Potential Issues When
Hiring Employees from
Competitors in the
United States
German companies that intend to start-up or
grow their U.S. business operations may choose to do so by hiring qualified and
successful sales, management or marketing people from other businesses in the
same or a similar market, who may have excellent relationships in the relevant
industry. Such hiring decisions are often made quickly with the expectation of a
short-term investment return. However, the best available and most highly paid
sales, management and marketing employees often may have contractual
non-competition, non-solicitation and confidentiality obligations following
termination of their employment. A violation of these agreements may not only
expose the employee, but also the new employer, to severe liabilities and
restraints. Following are some aspects that should be considered before
making any hiring decisions that may later turn out to be regrettable.
Scope of Restrictions
Typically, there are three possible
post-employment restrictions: (i) obligations not to compete with the business
of the former employer, (ii) obligations not to solicit customers and employees
of the former employer and (iii) obligations to keep proprietary information or
trade secrets confidential. While reasonable confidentiality obligations are
almost always enforceable, the enforceability of non-compete and
non-solicitation obligations, even in writing, is dependent on which state law
applies and the nature and scope of the restrictions as well as other factors,
such as the business level or role of the employee and the public interest.
Under some state laws (such as New York) such prohibitions may be enforced
(within certain limitations), while other state laws construe the agreements
narrowly and limit their application. California law, for example, generally
does not allow post-employment non-competition and non-solicitation agreements
for employees.1
Additionally, even if no express
confidentiality obligations are set forth in an employee's offer letter,
restrictive covenant agreement or employment agreement, an employee may
generally not disclose his former employer's trade secrets to a new employer
under applicable state law. The Uniform Trade Secrets Act (UTSA) § 1.2 prohibits
the unauthorized disclosure of trade secrets and UTSA2 § 1.4 defines
a trade secret as any "information [...] that: (i) derives independent
economic value, actual or potential, from not being generally known to, and not
being readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use, and (ii) is the subject of efforts
that are reasonable under the circumstances to maintain its secrecy."
Protective Measures
If it is determined that the
prospective new employee is subject to one or more of the above described
restrictive covenants, the new employee should consider whether the new
employment may trigger a violation of such restrictions. For example, just
because the former and potential new employer manufacture and distribute the
same or similar products, the new employment would not necessarily violate a
non-compete obligation. If the former employer sold the product only in a
specific industry, which is unrelated to the customer base of the new employer,
or if the former employer was in the wholesale business, while the new employer
is in the retail business, good arguments can be made that the non-compete would
not be violated. In these situations, the analysis often comes down to the
question of what the former employer's scope of "business" was, against which
the former employer seeks to prevent the employee from competing.
The
new employer should make sure to memorialize that it expects the new employee
not to violate any non-solicitation or non-compete obligations and not to
disclose any trade secrets. Accordingly, the offer letter should include express
representations from the employee that he or she will not perform certain
activities (such as soliciting former colleagues or customers) as long as a
restrictive covenant remains in effect. The offer letter should also direct the
employee not to bring any documents containing trade secrets or confidential
information to the new employment. Should a lawsuit arise in the future (which,
as explained below, may also be targeted against the new employer), such an
offer letter can be very helpful for the employer's defense.
Risks for the New Employer
If the new employee's hiring
or his actions at the new employer might be prohibited by his post-employment
covenants, the new employer is subject to three risks.
First, the
former employer may sue the employee and request the court to grant temporary
restraints prohibiting the employee (and any colleagues he may have solicited to
join him at the new employer) from working for the new employer. At that point,
the employee may become (at least temporarily) useless for the new employer.
Second, the former employer may sue the new employer directly. Such a lawsuit
may assert a violation of the applicable state statute or case law for the
protection of trade secrets, with the argument that the new employer
misappropriated the former employer's trade secrets using improper means.
Another cause of action may be a claim for tortious interference with a
contractual relationship or prospective economic advantage. The employee and the
former employer continue to have a contractual relation for the duration of any
post-employment covenant. If the new employer knows about the agreement and
hires the employee with a reasonable expectation that the employment would
violate such restrictive covenants, U.S. law may allow the former employer to
proceed directly against the new employer for damages or injunctive relief
(prohibition to employ). To avoid such direct actions against the new employer,
the above described protective measures can be of utmost importance.
Third, even where the employee and the new employer believe, in good faith, that
there is no violation of any obligation to the former employer and even in the
absence of such an obligation, the former employer may sue the employee and the
new employer in an attempt to lessen the competitive impact of the new
employer's hiring. In our system, where each party usually pays its own
attorney's fees, irrespective of the outcome of the litigation, such strategic
steps by the former employer cannot be discounted.
Conclusion
German employers interested in hiring valuable
management, sales or marketing people for their U.S. operations, should
determine whether such employees are subject to post-employment restrictions,
analyze carefully whether those covenants are enforceable and if they are, take
protective measures to avoid a violation. Not doing so, can subject the employee
and employer to unnecessary litigation risks in the United States. Finally,
where the analysis is done through counsel, and a strategy is devised by
counsel, the new employer stands a better chance of asserting applicable
discovery privileges over related internal communications.
1 To avoid any confusion,
the above enforceability limitations only relate to restrictive covenants in
employment situations. Non-compete and non-solicitation covenants entered into
in connection with the sale of a business, are construed much more liberally,
including in California, and often are enforceable particularly to protect the
assets conveyed in the deal.
2 The UTSA is a form of
proposed legislation that, as of 2014, has been adopted by almost all U.S.
states, except for New York and Massachusetts. Here, trade secrets are governed
by case law following the Restatement of Torts, in particular Restatement
(First) of Torts, § 757, cmt. b. However, in general, a trade secret under the
UTSA would also be considered a trade secret in application of the Restatement
of Torts.
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