That dark lord of the Nixon White House, H.R. Haldeman, is said to have warned White House Counsel John Dean that "once the toothpaste is out of the tube, it's hard to get back in." Generally speaking, Haldeman was right; once a secret or item of confidential information is known outside of the circle that needs and is authorized to know it, there is virtually nothing that can make it secret or confidential again.
In these economic times, companies will almost certainly shed even what were once valued employees - employees with whom the company has shared confidential business information, forecasts, lease termination dates, product and upgrade rollout plans and other sensitive business information. Former employees are the principal source of misappropriated intellectual property. In fact, a recent survey and study by the Ponemon Institute of over 900 employees who had been terminated or laid off found that 65% took email lists; 45% took non-financial business information; 39% took customer information and lists of customer contacts; and 35% took records relating to employees. These individuals - particularly those taking email lists, and business and customer information - were likely attempting to take with them something that would allow them to be attractive to a new employer and allow them to hit the ground running.
Employers need to take a hard look at the departure of once-valued employees. If your company is likely to terminate employees or conduct a true reduction in force, there are steps you should have already taken and can still take to reduce and manage the risk of an employee taking and using your company's secrets and valuable customer good will.
Of course, you must also be vigilant when hiring employees who are traveling with confidential information and customer goodwill properly belonging to their prior employers. During these hard times, your competitors are also likely aggressively to protect their proprietary information and customer goodwill. Fortunately, there are steps you can take to reduce the risk that your new employee doesn't lead you into a battle you don't want.
A. Non-Competition, Non-Disclosure and Non-Solicitation Agreements
Your company should long ago - at the outset of the employment relationship and as a term and condition of employment - have entered into agreements restricting former employees from competing within narrowly-defined areas; from disclosing secret and confidential business information and trade secrets; and from soliciting the customers with which they interacted (and developed or enhanced goodwill) while employed by your company. Vigilant and consistent enforcement of those obligations is crucial. The law relating to restrictive covenants, as described, requires an employer to demonstrate that it is protecting a "legitimate interest" (such as goodwill, trade secret, confidential information). The failure to enforce an agreement as to one or a number of former employees will almost certainly suggest to a reviewing court and the former employee's lawyer that the interests are not sufficiently important to pass this test of legitimacy.
As we have noted in past articles, companies that identify during the course of employment what they believe to be confidential - that is, exactly what the former employee is not allowed to use, rely upon or misappropriate after departure - and reasonably define those customers they believe are the subjects of the former employee's non-solicitation obligation are more likely to have their agreements enforced.
B. The Exit Interview
Every departing employee should be interviewed at the conclusion of their employment with the Company. The exit interview can pull together several of the threads of the company's overall objective of maintaining the confidentiality of its business information and trade secrets and protecting against disclosure by departing employees.
For example, during the exit interview, the departing employee should be specifically advised about his or her agreements with the Company, and given a copy of any such agreements. The departing employee should be reminded of the Company's trade secrets and confidential information policy, if there is one, and handed a copy of the written policy again. The departing employee should be admonished not to disclose any information relating to the business of the company and reminded of his or her post-departure obligations under the applicable agreements. If the Human Resources Department typically conducts the Exit Interviews, consider having a manager or co-worker who is more familiar with the departing employee's responsibilities, projects and knowledge of the company's business observe and participate. Finally, the employee should sign an Exit Interview and Departure Acknowledgment Form, under which he or she acknowledges:
- That the exit interview occurred, naming the people present at the interview;
- That their post-employment contractual and statutory obligations were reviewed, including obligations under any Non-Competition, Non-Solicitation, Confidentiality and Non-Disclosure Agreement signed by them when they became employed by the Company; and
- That they have returned all Company property and possess no copies of any Company-related materials in written or electronic or electronically-stored form.
With respect to the last bullet point, keep in mind that in today's business environment, you need to do more than just collect the departing employee's hard files and laptop. You must also get from the employee the Company's cell phone, PDA and any other device that might contain Company information. This can be tricky when employees are permitted to use Company issued technology for personal use. For example, if the departing employee has notes from her last medical appointment on the PDA belonging to the Company, then extracting proprietary information without violating the employee's privacy can be difficult. One way to deal with that is to adopt and promulgate a written policy that makes it clear that employees do not have a reasonable expectation of privacy in company issued computers and other devices, and to insist that they only be used for Company purposes.
C. New Employee Representations
In addition to obtaining from all new employees an executed agreement protecting your Company's vital interests, you should also require the new employee to acknowledge in writing his or her understanding that employment with the Company and the performance of his or her duties for the Company will not violate any obligations the employee may have to any previous employer or other party. The new employee should also represent that he or she will not disclose or make use of any information in violation of any agreements with any previous employer or other party, and that he or she will not bring to the premises of the Company any copies or other tangible embodiments of non-public information belonging to or obtained from any previous employer or other party.
Finally, if the employee has revealed to the Company that he or she executed one or more agreements that may restrict the employee's work for the Company, then you should obtain a copy of all such agreements and have them reviewed by legal counsel prior to hiring the employee, or at least prior to allowing him or her to begin working for the Company.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
See, e.g., Christopher Cole's article, The Other Side of the Coin: Restrictive Covenants Protect Important Investment and Advantages, appearing in the January 31, 2008 edition of Good Company, and David McGrath's article, Fixing Your Non-Compete Agreements Before You're in a Fix: Ten Common Employer Mistakes, appearing in the July 10, 2007 edition of Good Company.
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