By Richard Darwin
Sep. 2, 2010
The departure of an employee to pursue an opportunity with a direct competitor is not uncommon. Under California law, for example, it is neither wrongful nor illegal for an employee to join or start a competing enterprise, and thereafter to compete for his or her former employer’s customers and business. However, employees frequently (and sometimes unknowingly) cross the line from fair competition to unfair and actionable conduct in the process of making a career move of this sort.
The unexpected and/or unexplained departure of an executive, key employee or group of employees should almost always raise a red flag, particularly when an individual resigns to join a direct competitor. All three scenarios implicate the same threat: that of a competitor attempting to gain a business advantage through unfair and wrongful means.
The competitor may use one or more of the following tactics:
• Theft and misuse of trade secrets and proprietary materials
• Destruction of company assets and files
• Recruitment of employees by unfair means
• Disruption of business operations
• Interference with customer relationships
Identify wrongful conduct
There are a number of steps an employer can take in response to an employee departure. First of all, an employer should investigate the circumstances surrounding the departure and secure important evidence. Keep in mind that time is of the essence—delay will create a risk of lost, overwritten or deleted data and evidence, and will also provide the departing employee with the time and opportunity necessary to exploit his or her wrongdoing.
The following steps should be taken as quickly as possible after the employee’s resignation:
1. Secure the defecting employee’s computer and make sure no one uses it. It will be a primary source of information and evidence.
2. If the IT department recycles backup tapes, immediately suspend that practice to avoid overwriting critical evidence.
3. Check the office or workspace of the defecting employee for missing documents and files.
4. If the building has security cameras, secure or get copies of the tapes or electronic files.
5. Pull all relevant employment agreements, nondisclosure agreements and employment policies signed by the departing employee.
6. Interview co-workers. Quite often, someone has an ax to grind, e.g., an employee who wanted to leave with the departing employee(s) but was left behind, or who was asked to join the defecting employee(s) but chose not to do so. These will be very important witnesses.
7. If the departing employee is still on the premises, request an exit interview and the preparation of a memo summarizing the status of his or her pending projects.
8. Document any expenses and damages related to the departures, e.g., headhunter fees, lost employees, lost business.
9. Get an outside lawyer involved.
Key things to look for during this investigative phase include:
• Missing documents and files, as well as any other evidence that the employee has physically removed company property or information
• Evidence that data has been copied from a computer hard drive or server onto CDs, DVDs or portable storage devices, or has been sent to an online storage site
• Evidence that the employee began competing before he or she resigned, e.g., recruited co-workers or solicited clients
• Evidence of data destruction, e.g., indications that the employee engaged in the mass deletion of computer files or “scrubbed” a hard drive
Remedy the harm
Next, evaluate the company’s options. Ask the hard questions, e.g., has the company suffered any real harm? Even if the investigation fails to uncover any evidence of wrongdoing, it is still a good idea to send a letter reminding former employees of their obligations under any operative agreements and demanding the return of any materials they may still have in their possession.
If, on the other hand, you discover evidence that the employee engaged in wrongful conduct, you may need to take more aggressive measures such as a cease-and-desist letter, which may be used to demand the return of stolen materials and/or to demand that the former employee stop soliciting customers, recruiting employees and/or using confidential materials. Occasionally, exigent circumstances may warrant immediate litigation and an application for a temporary restraining order. All of these decisions will necessarily depend upon the results of your investigation and consultation with your litigation counsel.
In the event of litigation, choose your claims wisely. The removal of documents and materials by a departing employee may or may not constitute trade secret misappropriation, depending upon the nature of the information taken and the method by which it was removed and used by the former employee. Be aware that bringing a cause of action for trade secret misappropriation in bad faith, or purely anti-competitive purposes, can result in liability for the defendant’s costs and attorney fees.
It is always a good idea to evaluate the things the company can do before a departure to minimize the harm that a departing employee can potentially inflict, and to maximize its chances of prevailing in the event of litigation:
• Review and update employee policies and handbooks.
• Put key employees and executives under contract, if appropriate.
• Identify the company’s trade secrets.
• Ensure that the company is taking steps consistent with those used by others in the relevant industry to maintain the secrecy of its confidential information, e.g., password-protected computer networks, “confidential” stamps and footers on sensitive documents, and locked file cabinets.
Taking care of these things proactively will pay huge dividends down the line.
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