Attract Competitors' Employees But Keep Your Own

June 1, 1999
You can try recruiting. You can try retaining. But in this tight labor market, human resources professionals may try a third R—raiding.

Your company may already practice occasional corporate raiding, or it may be something you're considering. But here's another thing you should consider: If you're eyeing your competitors' people, tread carefully.

Although you may think you're playing a fair game, your competitors—and the law—may not agree. And then you may face a costly legal battle, or be prohibited from hiring those people altogether. John Siegal, a member of the noncompete and trade-secrets practice group at Proskauer Rose LLP in New York City, offers the following advice to wanna-be raiders.

What is the conflict in a corporate-raiding lawsuit?
These lawsuits are disputes over attempts to hire entire departments, or to quickly create new capabilities through large-scale hiring binges. These are binges in which the target employer seeks court orders preventing further raiding—even in the absence of noncompete contracts with employees.

Describe a general outline of a corporate-raiding lawsuit.
The company that's losing people claims that the hiring company is interfering with its employment relations, misappropriating its trade secrets, and/or unfairly competing. It can seek a temporary restraining order or preliminary injunction.

The outcome of the case is likely to depend on a lot of things, including the departing employees' knowledge of confidential, proprietary information; the safeguards the prior employer has taken to protect its confidential information; the caution of the hiring company to avoid misusing trade secrets the new employee may have; and the evidence, if any, that the new employer acted with bad intent or predatory motives.

So the suits aren't necessarily about the employees, but about what employees know?
At least from a legal standpoint, employee-raiding cases are often less about people than about confidential, proprietary information and, in some states, customer relationships—how well they're protected, how vital they are and how much access the transferring employee has. In this context, the law reflects economics: If know-how and know-who create value, then the law protects employees from corporate raiders because they're valued by the company being raided.

Then how can HR tell whether an employee is off-limits legally?
Whether the hiring will be enjoined often turns on the legal definition of a trade secret. The law defines a protected trade secret as "any formula, pattern, device or compilation of information which is used in one's business, and which gives an opportunity to obtain an advantage over competitors who do not know or use it." If that sounds broad, it should—trade-secret law is not just limited to technical formulas and scientific information.

What kind of information does the trade-secret law include?
While manufacturing processes, like a food company's "secret recipe," are often found to be trade secrets, so too is a wide array of commonplace business information that employees at all levels routinely encounter. For example, courts have found that revenue projections, plans for future projects, pricing and product strategies, databases, customer lists, contact information and sales reports can all qualify for trade-secret protection.

How can HR tell if the information possessed by potential employees is the sort of trade secret that can cause a court to enjoin the hiring?
The courts have identified six highly fact-intensive factors for evaluating this decision:

  • The extent to which the information is known outside of the business
  • The extent to which the information is known by employees and others that are involved in the business
  • The extent of measures that were taken by the business to guard the secrecy of the information
  • The value of the information to the business and its competitors
  • The amount of effort or money expended by the business in developing the information
  • The ease or difficulty with which the information could be properly acquired or duplicated by others.

These [qualities] may sound complicated, but it boils down to a couple of questions that are simple to ask, but not so simple to answer: Has your competition done an effective job protecting its information? And could you get the information from sources other than your competitor's former employees? Using these tests, a great deal of relatively routine corporate information can qualify as a trade secret.

What are other guidelines for hiring from competitors?
Consider these cardinal rules: Act to benefit yourself, not to hurt the competitor, and watch out for what is in writing.

Every experienced litigator can tell tales of uncovering documents you wouldn't believe people actually created or kept that have blown cases wide open. In one employee-raiding suit, someone at [the raiding company] wrote and distributed a report about an internal presentation of an "action plan" that included as its first item: BE PREDATORY ABOUT PEOPLE in capital letters. The memo actually stated: "Remember, the taking of their people ... makes it even harder on them to do business."

Needless to say, the memo was attached to [the plaintiff's] complaint as Exhibit A. It crippled the fair-competition defense from the outset and the litigation was quickly settled.

Can the employee bring non-proprietary documents from the former employer?
Urge them to leave the competitor's documents behind. Any documents that your new employees bring with them from their old jobs will create real problems in litigation. Where there is smoke, there's often fire, and the existence of any purloined documents—no matter how innocuous—can burn you in court.

Departing employees are not supposed to take company documents with them, and people who do are suspect. The litigation will begin with your competitor requesting documents, so make sure your new hires don't take any—including their Rolodexes —and eliminate this issue at the outset.

How can a company prove it's pursuing the employees, rather than the trade secrets those employees know?
Make sure new employees don't bring any documents with them. Make sure any documents you create in the course of hiring people from a competitor are completely accurate—reflecting your company's desire to hire the people for their general knowledge and experience, not any specific, proprietary information to which they may have had access when employed by your competitor.

Ask yourself these simple, fundamental questions: Are these people I'd want to have around for the long haul, even if they don't know any of my competitor's secrets or don't have my competitor's customer list? Can I honestly tell them I don't want them to use any confidential, proprietary data, documents or customer lists they took from my competitor? Can they do the job for me without misusing the competitor's trade secrets and customer lists? If you're not absolutely certain that the answers to these questions are "yes," you may be in for trouble.

How careful do companies need to be?
Courts will crack down on employee raiding to prevent the misuse of trade secrets, but they are loathe to stop people from taking the job of their choice, especially where there is no contractual noncompete provision. But it still pays to be careful about how you approach a competitor's employees. If the evidence tends to show that you have predatory intent, it can tilt the case against you.

So courts could prohibit employees from working for a particular company if its actions were ruled predatory?
The 13th Amendment outlawed slavery in this country more than 130 years ago, and courts almost never order that people must remain in employment that they wish to leave, but courts frequently do enjoin an employee from going to work for a new employer.

What are the chances of a corporate raider avoiding that kind of situation?
If the new employees sought you out—or even if you identified the group of new hires as part of a broad-based search in which you had interviewed and considered prospects from numerous sources, your chances of prevailing in litigation will be substantially greater.

On the other hand, if the evidence shows that you specifically sought out particular employees in a particular competitor's operation, it will lend credence to the competitor's claim of "bad intent"—that you were seeking its trade secrets, not its bodies, or that you were seeking to hurt it rather than trying to help yourself.

What can an employer do to protect itself?
Take several practical steps to avoid liability if you are sued: Include a representation in new employees' offer letters or employment agreements that they will not use trade secrets from their former employers. Make sure the new employees' job descriptions differ from their prior posts and leave legitimate room for the employees to operate without using trade secrets. Instruct the new employees' colleagues in writing as to subject matters that should not be discussed with them. Most of all, make sure in job interviews and initial meetings on the job that the new employees are honestly committed to fair competition, not to misusing trade secrets and customer lists from their prior jobs.

Employee-raiding litigation is a problem that good management and planning can often avoid. However, even if litigation does occur, the same steps you take to try to avoid litigation will help prepare your defense by making a solid record to use in court.

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 legal opinion.

Workforce, December 1998, Vol. 77, No. 12, pp.121-123.