this won't take too long.
The data at issue are far from trade secrets.
You’ll find it in public, in brochures and on leaflets.”

“The contract is void, it lacks consideration.
And the covenants purport to cover the nation.
My clients, they acted at all times with great reason.
In contrast, the plaintiffs use contracts adhesion.”

Defense counsel sat, while the court thought about it;
Parsing through the arguments each party had spouted.
And finally the court was ready to rule;
To give its decision at this time of Yule.

“First let me address the non-compete clause;
Please wait ‘til I’m finished; please hold your applause.
The non-compete is too onerous, it’s unreasonable;
But I find that the covenants are quite severable.”

“Defendants have breached the clause nondisclosure;
Confidential information – indecent exposure.
And let’s not forget the non-solicitation;
That covenant is of reasonable duration.”

“So I’m going to issue a restraining order;
Please take this down, my dear court reporter;
A bond shall be posted at ten thousand dollars;

I say this to both parties and their legal scholars:

Explore resolution. Think how not to fight.
Merry Christmas to all, and to all a good night.”

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed

Now Available at Your Convenience!!

The use of online social media such as LinkedIn is becoming increasingly prevalent, and as a consequence, employees are often very casual about what they say and do online. They frequently share information first, and think about the consequences later. Any business that does not have a solid contract, a sound social networking policy, or does not train its employees on the do's and don'ts of social networking may have a critical security gap in the protection of its trade secrets and its confidential information. Click here to join us for this free one hour webinar led by Mike Greco and Chris Stief from the Employee Defection and Trade Secrets Practice Group at Fisher & Phillips LLP as they explore steps employers can take to address this growing threat.   

Michael R. Greco and Christopher P. Stief are partners in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts by Mr. Greco, Mr. Stief or other members of the Practice Group, you may subscribe to this blog's RSS feed or follow Mr. Greco on Twitter on on LinkedIn or follow Mr. Stief on Twitter or LinkedIn.  As always, please feel free to share your thoughts or pose your questions in the comment field below.

Departing employees sometimes access workplace computer systems to obtain information for purposes of using it in competition with their employer.  Sometimes they use the internet at work to send emails concerning their post-employment plans.  And while employers have many tools and tactics at their disposal to investigate their computers and related systems, these investigations are fraught with pitfalls for the incautious employer.

One of the issues employers need to be aware of in conducting such investigations is the unauthorized interception or monitoring of electronic communications – which includes e-mails – by an employee pursuant to the Electronic Communications Privacy Act, 18 U.S.C. § 2510 (“ECPA”).  The ECPA was passed by the United States Congress to update government restrictions on wire taps from telephone calls in order to protect transmissions of electronic data through computers.  In fact, the ECPA was passed by way of an amendment to Title III of the Omnibus Crime Control and Safe Streets Act of 1968, which was intended to curb unauthorized government access and monitoring of private electronic communications.  Through the ECPA, Congress prohibited the acquisition of a communication through the use of any electronic, mechanical or other device by criminalizing unauthorized acquisitions and creating a civil cause of action for victims of unauthorized acquisitions.  Title II of the ECPA, the Stored Communications Act, 18 U.S.C. §§ 2701-12 (“SCA”), protects certain electronically stored communications.

The intersection of the ECPA, the SCA and an employer’s investigation of a departing employee can become fertile ground for mistakes by the investigating employer.  When investigating an employee’s use of workplace computer systems, employers typically review corporate e-mails, corporate servers, and the computer assigned to the employee suspected of disloyal acts.  Such investigations can uncover personal information, like the passwords used by the employee for his or her personal, internet-based e-mail accounts, and this is where investigating employers need to be careful.  Some federal courts have held that improperly using these passwords to open and monitor the employee’s personal, internet based e-mail or social media accounts may give rise to a claim for unauthorized access under the ECPA and SPA.  See, for example, Pietrylo v. Hillstone Rest. Group, No. 06-5754, 2009 U.S. Dist. LEXIS 88702, at *10-11 (D.N.J., Sept. 25, 2009).  (A copy of the Pietrylo opinion is available in pdf format below.)

But the ECPA and SCA are not one-way streets running only in favor of departing employees.  These statutes apply with equal force to allegations of misconduct by disloyal employees, as demonstrated by the recent case of United States v. Szymuszkiewicz, 622 F.3d 701 (7th Cir. 2010).  Szymuszkiewicz was employed as a revenue officer by the IRS, and he was convicted by a jury of violating the ECPA.  In an appellate opinion affirming the conviction, Chief Judge Frank Easterbrook described Szymuszkiewicz’s conduct as:

"monitor[ing] email messages sent to his supervisor, Nella Infusino.  She found out by accident when being trained to use Microsoft Outlook, her email client.  She discovered a “rule” that directed Outlook to forward to Szymuszkiewicz all messages she received.  Szymuszkiewicz was convicted under the Wiretap Act for intentionally intercepting an electronic communication … agents found emails to Infusino stored in a personal folder of Szymuszkiewicz’s Outlook client -- in other words, Szymuszkiewicz not only received the emails but also moved them from his inbox to a separate folder for retention--which is not what would have happened had all of Szymuszkiewicz’s access been legitimate.…The jury could have chosen to believe Szymuszkiewicz’s contention that he received Infusino’s emails legitimately, or by mistake, but the evidence supported the more sinister inference that he obtained them intentionally and without her knowledge."

622 F.3d at 703-4 (internal citations omitted).  (A copy of the Szymuszkiewicz opinion is available in pdf format below.)

The takeaway from Szymuszkiewicz for employers is the importance of exercising extreme caution when conducting investigations of an employee’s use of corporate computer systems, as mistakes committed during these investigations could possibly give rise to independent civil, and potentially criminal, liability.  In addition to consulting with counsel and forensic computer specialists, employers should keep their eyes on the ECPA and SCA, under which one of the touchstone inquiries is whether there is authorization to access the electronic communications.

 US v Szymuszkiewicz.pdf (112.39 kb)

Pietrylo v Hillstone Restaurant.pdf (95.40 kb)

Brent Cossrow is a member of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group.  Mr. Cossrow's practice focuses on e-discovery and other electronically stored information issues.  As always, please feel free to share your thoughts and questions in the comment space below.

If you had dismissed Oracle's lawsuit against rival SAP as just one more squabble between giant IT competitors, you likely weren't alone.  But yesterday afternoon, all that changed when a nothern California jury ordered SAP to pay Oracle a whopping $1.3 billion for theft of software and related documents.  According to Oracle's Complaint, the case arose out of "a conspiracy by German software conglomerate SAP AG to engage in and cover up corporate theft of Oracle intellectual property on the grandest scale."  (A copy of Oracle's Fourth Amended Complaint available in pdf format at the bottom of this post)

Before the trial even began, SAP admitted that TomorrowNow, a company it acquired in 2005, had illegally downloaded software and documents from Oracle through the use of a web scraper (a computer software that systematically extracts information from websites).  Despite SAP admitting liability for its subsidiary's conduct, the gap between the parties' positions was tremendous.  SAP claimed that it should only be held to pay for the money it made by using the purloined assets, somewhere in the neighborhood of $40 million.  Oracle was thinking of a different neighborhood, and apparently the jury agreed.  The $1.3 billion verdict represents more than half of SAP's profits last year, and is one of the largest ever for a suit of its kind. 

FORTUNE previously quoted Oracle's General Counsel as stating "SAP's admitted infringement is unprecedented. SAP's web scraper alone resulted in millions of copies of Oracle's downloaded software and support materials on SAP's servers. That's before you even get to the thousands of copies of Oracle applications software made from Oracle's CDs. Don't underestimate how unusual this suit is."

SAP is almost certain to appeal the result, and the Department of Justice is reportedly uncertain as to whether it will file criminal charges.

Although the case was clearly more oriented towards intellectual property concerns such as copyright infringement, a lesson stands for non-compete and trade secret plaintiffs and defendants.  Juries are willing to punish bad actors. 

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either by Mr. Greco or other members of the Practice Group, you may subscribe to this blog's RSS feed or follow Mr. Greco on Twitter at @MGrecoEsquire or Fisher & Phillips on Twitter at @labor_attorneys.

Oracle v. SAP Complaint.pdf (1.29 mb)

A few days ago, I wrote about the top ten things a company should do when an employee resigns to join a competitor (click here to see that post). But what about the flip side of that coin?  What mistakes should be avoided by departing employees and the firms that hire them?  Here are ten things to keep in mind:

1. Avoid Taking Business Records
Taking business records and information may be a bad idea for many reasons. It may be a violation of a confidentiality or nondisclosure agreement, and depending upon the content of the records, it may also constitute misappropriation of trade secrets. It may also give rise to a claim for conversion of property. In addition to these possible legal reasons, taking  business records angers employers and augments their suspicions. When a company learns that a former employee has e-mailed information to a home e-mail account, or, that a previously full file cabinet is now empty, a number of questions arise. Why did the employee take it? What else did the employee take? What does the employee plan to do with it? Upon asking these questions, employers may begin to “re-think” a previous decision to permit the employee to accept a new job free from litigation. The employee may no longer seem trustworthy, and the company may feel it can no longer rely on assurances that the employee’s new job poses little or no competitive threat.

2. Sabotaging Records
Refraining from taking records is a good start, but respecting the integrity of records is a good follow-up.  Some employees mistakenly feel they can secure an undetectable advantage by altering company records on their way out the door. For example, departing employees can be tempted to alter a telephone number in a computer system by one digit simply to gain a head start by slowing down the company’s ability to contact clients, or to delete key information, assuming that no one will ever find out. In this time of technological advancements, however, employers are gaining more and more investigative resources that enable them to discover such misconduct, and computer sabotage easily begets claims for a violation of the Computer Fraud & Abuse Act. Departing employees should be reminded that the “gain,” if any, secured by sabotaging records is far outweighed by the “pain” that may follow when their misconduct is uncovered.

3. Soliciting or Telling Clients Prior To Resignation or Departure
Even if an employee lacks a non-solicitation agreement, it is wise to remind departing employees not to begin soliciting clients until after their departure. Soliciting clients or advising them of the employee’s plans prior to resigning can lead to problems. Although the law varies among states as to the propriety of an employee giving clients advance notice of his/her departure, solicitation prior to the employee’s departure generally is not permitted. Pre-resignation solicitation may give rise to claims for breach of duty of loyalty and may serve as an aggravating factor for a judge who later considers the equities when contemplating injunctive relief. Departing employees often feel that if they do not advise clients of their impending departure, the clients will hold it against them. Although this is possible, employees should be reminded of the possibility of being enjoined from doing business with clients who were improperly solicited prior to resignation.  Moreover, solicitation of clients prior to resignation may result in the employer finding out about the impending resignation from the client, and not from the employee, resulting in a heightened mistrust of the employee. The safest route is for an employee to continue to serve the interests of the employer until the very last moment of employment.

4. Soliciting/Telling Fellow Employees Prior To Resignation or Departure
Similar to solicitation of clients prior to resignation or departure, solicitation of fellow employees may also be a bad idea. Departing employees often misjudge whether they can trust their colleagues to keep their impending resignation a secret.  Moreover, even if their colleagues do keep the secret, they frequently become witnesses after the employee’s departure as the former employer will turn to its remaining employees when it conducts its investigation. Employers resent being the last to know about an employee’s departure for a competitor, and they may scrutinize the former employee’s actions with greater vigor if they believe the employee was trying to encourage others to join in the move to a new company.

5. Failing To Segregate Non-Public vs. Public Data
Departing employees sometimes take information for innocent reasons, unintentionally creating the appearance of an intentional misappropriation of trade secrets or conversion of property. A common example includes employees taking contact data that contains not only personal contact information, but also professional contact information. Other employees remove sales records with the intent of retaining information to enable them to substantiate their entitlement to commissions after they depart. Another common example includes employees taking articles or studies they wrote simply because the employees feel proud of their work product, not realizing that the employer views the work product as belonging to the company. It is wise to remind a departing employee that the removal of “personal” information and property should be carefully analyzed to ensure that unwanted and allegedly proprietary or non-public information is not inadvertently taken.

6. Granting An “Exit Interview”
In some instances, it may be advisable for an employee to resign without giving prior notice. Negotiations concerning the parameters of the employee’s subsequent employment with a competitor may well be more successful if conducted by counsel after the employee has resigned. The simple truth is that no matter how well you coach employees about how to resign, they rarely appreciate the legal consequences of their words. Moreover, savvy employers may use an exit interview effectively to create evidence that later shows up in support of a motion for a temporary restraining order. If delicate legal issues surround the departure of an employee from one competitor to another, the discussion with a former employer may well be left to counsel, and the employee should be advised to avoid granting an exit interview.

7. After-Hours Access
Employees planning to leave for a competitor often access their offices or computers during odd hours with the intention of preparing for their departure when no one is around.  After-hours access can be detected by security systems, or in some cases, it can be recorded by computer systems. If such access deviates from an employee’s normal course of conduct, it may tip off the employer of the impending resignation. Even if such access is not detected until after the employee’s resignation, it creates the appearance of impropriety. If coupled with other common mistakes discussed in this article (e.g., after-hours removal of business records), the appearance of impropriety grows stronger.

8. Badmouthing The Firm
Any time an employee leaves to join a competing firm, there is likely to be some hard feelings. Nothing compounds these hard feelings like an employee who badmouths the former employer on the way out the door or even after departure. Departing employees should be reminded that badmouthing the former employer to fellow employees accomplishes little -- other than providing motivation for the former employer to make the transition difficult. Moreover, badmouthing the former employer to customers can have the additional effect of backfiring, resulting in the loss of otherwise attainable business and perhaps leading to defamation claims. Employees should be advised to take the high road.

9. Failing to Work Until The Last Minute
Understandably, it is hard for a departing employee to be motivated when a new job is on the horizon. In some instances, after providing notice of resignation, employers may limit the departing employee’s access to information and customers. But a decrease in productivity in the weeks or months leading up to a resignation or departure may tip the employer off about the impending resignation, and worse yet, it may create the appearance that the departing employee was holding off on completing work with the intent to divert such work to their new employer.

10. Failing To Consult With Attorney Prior To Resignation
Many hiring managers make the mistake of waiting until after an employee has been hired to get counsel involved, by which time the departing employee may have made many of the mistakes outlined in this post. Counsel should be included early in the hiring process so that departing employees obtain the advice they need. If there are attorney-client privilege concerns, the employee should be advised to consult with an attorney of his/her choosing. No matter what, transitioning employees from one competitor to another is a process filled with tension. Foolish mistakes can increase that tension and may lead to litigation or strengthen a party’s desire to litigate. Careful planning and early advice can minimize this risk.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

A merger that looks good on paper can lose value when too many employees in the target company get nervous about what life will be like after the deal closes -- Will the culture be different?  Is the acquiring firm too big?  Too rigid?  Will they understand how we do business?  These risks have had enormously negative impacts on many mergers.  Employee attrition following mergers and acquisitions is so common that it has been the subject of psychological studies, has been written about in Human Resources publications, and even has spawned its own name -- “Merger Syndrome.”  Back in 1986, Psychology Today published an article called, “The Merger Syndrome: When Companies Combine A Clash Of Cultures Can Turn Potentially Good Business Alliances Into Financial Disaster.”  What can an acquirer’s Legal Department do to manage this risk? 

            Check the Old Restrictive Covenants – Do They Exist?  Are They Enforceable?.  Start early in the process.  During due diligence, check whether the target company has its key people under enforceable restrictive covenants.  Don’t just inventory HR files.  Analyze what restrictions are in the contracts.  Where are the employees located?  Are those restrictions enforceable in those states?  Were the contracts signed at the inception of employment or later?  If they were signed later, then consideration may be an issue, depending on the state. 

            Will You Have Standing to Enforce the Old Covenants After the Deal Closes?.  Even if there are non-compete agreements in the file for the right groups of employees, you must determine whether you – as the acquiring entity – will have the right to enforce the old non-competes after the deal closes.  Do the covenants have clauses providing that the agreement is assignable, or better yet automatically assigned, to a successor upon merger or acquisition?  If the clauses are there, you probably can enforce.  If not, the question may be much trickier – it will depend on the state’s law that governs, and on the form of the transaction.  Mergers and stock purchases are more likely to transfer the right to enforce.  Asset purchases are less clear. 

            Think About New Covenants.  If you find that many of the old contracts are not enforceable, then you want to build into the negotiation a strategy for getting newer and better agreements from the key people, especially for executives you want to retain after the merger.  Everyone knows that.  But make sure you identify the types of attrition that can turn a great deal into a disaster.  Often the sales force is a key.  In September 2005, Wall Street giant Merrill Lynch agreed to purchase AXA’s Advest brokerage unit for $400 million.  By May 2006, it was being reported that 417 out of Advest’s total of 505 brokers had jumped ship.  See K. Burke, “Failure to Launch,” Registered Rep (May 1, 2006).  It literally became a case study of a failed merger.  See S. Grantham, Risk Assessment as a Function of a Successful Merger: Merrill-Advest Merger, 11 Journal of Communications Management 247-57 (2007). Mergers and acquisitions can be especially stressful for employees lower down the chain of control, who have access to less information.  As one study noted, mergers “can change an individual’s working life significantly but fail to provide the individual with any control over the event.”  Julie K. Anderson, “People Management: The Crucial Aspect of Mergers and Acquisitions,” Industrial Relations Centre, Current Issue Series (1999).  Don’t make the mistake of only worrying about the top few executive non-competes.  Carefully assess points of exposure to potentially damaging employee defection, and then craft restrictive covenants that will protect the company.

Consideration for New Agreements.  If new contracts are required, you must address issues of timing and consideration.  The demands of adequate consideration vary depending upon the form of your transaction, and the states in which key employees are located.  In a statutory merger or stock purchase situation, the employment of target-firm employees continues uninterrupted through and after closing.  In many states, simply agreeing to continue employing people is legally sufficient consideration to support execution of a covenant not to compete executed during the midst of employment – what some cases refer to as “mid-stream” covenants.  But in a substantial and important minority of states, merely keeping someone on the job is not sufficient consideration for a mid-stream covenant.  In these states – North Carolina and Pennsylvania are two examples – you must give each employee new and sufficient consideration.  Sufficiency will be measured in proportion to the employee’s pay level and duties.  A check that would be sufficient for one employee will not be seen as sufficient for a much higher compensated employee.    

Determine Whether Key Employees are Located in “Problem States”.  It is inconvenient, to say the least, that nearly all of the legal issues relevant to the risk of employee defection are governed by varying state laws, rather than by one consistent federal standard.  In fact, it is so inconvenient that many companies simply ignore this undeniable reality.  They do so at great risk to their ability to protect themselves against defections.  One size rarely fits all when drafting restrictive covenants.  If you roll out one version of your agreement, it may well fail in any number of key locations, including tricky states such as California, Georgia and others.  You probably can cover the national map with anywhere from three to six versions of an agreement, depending upon how many different types and levels of employees you are signing up.  You may be tempted to side step this problem by inserting choice-of-law/forum clause, but this often fails and is inadvisable in any case.  It is dangerous to put all your eggs in one basket.  If things turn bad in your chosen state, you are out of luck everywhere.    

Don’t Forget to Use Carrots with Your Sticks. The company of course is even better off if employees decide to stay on board, and are happy about doing so.  This is why the most effective method is to roll out an attractive employee retention plan designed to induce important players at all levels to stay around long enough get to know what is good about your company.  Consider stay-bonuses, with repayment obligations that kick in if an employee leaves within a year (or two or three  years, as the case may be) after receipt.  Salary or minimum bonus guarantees also can ease concern about transition into a new compensation environment.  At a minimum, you can use retention agreements to be sure key employees stay with you long enough to get through the transition period after the deal closes. 

Communicate Your Retention Offers Early.  Retention packages are more effective tools when deployed rapidly and when their benefits are communicated effectively.  Deal with this immediately after announcement of the pending merger.  Don’t wait until closing.  Headhunters will waste no time starting to recruit the most valuable employees from your target company.  The last thing you want is for the dominant voices to be those of recruiters calling in and reinforcing the natural fears of employees whose company is being acquired. “[T]he period following the announcement of the takeover is one of intense personal risk analysis, in which the individual decides whether s/he will leave the organization or stay.”  Gunter K. Stahl & Sim B. Sitkin, “Trust in Mergers and Acquisitions”, in Mergers and Acquisitions: Managing Culture and Human Resources (G.K. Stahl & M. Mendenhall, eds., Stanford University Press 2004).  Effective retention packages offer sufficient financial inducement for employees to remain on board, and ideally are communicated before the headhunters are out in full force.  You know the announcement is coming before they do.  Take advantage of that head start -- don’t announce until you are ready to convey information about retention packages almost simultaneously. 

Employee attrition will always be a risk factor in mergers and acquisitions, but careful attention to restrictive covenants and retention packages can go a long way toward minimizing those risks.   

You are the Assistant General Counsel for Employment with a national company and just learned that the Branch Manager and the entire sales team from your Kansas City branch office have jumped ship and joined your largest competitor.  The Branch Manager attended all of your strategic planning meetings in late 2009, which led to the roll-out of your company’s 2010 marketing plan.  The sales reps control four of the company’s ten biggest accounts, and already you have heard that they are calling your customers.  Your Regional Vice President’s first reaction:  "let’s go after them."  But HR reminds you that all these employees were from the company that you acquired a few years back – the one that didn’t have any of its employees sign non-competes.  So now you are asked, “what can we do when we don’t have a contract?” 

Well … you are not necessarily out of luck.  Here are some of the key claims to consider:

Misappropriation of trade secrets.  For sales employees, the key question is whether your customer list can qualify as a trade secret.  It may qualify if it is a “retail” list of individuals.  Their names may be in the phone book, but of course the phone book doesn't have any cross reference that identifies names might be your customers.  But if your customer base is “institutional” -- well-known companies that obviously would need your product, such as if you sell windshield glass auto manufacturers – your list is easy to figure out and probably isn’t secret enough to qualify.  Compare, for example, Merrill Lynch v. Zimmerman, 1996 WL 707107 (D. Kan. 1996) (retail stockbrokerage customer list is a trade secret) with Reed, Roberts Assocs. v. Strauman, 353 N.E.2d 590 (N.Y. 1976) (customer list not a trade secret; plaintiff’s consulting business advised companies on unemployment compensation and workers compensation issues).  Even if your customer list is not a secret by itself, additional data about customers, such as sales history, preferences, and the like, may qualify, if you can prove it meets the common law or statutory standards.  See, e.g., Zoecon Corp. v. American Stockman Tag Co., 713 F.2d 1174 (5^th Cir. 1983) (in this case, trade secret customer information included “type and color” of items purchased, “date of purchase,” “amount purchased,” as well as names and addresses of otherwise obvious purchasers of livestock ear tags).

The Branch Manager has knowledge of marketing and business information.  You may be able to argue that the information he learned during your strategic planning qualifies as a trade secret.  See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7^th Cir. 1995).  The question is whether it has been kept secret, or is it now obvious because you rolled out the plan?

What kind of relief can you get on a trade secrets claim?  Listed from easiest to obtain, to hardest, you may be able to get:  (1) non-disclosure – an order prohibiting the employees from disclosing information; (2) return of information – requiring them to return it; (3) non-use -- an order prohibiting the competitive use of the information; (4) non-solicit – prohibiting them from soliciting trade secret customers; and (5) non-compete – prohibiting them from working for your competitor.  The non-compete order relies on a theory of "inevitable disclosure" of the trade secrets.  Such relief is hard to get, and in some states is completely unavailable.  Where available, it usually requires evidence that the employee cannot be trusted, and that lesser relief is inadequate. 

Breach of duty of loyalty:  This focuses on pre-resignation conduct.  Before they resigned, did they:  (a) solicit customers; (b) recruit employees; or (c) divert business opportunities?  Soliciting customers and putting a business opportunity in the “back pocket” to pursue at their new place are both out of bounds.  Some discussions with employees may be okay, but in certain jurisdictions managers may not solicit underlings to follow them to their new company.  This sometimes boils down to a question of whether communication about the new jobs constituted "solicitation" or something less. 

Unfair competition / raiding:  Unfair competition or “raiding” tends to be an “I know it when I see it” type of claim.  This vagueness is both an asset and impediment.  The claim is elastic enough to use it in unusual situations, but its vagueness also makes it difficult to assess its chances of success.  In most instances, you'll have to prove “malice”:  an intent by the hiring firm to harm your business, rather than just an intent to help their own business by adding talent. 

Computer Fraud & Abuse Act, 18 U.S.C. § 1030:  Under the CFAA, you must prove (a) the employees either fraudulently or "intentionally" accessed your computers; (b) they did so without authorization or exceeding the scope of their authorized access; and (c) that they caused damage.  Did they go into your computer and take information, such as customer lists or business data?  If so, you may have a claim, although the decisions are far from unanimous in applying the CFAA to departing employee cases (including differing interpretations of what constitutes "damage").  Advantages of a CFAA claim:  (a) no need to prove the information was secret; and (b) no need to prove “malice.”  See, e.g., Shurgard Storage Centers, Inc. v. Safeguard Self-Storage, Inc., 119 F.Supp.2d 1121 (W.D. Wash. 2000).  But see Condux Int'l Inc. v. Hangum, 2008 US Dist. LEXIS 100949 (D. Minn 2008).  There also are special provisions in the Act that apply in a medical or financial business context.  For further discussion, see Heather Steele's blog entry: "Establishing the 'Without Authorization' Element under the Computer Fraud & Abuse Act".  

Civil conspiracy:  This is an option for multiple employee departures.  Generally, co-conspirators may be held liable for all violations of each conspirator, but there must be an underlying and independelty actionable improper act by one of the conspirators.  This works well with tort claims such as trade secrets or duty of loyalty, and may apply with statutory claims such as the CFAA.  In certain states, it may even work where some employees have contracts and others don’t – you may be able to bind them all to the contracts if they all are conspiring to violate.  See, e.g., Catercorp, Inc. v. Catering Concepts, Inc., 431 S.E.2d 277, 282 (Va. 1993).  Other states don't recognize claims for conspiracy to breach a contract.     

So, there may be some things you can do, even without a contract.  To enhance your position, consider taking these steps now:

• Get contracts:  sign employees up if you acquire a company that did not use them.  Consider whether you should roll out contracts if your company is not using them yet. 
• Protect your information:  to help establish trade secret status you can use non-disclosure agreements; build computer system firewalls; remind employees of confidentiality (in manuals, log-in screens, memos, bulletin board postings); and limit access to files, lead lists, and other sensitive data. 
• Monitor computer activity:  make sure you can determine -- quickly -- if someone accessed or removed information via computer prior to their departure.