Importance of Post-Employment Procedures
Post-employment considerations are an important component in the overall strategy for protecting trade secrets and confidential information. Because the overwhelming majority of trade secret misappropriation and loss of customers occurs when an employment relationship between an employer and employee is terminated, the need for developing effective procedures for maintaining the secrecy of company trade secrets and preventing the movement of business is critical.
Post-employment procedures are often the last opportunity the employer has to ensure the protection of valuable information. Following clear post-employment procedures may also be helpful to prevent the unauthorized use of trade secrets by the departing employee and unauthorized solicitation of the employer's customers.
The exit interview for departing employees, including employees who depart voluntarily or involuntarily, is frequently an optimal time to discuss each employee's continuing obligations to the employer. Suggested methods are therefore provided for conducting such interviews, in addition to the potential pitfalls to avoid. An exit interview checklist (Appendix Form22) and an employee acknowledgment form (Appendix Form23) also are provided.
One of the purposes of post-employment procedures is to prevent the departing employee from soliciting the employer's customers for the purpose of moving business. This chapter discusses two methods for preventing erosion of the customer base by departing employees. The first involves protecting customer lists as a trade secret; the second is a practical approach to dealing with customers during the transition phase between the time that the employee leaves the company and the assignment or hiring of another employee by the employer to service the customers' needs.
Notice to the new employer of the former employee's continuing obligations not to disclose the employer's trade secrets and confidential information and to refrain from soliciting customers is another important post-employment procedure to consider. Proper notice to the employee's new employer prevents the new employer from later claiming that the use of the employer's trade secrets and confidential information, or solicitation of its customers, was innocent or inadvertent. Great care, however, must be exercised in drafting these notice letters in order to avoid future allegations against the employer of interference with the contractual relationship between the former employee and his or her new employer.
We will address as well the effect of involuntary termination on the employer's ability to enforce covenants not to compete. The answer to this question varies significantly from state to state.
Post-Employment Procedures: A Primer for Employers
Post-employment procedures should complement the employer's overall trade secrets protection strategy. While courts usually evaluate the reasonableness of precautions taken by the employer on a case-by-case basis, the employer's adherence to a uniform protection procedure is important. A well-reasoned and uniformly applied procedure for conducting exit interviews, protecting customer lists, counseling customers during the transition phase, and providing notification to a new employer when appropriate are all relevant considerations in evaluating the employer's diligence in protecting its trade secrets and confidential information.
Effect of Involuntary Termination
A covenant not to compete is an essential tool in preventing the loss of customers to a former employee following the termination of the employment relationship. It must be emphasized, however, that in some states, covenants not to compete will not be enforced where the employer terminates or breaches the employment relationship.
It is essential for the employer to be knowledgeable about the applicable law in its principal place of business. While the employer should consider including a choice-of-law provision in its employment agreement, such choice-of-law provision may not be enforceable if the applicable law agreed to by the employer and employee is contrary to the law of the state in which the court hearing the dispute sits.
The Exit Interview
The employer should educate its employees, at both the management and nonmanagement levels, about the importance of protecting the employer's trade secrets and confidential information from disclosure. This educational process should start at the beginning of the employment relationship and should continue during the course of employment, as it is generally too late to educate a departing employee for the first time at an exit interview regarding what constitutes "trade secrets." The use of nondisclosure provisions and covenants not to compete in employment agreements, as discussed in previous chapters, is an ideal method for ensuring employee awareness and compliance from the outset.
The exit interview should ideally satisfy three purposes:
- it provides a final opportunity to remind the departing employee of his or her obligations not to disclose confidential information or solicit customers;
- it provides an employer with a practical mechanism to secure the return of trade secrets, confidential documents and customer lists, and other documents and information; and
- when the employee is leaving voluntarily, it provides the employer with an opportunity to explore the reasons for the employee's departure.
Worth noting is the fact that exit interviews have the potential to become adversarial experiences. Emotions often run deep when a valued employee decides to leave a company and pursue his or her career elsewhere (often in the employ of a competitor), or when an employer terminates an employment relationship with an employee involuntarily. An employer must, however, prevent the exit interview process from breaking down, as it is likely the last opportunity, bar litigation, for the employer to emphasize to the employee what his or her continuing contractual and common-law obligations are to protect company trade secrets and confidential information.
At the exit interview, the departing employee should be clearly reminded of his or her continuing obligation not to disclose confidential information that he or she learned during his or her employment. The employer should review the employee's personnel file with the employee, concentrating on such documents as employment agreements, express written agreements not to disclose trade secrets and confidential information, nonsolicitation agreements, and covenants not to compete. While nonmanagerial employees are not frequently asked to enter into such agreements at the beginning of their employment, they are still subject to the same common-law obligations applicable to management-level employees; namely, to maintain the confidentiality of information they learn by virtue of their employment and to refrain from competing unfairly with their former employer.
A major advantage of a written employment agreement is that it provides unequivocal proof that the employee, at the outset of his or her employment, was aware of the duty to maintain the confidentiality of the employer's trade secrets and confidential information. Such documentation is indispensable for a clear understanding of the employee's obligations both during employment and thereafter.
In situations where an employee has signed a nondisclosure agreement or covenant not to compete at the beginning of the employment relationship, the employer may wish to have the employee reacknowledge or even re-sign the document that the employee previously signed. After the employee has been given access to the employer's confidential and trade secrets information during his or her employment, the employer may also choose to be more specific by identifying the information that the departing employee is precluded from disclosing and the customers subject to a nonsolicitation provision. Consideration should be given to having the employee sign a "Trade Secret Acknowledgment Form" or similar document containing this information.
In the event that an employee has not entered into a written employment agreement, or where state law does not recognize the agreement because of the employee's involuntary termination, the former employer is still entitled to rely on common-law protection. Most courts recognize that a confidential relationship exists between an employer and its employees. The Restatement (Second) of Agency § 396(b) further provides that:
After the termination of the confidential relationship, the agent, nonetheless, owes a duty not to disclose the principal's trade secrets, lists of names, or other confidential matters given to the agent.
The employer should bear in mind, however, that the law will enforce an employee's obligation to protect a trade secret only where an employer has shown that it has taken reasonable precautions to protect the trade secret. It is for this reason as well that a uniform policy for the protection of trade secrets and confidential information should be strictly adhered to.
Whenever possible, the presence of legal counsel at the exit interview is advantageous. In-house or outside counsel can best explain to the departing employee the legal ramifications of future disclosures as a breach of an express contractual obligation, and/or their common-law fiduciary duty, and can also clear up any misunderstandings that may arise during the exit interview regarding the employee's continuing obligations. Because litigation is always a possibility, the guidance of legal counsel at this stage may prove to be a worthwhile precaution.
The employer should properly and completely document the results of the interview by use of an exit interview checklist, as set forth in the Appendix, Form No.22. Consideration should also be given to having the employee acknowledge the accuracy of the relevant documents and the content of the exit interview by signing a written statement, as set forth in the Appendix, Form No.23. Both of these forms may prove to be valuable documentary evidence in the event of future litigation to establish that the employee was thoroughly advised of his or her contractual and/or common-law obligations upon the termination of employment.
Protecting the Customer Base
The single most valuable asset of a business is often its "good will," which is measured by the positive relationship it has developed with its customers. The employer's source of income, and thus profit, is in most instances directly related to the business relationships it develops and maintains with its customers. For this reason, the employer's need to protect the customer base is critical, as is its need to effectively communicate with its customers during the transition phase following an employee's departure.
Protecting the Customer List
Significant litigation has been pursued in recent years in an effort to protect the confidentiality of the "customer list." Employers frequently believe that the identity of their customers, their buying habits, and other customer-specific information constitute trade secrets and are thus protected from use by former employees. These assumptions, however, are not necessarily accurate.
Customer lists are not automatically protectable as "trade secrets." Where the customer list merely contains names of customers that can easily be collected by any competitor, the list is generally not considered to be a trade secret. Where, however, the customer list contains unique information, such as customer buying habits, or is particular to the employer's business and cannot be easily reproduced from scratch by a competitor, the customer list may qualify as a trade secret.
In order to persuade a court that a customer list constitutes a trade secret, it is essential that the employer treat it as such by taking reasonable steps to prevent the unauthorized disclosure of the identity of its customers and other relevant information. It should be noted that even if a customer list is not a trade secret, it is still the employer's "property," and any physical removal of the list or copying of it may justify injunctive relief for the employer.
Although there is no clear majority rule regarding the trade secret or confidential status of customer lists in the absence of an express agreement between the employer and the employee, an employer can often protect customer lists from disclosure by an employee by using nondisclosure and nonsolicitation provisions in employment agreements. A protectable customer list and the existence of express nondisclosure and nonsolicitation provisions in an employment agreement may significantly assist the employer in maintaining the confidentiality of the customer base.
Importance of Communicating With Customers During the Transition Phase
Another important consideration for protecting the employer's customer base is to engage in informative communications with customers with whom the employee had regular contacts during the transition phase, after the announced departure or past departure of the employee. While this consideration appears elementary, its importance cannot be overemphasized. Once a customer enjoys a comfortable and good rapport with an employee, it may be tempted to follow the employee to the competition unless aggressive efforts are made by the employer to retain the customer, thereby protecting its customer base.
To prevent the migration of customers, the employer should write to the customers to whom the employee was previously assigned and advise them that while the employee is no longer with the company, the employer will continue to provide them with the same quality of service they have come to expect. The employer should also tell customers who will be assigned to work with them going forward. The importance of personal contacts, including social outings, visits to the customer's place of business, regular telephone calls, personal notes, and verbal follow-up is critical to encourage customers to keep their business with the employer. The employer should assure its customers that any concerns or questions they may have will be dealt with in an efficient and expeditious manner. The customers should be made to feel comfortable about leaving their business with the employer despite the employee's departure.
Caution should be exercised in the content of these communications with customers to prevent the possibility of a future civil action for defamation against the employer by the departing employee. The employer should refrain from mentioning the circumstances under which the employee left the company, and should concentrate instead on assuring the customer that quality service will not be interrupted.
Whether to Provide Notice to the Employee's New Employer
The well-established rule concerning the rights of an employer with respect to the protection of trade secrets is that an owner of trade secrets may protect them from unauthorized disclosure or use by a third party only when the third party has actual or constructive notice:
- that the information is considered to be a trade secret and
- that the information was disclosed to the third party through a breach of duty arising from an express contract or a common law fiduciary duty to the trade secret owner. The employer bears the burden of demonstrating that the third party received notice.
The most common and effective method of providing notice to a former employee's new employer is by means of a letter from the employer. This letter should be signed by the president of the company or by in-house or outside counsel. The new employer should be advised that the employee had access to trade secrets and confidential information and that he or she has a continuing contractual and/or common-law duty not to disclose such information to third parties. Where the former employee signed an employment agreement containing a covenant not to compete and nonsolicitation and nondisclosure provisions, the employer should also reference these provisions in the letter.
New employers will occasionally initiate contact directly with the former employer. Typically, the new employer may write a letter to the former employer acknowledging the employee's former employment, and provide written assurance to the former employer that it does not intend to induce or permit the use or disclosure of the former employer's trade secrets or confidential information, or the solicitation of its customers. Such letters are an effective means of establishing clear lines of communication and often have the desired effect of preventing litigation.
A Word of Caution Regarding Interference With Contractual Relations
The employer should exercise caution when drafting letters to a former employee's new employer, as such communications may cause the new employer to revoke offers of employment they have extended to the former employee or otherwise cause them to sever their new employment relationship with the former employee. Should this occur, potential civil liability may arise for intentional interference with contractual relations. Extreme caution should therefore be exercised when drafting such letters to ensure that they are accurate, based on fact, do not overstate the employer's legal rights, and are not defamatory in nature. Caution should also be exercised to avoid reference to threatened litigation unless a clear basis exists for such assertion.
Proper drafting of the notice to the new employer should reduce the likelihood that a tortious interference cause of action will be asserted against the employer.
Post-employment considerations are important for protecting the employer's trade secrets and confidential information. By utilizing an established exit interview procedure, taking steps to protect the customer list, communicating with customers during the transition phase, and providing proper notice to the new employer, an employer can protect its valuable confidential and trade secrets information long after the employment relationship with its employee terminates. Should an unauthorized disclosure to a third party of trade secrets and confidential information occur, the employer will be in a better position to effectively protect this important information.