In today’s competitive environment, no business can afford to lose even the slightest edge to a rival. That’s why if a key employee defects to a competitor, it is crucial to have a system in place that protects your proprietary information.
Mark Neubauer, a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department, has noticed that as the length of employees’ tenures has lessened, the number of conflicts has grown.
“Increasingly in California and elsewhere, as more and more business turns on the development of innovative ideas, trade secrets become increasingly important,” he says. “As a result, there is a tension between an employee’s mobility and the ability of companies to keep what they paid that employee to develop.”
Smart Business spoke with Neubauer about how to best protect a company’s intellectual property if a key employee leaves, what information should be included in an employee’s contract and what steps should be taken if a noncompete agreement is breached.
What steps should be in place to ensure that a company’s intellectual property is protected?
First of all, in terms of trade secrets and confidentiality, they should only allow access as needed. Very often, that involves passwords for computers to get access to certain confidential information, and materials kept secure, such as in locked cabinets … so that there is not general access to information a company wants to protect.
For other types of intellectual properties, such as copyright, there’s a device called a work-for-hire agreement which, especially in the advertising and entertainment industries, is very important to have people sign. Absent that, the creator, which could be the employee or independent contractor, could own the copyright of a work or a portion of the project.
What information should be included in an employee contract?
It is important with a contract to specify that the employee acknowledge that he or she is receiving confidential information and that they agree that the information belongs to the employer. This can be true especially in sales, but also people working in research and development.
Generally, with certain exceptions, covenants not to compete are disfavored in California, but agreements to protect an employer’s trade secrets and covenants limiting competition to protect those trade secrets are potentially allowed.
Having the employee acknowledge at the beginning of the relationship,”If I receive this information, I acknowledge that it belongs to the employer” is important. An assignment of copyrights and/or invention and a work-for-hire agreement are also important.
If an employee has signed a noncompete agreement but takes a job with a competitor, what steps can the former employer take?
The first step is to put the new employer and employee on notice that your former employee has an agreement not to compete or use any information they obtained (previously). Courts recognize the argument: Why buy a business when you can steal it for free?
If you develop your business through a series of employees, and those employees are diverted to a competitor, the competitor can potentially gain an advantage. In other words, the competitor doesn’t have to invest the capital or start-up time or costs. It’s much easier to just hire an employee.
California will protect the employer against the competitor using those trade secrets, so the first thing is to put both the employee and the new employer on notice with a demand letter that they not engage in that use.
The second thing ,of course, if that does not work, is to consider litigation, including a temporary restraining order and preliminary injunction.
What evidence does a business need to pursue legal action against a former employee whom it suspects has leaked confidential information?
The most interesting evidence in today’s market is e-mails. People have the mistaken notion that if you delete something on your computer, it’s gone. There are a number of companies, witnesses and employees who are finding out that doesn’t happen.
The first thing to do is to check the hard drive when an employee leaves and make sure that it is sequestered. Then go through and see whether or not the employee was downloading confidential information prior to leaving.
The second thing is to find out the circumstances under which the person left and whether he or she attempted to recruit other employees.
What steps can a business take to decrease the likelihood of losing a key employee to a competitor?
The first one is to make sure your employees are well-paid. Generally, when employees leave for a competitor, it’s because they’re thinking there is greater advancement or they’re going to make more money.
Keeping salaries competitive, keeping morale high and keeping your employees happy are the best ways to avoid losing key employees.
Mark Neubauer is a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department. Reach him at (310) 255-9144 or [email protected]
