Absence of Non-Compete Doesn't Mean Your Company is in the Clear

You just received a telephone call from the HR director about a recent hire, a high-level sales manager from your direct competitor, Widgets, Inc.

The director says that the manager, Tom Takealot, contacted your company on his own, that the company did not solicit this individual and that, indeed, it was not even looking for a new sales manager.

Because the two companies compete directly, it was known generally that Takealot was extremely successful and managed a staff of seven hard-working representatives, all dedicated completely to him.

It is also well-known that Widgets is in serious financial trouble, and that Takealot and the folks he supervised had legitimate reasons for looking around. In fact, during the interview process, Takealot said that everyone he supervised was leaving, either with him or to go somewhere else.

Takealot, who never signed a non-competition agreement with Widgets, accepted the offer, and he and his group will shortly generate significant new revenue.

So why the call to legal? Because the company just got sued!

But why, you might ask. He didn’t sign a non-compete. And his company is in deep financial trouble.

Companies are often lulled into a false sense of security when hiring employees not bound by non-competition agreements. What many fail to appreciate is that a non-competition agreement restricts an employee’s post-termination activities only.

Pre-Departure Activities

Here, it is Takealot’s pre-departure misconduct that gives rise to a number of claims, including: inducing a breach of fiduciary duty; tortious interference with contractual and beneficial relationships; misappropriation of trade secrets; unfair competition; civil conspiracy; conversion; and violation of state unfair practices statutes.

This article summarizes how Takealot’s pre-departure activities can expose your organization to significant liability and provides some advice on how to counsel your client and prospective employees during the hiring process.

Unquestionably, employees are free generally to change jobs, and may even plan to compete with their current employer while still employed. However, even if there is no written agreement, employees who occupy a position of trust and confidence owe a fiduciary duty of loyalty and, consequently, must always act in their employers’ best interests.

Takealot violated his duty by, among other things, leading the people he supervised to your company. A company’s financial problems or employees’ desire to leave do not relieve a manager of the duty to protect the company for which they work.

Typically, the manager’s only options are to stay and fight for the company, resign as a manager or quit. Moreover, if Takealot, who is in sales, retained confidential information, such as client lists, business plans or marketing materials, this would constitute yet another breach of duty.

Takealot’s access to confidential information and trade secrets itself imposes duties upon him. While Takealot is permitted to take and use general skills and knowledge acquired during his tenure with Widgets, he is precluded from misappropriating trade secrets.

If Widgets identifies specific trade secrets, demonstrates that it took the necessary steps to ensure confidentiality, and then shows that improper means were used to take the trade secret, it can assert a misappropriation of trade secrets claim.

Be forewarned: In some jurisdictions, your competitor does not need to prove that the trade secret was used or disclosed. If disclosure or use is “inevitable,” that often suffices.

It’s Your Problem Too

But all of this really is Takealot’s problem, right? Wrong. It is well-settled that the new employer can be liable for participating in, or “aiding and abetting,” a breach of duty of loyalty.

Widgets need allege only that Takealot breached his fiduciary duties and that your company participated in this breach. If successful, Widgets may be entitled to an injunction preventing the company from employing Takealot, as well as damages for its lost profits, the cost of finding his replacement, and disgorgement of Takealot’s salary during the period of disloyalty.

If the company created a new position for Takealot and his crew, then the stakes grow even higher. In many states, seeding a new venture by “hiring away” a competitor’s unit, especially if that hiring substantially eliminates the competition (because Widgets no longer has a sales force) can violate both statutory and common law. Many statutes that cover such claims provide for multiple damages and attorneys’ fees and costs.

At the end of the day, violating a non-compete agreement might be the least of your company’s problems.

How to Avoid Liability

How can a company hire management level employees and “lift out” units and avoid such a mess? Although the answer varies state by state, and with the circumstances of each situation, there are some fundamental things to do.