Unfair competition: Proactive preemption can save you from litigation

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Jeffrey Farrow, partner, Michelman & Robinson, LLP
Jeffrey Farrow, partner, Michelman & Robinson, LLP

Today's workplace bears little resemblance to one from 20 years ago. On average, today's typical worker will change employers eight times over the course of his or her career, a threefold increase in only two decades. With each job change, the risk that the new hire will bring confidential information or trade secrets along to the new company grows – thus increasing the risk of lawsuits surrounding unfair competition and misappropriation of trade secrets.

According to recent statistics, one third of all lawsuits filed in California involve employment and unfair competition claims. Many of these claims could have been avoided had the new employer taken steps to ensure that its recent hire did not bring confidential information from his or her former employer to the new job. Dealing with the constant threat of potential litigation is something that must be dealt with head on. It does not have to be particularly time consuming or expensive; however, it does need to be documented and it does need to be thorough.

First, it is important to understand why companies heavily guard confidential information and trade secrets.That information (such as customer lists, financial data, computer source code, etc.) is often the life blood of a company. It sets a business apart from the competition, allowing it to do things better, smarter, faster and more efficiently than competi­tors. That edge is valuable and worth protecting. If an employee comes to your company with confidential information or trade secrets, you can expect to see a lawsuit in the near future.

Second, it is important to understand what your company can do to make sure that your new hire does not spawn a lawsuit. One of the most proactive ways to address this issue is to speak directly to the new hire and clarify that company policy prohibits an employee taking or bringing anything from a former employer. This includes reports, sales data and customer information. 

Look carefully at the new employee's reaction when you reveal the company policy, and fully explain that if they violate the policy, they will be terminated. Record these conversations by having the employees sign documents confirming that they have been advised of the company policy, and that they understand if they violate the policy they will be terminated.

Third, a preemptive way to head off a potential lawsuit is to contact the former employer after your new hire has given notice. This approach is as much about gathering information as it is about being upfront. Engage the competitor and let them know that you will be sending out a professional announcement or placing an advertisement in a trade journal to publicize the new hire. 

See if the former employer would like to send a joint announcement regarding the employee's recent addition to your company. Many companies will jump at the chance to send joint announcements because they may have some control over the content and wording of the release. Engaging a former employer in this process will avoid claims later that the content of the announcement was unfair or improper. If the employer decides not to participate in the issuance of a joint announcement, you have lost nothing.  

However, if there is some contractual or legal reason that would bar the new hire from joining your company (such as a covenant-not-to-compete), you can expect the competitor to bring it up during that conversation. An effective way to document this conversation is to send a cordial handwritten letter detailing that the conversation took place. If a lawsuit is ever filed over a claim that the employee took confidential or trade secret information, this note will become Exhibit 1 at trial – and jurors have a fondness for the sincerity of a legible, handwritten letter.

While it is impossible to guarantee that your company will not be sued when hiring from a competitor, you can be sure that taking certain proactive steps during the onboarding process will dramatically reduce the risk of litigation and provide peace of mind, knowing you have made every effort to protect your company. 

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