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Litigation Over Noncompete Pacts Is on the Rise

November 20, 2008
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As many executives are taking extra measures to protect their companies during the economic downturn, employment attorneys are seeing an increase in litigation around trade secrets. Specifically, employers are being more aggressive about suing former employees regarding noncompete agreements, attorneys say.

“In these economic times, companies are taking precautions to protect their business,” said Marguerite Walsh, a shareholder at employment law firm Littler Mendelson. “These lawsuits serve two purposes: One is to salvage a situation, but also it’s to send a message to people at the company.”

In the past, the majority of litigation around noncompetes seen by Walsh has involved key executives or salespeople at the firms. But now, Walsh is seeing more litigation involving junior and midlevel employees. Even in these tough economic times, top-performing employees can be offered positions elsewhere, and companies want to be prepared for that, she said.

“Solid performers may be in a situation where their companies aren’t doing well, but they can go across the street to a more stable company,” Walsh said.

And with mass layoffs in financial services and other sectors, attorneys expect noncompete litigation to continue rising. Noncompete agreements can cover terminated employees.

“It’s going to be very interesting to see what happens to these agreements in the financial services industry over the next couple of months,” said David Landau, who is a partner at WolfBlock and has seen an uptick in trade-secret litigation in the past few months. “These people can’t be prevented from making a living.”

Don Schroeder, a partner in the labor and employment practice of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, said he is seeing a 15 to 20 percent jump in trade secret litigation around noncompete agreements. Specifically, he is seeing a lot of activity in the staffing industry.

He partially attributes the increase to rising temporary hiring activity since many employers are reluctant to bring on permanent workers in the current economy.

“With temporary hires, employers can still be nimble and respond to the fluctuating economy,” he said.

Because the industry is still growing, staffing companies are becoming more protective of their customer lists, he said.

“The well-established players want to protect their turf in this down economy,” he said.

Employers can save themselves a lot of time and money if they are careful about how they structure their noncompete agreements, attorneys say.

“I am not a fan of cookie-cutter noncompete agreements,” Walsh said. “Every situation is a little different, and so everyone shouldn’t have the same agreement.”

Companies also have to give more thought to making sure employees don’t leave their employment with trade secrets. “It’s not just about collecting former employees’ laptops,” Landau said. “Today, you need to get their cell phone, their PDA and anything that might have company information on it.”

—Jessica Marquez

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