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Negotiating the Departure of an Employee

December 1, 1999
Related Topics: Featured Article
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With growing frequency, employers around the country and overseas are asking courts to restrain or place limits on the employment of departing employees.

Such departing employees are dangerous because if they aren't properly handled, they can inflict great harm on themselves and the organizations and individuals with which they are associated. For the sake of convenience, the parties are referred to as the sending employer, the employee and the receiving employer.

Once you learn of an employee s impending departure, it's often already too late to effectively prevent the move to the receiving employer. The sending employer isn't likely to wish to retain the employee, nor will the employee wish to remain with the sending employer. Therefore, the following sections emphasize how the parties should agree to conduct themselves in the future after the move has occurred.

The key to achieving a favorable result is to use the threat of litigation to drive the parties to agreement on a sensible plan for moving forward with their lives, goals and objectives. Such a plan should usually be embodied in a consent order so that its future enforceability is not in doubt. To provide a clear basis for understanding what your goals should be in negotiating such a consent order, you should know the rights and duties of the parties in the dispute.

I. The Sending Employer's Rights and Duties

II. The Receiving Employer's Rights and Duties

III. The Employee's Rights and Duties

IV. Necessary Elements of the Consent Order

V. The Relationship of the Consent Order to Prior Agreements

VI. International Considerations

The Sending Employer s Rights and Duties
It's important to understand immediately what contract rights the sending employer has to control the employee s conduct during and after the departure process. It goes without saying that having well-drafted contract obligations in place with employees in advance of a problem is the key to obtaining the best possible result in court. Another important issue to quickly assess is how likely it is that the employee will live up to his or her obligations. Employers should interview the employee as soon as they learn of the impending move.

Obviously, considerable care should be taken to gain as much information as possible regarding the nature of the new assignment, what the job duties will be and how closely they relate to the employee's current job. The perception of the employee as one who is or is not capable of protecting the sending employer's secrets should be relevant to the behavior of all of the parties. Particular attention needs to be paid to whether information has been copied and removed from the employer in preparation for the move.

Certainly, almost all courts are sympathetic to the position that the employee has a duty not to harm unnecessarily the legitimate interests of the sending employer. Among these legitimate interests is the protection of the secrecy of confidential and trade secret information of the sending employer.

But what about preventing the employee's use of such confidential information even if it is not disclosed? It will be exceedingly difficult to control the employees use of information that is not embodied in tangible form or which has not been formally protected as a trade secret, patent or copyright. Also, what happens to the inventions or improvements of the employee once he or she has gone to the receiving employer?

Generally, the best that employers can hope for in the absence of a written assignment is a so-called "shop right," which gives a limited, nonexclusive right to practice the invention in the plants of the sending employer. In the absence of a written noncompetition agreement, the sending employer is in a very weak position to get effective relief if an employee moves. The courts are almost unanimous in refusing to enjoin the movement of the employee or the employee s right to use his or her knowledge even in closely related activities.

The Receiving Employer s Rights and Duties
The receiving employer is free to compete vigorously against the sending employer. Therefore, so long as the receiving employer does not directly or indirectly benefit from the misappropriation of trade secrets of the sending employer, the receiving employer faces little additional liability simply from hiring the employee. Having said this, the receiving employer must take care to determine that the facts are consistent with an assertion that as a result of hiring the employee, the receiving employer gains no benefit from the trade secrets or confidential information of the sending employer.

Consistent with this requirement is a careful review in advance of the hiring of the employee s obligations to the sending employer. This is, of course, particularly important when the employers are direct competitors or when the employee is hired to invent or at a very senior level with either employer. All receiving employers will understand that the shoe can easily be on the other foot.

Therefore, they will be hesitant to behave toward other employers except as they themselves would like to be treated. However, while vigorous competition is a right and a duty in our society, the line is drawn at theft and breach of contract. There are significant penalties that can be imposed if a sending employer can demonstrate the theft of his trade secrets, or the infringement of his patents or copyrights.

The Employee s Rights and Duties
Perhaps the most important factor in these cases concerns the employee s right to earn a living. Those situations in which a sending employer attempts to restrain a person from accepting new employment or tries to force an employee to assign an invention to the sending employer, the most difficult aspect for a court is balancing the relief requested by the sending employer against the impact on the employee. The general view is that the employee owns whatever knowledge, skill or experience he or she has developed.

The employee is free to use that knowledge and skill in future endeavors, even to compete against the employer. Even when the sending employer has contracted with the employee respecting such matters, the courts go to great lengths to avoid placing undue hardships on the employability of the person affected. While the concept of undue hardship varies somewhat, most jurisdictions will not enforce a noncompete that imposes an obligation of more than one year.

Nor will most courts enforce an invention assignment that covers a period more than 12 months beyond the termination of the employment or developments that are outside of the employee s assigned duties with the employer. Among the jurisdictions that are most favorable to employees' rights are California, Michigan, North Carolina, Minnesota and Washington. These states have placed statutory limits on the extent to which an employer can impose contractual limits on the employee's general right to take whatever knowledge and skill the employee possesses to the receiving employer.

Necessary Elements of the Consent Order
The consent order that one should seek in these matters is one that provides reasonable assurance that the information possessed by the employee will no longer be current when it benefits the receiving employer.

Since it is understood that the employee in most cases will be permitted to move, the consent order should focus on specific commitments that restrict the employee from communicating directly with parts of the receiving organization that would derive the greatest benefit from the trade secrets or confidential information of the sending employer. In most cases, it will be sufficient if, for a limited period of time, the employee is given a different type of job requiring different skills and knowledge than was important during his work for the sending employer.

The length of such a restriction can't be longer than the period that a court will enforce, which is generally six months to two years depending on the nature of the information, the agreements to which the employee is properly obligated and the effect of the restriction upon the employability of the employee. To ensure compliance with the consent order, it should contain a reporting obligation that requires a certification every two or three months by an appropriate officer of the receiving company, such as the general counsel.

The Consent Order s Relationship to Prior Agreements and the Forum s Law
I hope that it is clear that having an effective written agreement with the employee is the sine qua non of protecting the sending employer s information after the employee leaves. In the United States, employers have few statutory protections that assure the confidentiality of information lawfully in the possession of the employee. However, with a proper employee agreement, the terms of a consent order may be largely directed to enforcing its terms.

There are many considerations that must be taken into account in drafting effective agreements. Among the many factors that must be considered are: the adequacy of the consideration relative to the restriction imposed upon the employee, the law of the forum where the agreement is likely to be enforced, the nature of the sending employer s business, the level of responsibility and trust afforded the employees involved, the length of their tenure, whether they are hired to invent, whether they are regular recipients of strategic or technical information of the sending employer.

Although we recognize the need for standardization in dealing with large numbers of employees, the one-size-fits-all approach is perilous. Such an approach cuts against the notion of a bargain for exchange and conjures up instead the appearance of adhesion contracts. Although a standard approach may be appropriate for large numbers of employees, key employees should have special agreements that can parallel the special compensation packages they normally receive. By focusing on the key employees, an employer can minimize the risk of appearing to overreach, and the employer can more easily tailor and modify approaches to suit changing circumstances. It's important to remember that this is an area where the law is changing.

Most states are adopting the Uniform Trade Secrets Act. In addition, with the passage of the Economic Espionage Act of 1996, important new federal legislation has been enacted that further defines and protects the trade secrets of American employers. It's reasonable to include a reference to such laws in the agreements that one enters into with employees.

International Considerations
In the global economy, it's important to consider that companies today will frequently need employee agreements that are effective in foreign jurisdictions. Although a discussion of foreign law is outside the scope of this presentation, employers may encounter more favorable statutory environments in Europe, at least with respect to employees that are hired or assigned to invent.

However, employers may enter into agreements in America only to seek to enforce the agreement elsewhere. A celebrated case-in-point concerns the litigation between General Motors and Lopez, a former global purchasing head that left for greener pastures at Volkswagen. One of the reasons that we counsel the inclusion of an employer s arbitration option in our employee agreements is that arbitration awards may be more readily enforced in Europe than U. S. court decrees. In addition, arbitration can be more effective in certain circumstances to pursue the damages incurred by a sending employer if injunctive relief is unlikely or too late.

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion.

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