Recruiting an Employee without a Non-Compete Agreement from a Former Employer can Still be Harmful to Your Business Health


Employers who recruit high level managers, sales, or technical personnel from competitors typically assume that, unless the potential employee has signed a non-compete agreement with his former employer, there are no limitations on that potential employee's ability to work for the new employer. In the current competitive climate and under a recent line of cases, that assumption may be wrong.

The Inevitable Disclosure Doctrine

Employers have always been able to avail themselves of the courts to protect confidential and proprietary trade secrets from disclosure by former employees regardless of whether a non-compete agreement existed. Based upon that generally accepted doctrine, a number of recent court decisions have gone a step further in enforcing an employer's right to protect confidential information by restraining certain employees who did not sign a non-compete agreement from working for a competitor where such employment would inevitably result in the disclosure of confidential and proprietary trade secrets of the former employer.

In PepsiCo, Inc v Redmond, 54 F3d 1262 (CA 7, 1995), the United States Court of Appeals for Seventh Circuit established what is now commonly referred to as the "inevitable disclosure doctrine." In that case, the defendant Redmond was a relatively high-level employee assigned to PepsiCo's sport and new age drink division. In this position, Redmond had access to and knowledge of PepsiCo's strategic plan, annual operating plan, and innovations regarding selling and delivering systems for its sport and new age drinks. Redmond had signed a confidentiality agreement, but not a non-compete agreement.

After secretly negotiating with the Quaker Oats Company, Redmond accepted Quaker's offer of employment as Vice President - Field Operations for Gatorade/Snapple, a direct and fierce competitor of PepsiCo's All Sport division. Two days later, Redmond advised PepsiCo that he had accepted the Quaker offer.

Although Redmond had not signed a non-compete agreement, PepsiCo immediately sought to enjoin Redmond from working at Quaker because his new position and marketing duties with Quaker would inevitably require him to use information from PepsiCo's strategic plan and annual operating plan. In other words, PepsiCo argued that because Redmond would have such a high position in the Gatorade marketing and distribution hierarchy, it would be impossible for him not to be influenced by his knowledge of PepsiCo's strategic and annual operating plans.

The trial court, agreeing with PepsiCo, enjoined Redmond from assuming his position at Quaker for over six months and permanently enjoined him from using or disclosing any PepsiCo confidential trade secrets. The Court of Appeals affirmed the trial court's decision. As the Court simply explained: "PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game."

Since the PepsiCo decision, other courts have adopted the inevitable disclosure doctrine. In Double Click, Inc v Henderson, a New York trial court enjoined two former Vice Presidents of Double Click, an internet advertising company, from becoming employed with their own start-up competitive internet advertising business. The court concluded that "the centrality of Henderson and Dickey in Double Click's operations makes it unlikely that they could eradicate [Double Click's] secrets from [their] minds." In the Double Click case, only one of the former employees had a non-compete agreement, and its enforceability was disputed.

As another court has explained, even if, in good faith, the new employer takes precautionary measures to prevent the disclosure of trade secrets (through cautionary or "Chinese wall" memoranda to other employees), those measures cannot prevent the "inevitable disclosure" of confidential information about the former employer in the course of the employee's efforts to perform well for his new employer. Lumex, Inc v Highsmith, 919 F Supp 624 (E.D. NY 1996). Employees who are hired by competitors and put into similar positions simply cannot divorce their knowledge of their former employer's confidential information from the work they do with the new employer.

Therefore, when hiring technical, sales or management level employees from competitors, employers should be aware that despite the absence of a non-compete agreement, a former employer still may be able to restrain the employee from working in a similar position with a competitor.

Courts Can Extend Non-Compete Agreements Beyond Their Term

Most employers also assume that, if a new hire has a non-compete agreement which has expired, then the new hire is not prohibited from working for a competitor. A recent Michigan Court of Appeals decision has held otherwise.

In Thermatool Corp v Borzym, 227 Mich App 366 (1998), the Michigan Court of Appeals decided that, under appropriate circumstances, a non-competition agreement can be extended beyond its term by the Court. Although the Court did not approve of such an extension in Thermatool, it did indicate that such a remedy may be appropriate when a former employee "flouts the terms" of the non-compete and the damages caused by the breach are difficult to quantify in monetary damages. In such cases, it may be necessary to extend the duration of the non-compete for a period of time equal to the period of the breach to avoid injustice and give the former employer the benefit of its original bargain.

In Thermatool, the Court of Appeals reversed the trial court's extension of the non-compete because the injuries caused by the breach were quantifiable and could be compensated with monetary damages. Nonetheless, it makes good sense for an employer to inquire beyond the written terms of a non-compete agreement that a prospective employee has signed to ensure that there are no surprises after hiring.

Potential Criminal Liability

The Economic Espionage Act of 1996, 18 USC §1831 et seq, was enacted to assist the government in prosecuting "employees who leave their employment and use their knowledge about specific products or processes in order to duplicate them or develop similar goods for themselves or a new employer in order to compete with the former employer." While there always have been criminal laws prohibiting espionage involving military and government secrets, the Economic Espionage Act now makes it a criminal offense for an employee or anyone else to take, conceal, receive, or possess the trade secrets of another. The crime carries with it a potential sentence of up to $10 million and 10 years in jail.

Therefore, regardless of whether a non-compete agreement exists, the hiring of a competitor's employees may result in potential civil liability, and it also can create potential criminal liability for the employee and the new employer. While it remains to be seen whether federal prosecutors will want to involve themselves in the average dispute between two competitors, the potential for criminal liability cannot easily be discounted in any analysis of competitive issues.

Summary

Employers recruiting managerial, marketing or technical talent from competitors should be careful to ensure that, before extending an offer of employment, the employee's new position and duties will not inevitably force him or her to use or consider the confidential information of the former employer. In addition, the new employee should be required to acknowledge in writing that he or she has not taken and is strictly prohibited from using any confidential information of former employers in the performance of his/her new duties. Such precautions do not insulate employers from civil or criminal liability. They are, however, a significant step in protecting both the employee and employer from unintended and unforeseen problems.