Poaching Protection

By Ed Frauenheim

Nov. 15, 2005

American companies are telling it to the judge when it comes to employees who jump ship for a real or potential rival. Take these recent cases:

    Google hires a former Microsoft executive, Kai-Fu Lee, to lead its China operations. Microsoft sues. A judge rebukes Google and upholds Microsoft’s employment agreement with the executive.

    Yahoo hires a group of employees who recently worked at a smaller tech company, which in turn sues Yahoo. But the smaller company fails to win a temporary restraining order that would have kept its former employees from doing the same sort of work at Yahoo.

    Lawsuits like these aren’t confined to the tech industry. And, observers say, the amount of litigation related to employment agreements is on the rise.

    The trend is pushing companies to pay more attention to a still-developing area of employment law. In rough-and-tumble fights over key hires, success can depend on how you’ve written a contract for an employee not to compete with you after leaving, who has the best lawyers and whether your company is in a state that supports such contracts.

    California, for example, frowns on noncompete contracts except in limited circumstances. “California is the toughest on classic noncompetes,” says employment attorney Jonathan Segal of Wolf, Block, Schorr and Solis-Cohen, a Philadelphia-based law firm. “Some of the Southern states are a little more pro-employer.”

    Legal spats over worker departures are rooted partly in what seems to be an intensification of employee poaching in recent years. And these days, workers are quite willing to jump to a competitor. Recruiters rarely come across people with no thoughts of leaving their current position, says Richard Spitz, global managing director for the technology industry at executive search firm Korn/Ferry International.

    “It’s hard to find passive candidates,” he says. “They all have one eye on other opportunities.”

    The Microsoft-Google spat echoes this point. Lee, the former Microsoft executive at the center of the dispute, said in a court filing that it was he who approached Google for a job earlier this year. In July, Google hired Lee, a speech recognition specialist and former head of a Microsoft lab in China, to lead a new product research and development center in China and serve as president of the company’s Chinese operations.

    Microsoft promptly filed suit against both Lee and Google, touching off a bitter court battle between the two tech-world titans. Microsoft’s suit, filed in a Washington state court, claimed Lee’s new job violated the terms of a one-year noncompete agreement.

    In court papers, Google labeled Microsoft’s suit a “charade” really intended to scare Microsoft employees into staying put.

    But in July, Judge Steven Gonzalez issued a temporary restraining order limiting Lee’s work at Google. And in September, Gonzalez barred Lee from a number of activities until a trial slated for January–activities including “participation in setting the budget or compensation levels and defining the research and development to be undertaken at Google’s planned research and development facility in China.”

    Gonzalez also rebuffed Lee, with an implied scolding of his new employer as well. “Dr. Lee began assisting Google while he was still employed at Microsoft,” Gonzalez wrote. “Dr. Lee confused the difference between the discretion given him to disclose Microsoft’s confidential information for the benefit of Microsoft and disclosing Microsoft’s confidential information for his own benefit or the benefit of another.”

    On the other hand, Gonzalez did not prevent Lee from doing things like hiring engineers in China, as long as he does not recruit from Microsoft or use any of its confidential information.

    Nicole Wong, Google’s associate general counsel, says the ruling allows Lee to do what Google hired him to do, “which is build and recruit for our new research and development center in China.”

Careful crafting
Key to the Lee case is the employment agreement he signed in 2000. Among other things, it bars him from doing work that would compete with projects he worked on at Microsoft for a year after he leaves the company. During that time, he is also banned from inducing other Microsoft employees to quit the company. The contract also has nondisclosure provisions.

    More and more, employers are asking employees at all levels to sign noncompete and confidentiality agreements, says Johnny Taylor, senior vice president for human resources at financial services firm and chairman of the Society for Human Resource Management. It’s partly a response to the way companies in today’s knowledge-based economy expose more of their workers to valuable, proprietary information, he says.

    Asking employees to pledge not to solicit customers after they leave is another way companies try to protect themselves, Segal says. But when crafting such post-employment agreements, companies can shoot themselves in the foot by pushing too far, he says. Even in states that accept noncompete agreements, they generally have to be “reasonable” in terms of geographic area and duration, and employees are supposed to receive some “consideration” in exchange for signing, he says.

    A new, improved severance package may be grounds for asking existing employees to sign a noncompete, Segal says. Simply threatening to fire them if they don’t sign could backfire–with a judge ruling the pact invalid.

    “It’s always safer to give the employee something real as the lawful quid pro quo for signing the agreement,” he says.

    In the spat between Yahoo and the firm suing it, interactive speech technology maker Nuance Communications, there’s an interesting twist regarding noncompetes. Nuance said it removed a noncompete provision affecting a team of research and development engineers earlier this year in a bid to keep them at the company after it merged with a rival. Even so, according to a Nuance court filing, that team of Montreal-based engineers quit Nuance to join Yahoo.

    Those engineers are among 13 key Nuance employees who have been hired away by Yahoo in a move that “gutted Nuance’s R&D software engineering department,” according to a lawsuit Nuance filed in a California court in September.

    The suit contends that Nuance’s former vice president of R&D told Yahoo about the company’s technology plans, secured a job at Yahoo, then worked with it to raid his department.

    In its suit against Yahoo and former Nuance employees, Nuance claims that it “has taken every reasonable step to protect its proprietary information, including requiring employee confidentiality agreements.”

    Nonetheless, a judge declined in early October to temporarily restrain Yahoo from employing the Nuance R&D engineers to develop interactive speech technology. “At this juncture, the Court is unable to properly assess whether any wrongdoing has occurred,” the judge wrote.

    “We continue to believe the allegations in the lawsuit are without merit, and we plan to continue a vigorous defense,” Yahoo said in a statement after the ruling.

    The case continues, with a hearing set for November 14.

Calling in the lawyers
    Amid all the job switching and litigation, legal help has become more important to the hiring process. It is now common for prospective employers to pay attorney fees for candidates who ask a lawyer to review their existing noncompete contract, Korn/Ferry’s Spitz says.

    Legal strategy over possible court battles also can be critical. Google may have committed a misstep in the Lee case, says Robin Meadow, an attorney with the firm Greines Martin Stein & Richland in Los Angeles.

    Google should have gone to a California court as soon as it hired Lee to ask that the court rule his noncompete with Microsoft invalid, Meadow says. Google did file a suit in California along these lines, but it came two days after Microsoft sued in a Washington court. A California ruling in advance of Microsoft filing its lawsuit might have prevented the company from winning the initial ruling against Lee and Google, Meadow says. “Google just wasn’t fast enough,” he says.

    Google’s Wong suggests that the company hoped to keep the matter out of the courts in the first place. “Our preference is to avoid litigation altogether,” she says.

    Sound legal counsel is becoming essential when it comes to employment agreements partly because the rules governing them vary by state. Along with California, other states that take a dim view of noncompete contracts include North Dakota and Oklahoma, according to employment attorney Arnie Pedowitz. Noncompete agreements in those two states are void unless they involve the sale of a business or breakup of a partnership, says Pedowitz, who co-edited the book Covenants Not to Compete: A State-By-State Survey.

    Pedowitz would like to see more legislation that curtails the use of noncompetes, because he thinks the scales overall are tipped toward employers. Com- panies have a lot of leverage to get workers to sign the agreements even if they would be struck down by a court, he says, and ex-employees are loath to challenge the pacts for fear of legal fees or losing a new job.

    Pedowitz notices a rise in intimidating legal action based on employment contracts. “I’m seeing more companies bringing questionable cases solely for the purpose of sending a message back to the incumbent workforce,” he says.

    Even if the situation surrounding employment agreements favors companies these days, businesses would be wise not to rely on them too much as a retention tool, Segal says. “If you only keep people in chains, that’s not good for the corporate culture,” he says. “You want the noncompete to be an added reason for the employee not to leave, not the sole reason.”

Workforce Management, November 7, 2005, pp. 1, 45-48Subscribe Now!

Ed Frauenheim is a former Associate Editorial Director at Human Capital Media and currently works as Senior Director of Content at Great Place to Work. He is a co-author of A Great Place to Work For All.

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