Not a Member?  Become One Today!

HR Magazine, February 2005 - Strings Attached

Jonathan A. Segal    

HR Magazine, February 2005

Vol. 50, No. 2

  Learn how to reel in your competitors' employees without entangling your company in legal liability.  

Virtually every employer recognizes that a good hiring program is designed not only to attract talent but also to weed out those applicants who, if hired, could cause harm to the company. (For instance, you don’t want your new controller to recently have been convicted of grand larceny.)

What many employers fail to recognize, however, is that they also have an obligation not to interfere with the legal interests of a job applicant’s current and former employers. This obligation may arise from applicants’ common-law duty of loyalty to former or current employers, or from specific agreements between applicants and their current or former employers.

This article discusses the duty of loyalty and the steps employers should take to ensure that they “poach” a competitor’s talent without breaching either the duty of loyalty or express agreements.

Employee's Duty of Loyalty

Even in the absence of a written agreement, employees generally owe their employer a duty of loyalty during their employment. In most states, the duty applies to all employees.

For example, in Regal-Beloit Corp. v. Drecoll, 955 F.Supp. 849, 857 (N.D. Ill 1996), the court held that “all employees [under Wisconsin law] owe their employer a fiduciary duty of loyalty with respect to any and all matters within the scope of their agency.”

The nature of the duty may vary, however, depending on an employee’s position. For example, the duty may be greater if the employee has access to confidential information or relationships with customers and clients. Under New Jersey law, for example, “employees occupying a position of trust and confidence … owe a higher duty than those performing low-level tasks.” Cameco Inc. v. Gedicke, 724 A.2d 783, 789 (N.J. 1999).

There are material differences among the states as to which employees are covered by the duty and how far the duty extends. For example, confidential information is defined more broadly in some states than in others. Nevertheless, there are some general principles that apply in most jurisdictions. These include:

Planning to compete. Employees can make plans to compete, but they cannot actually begin to compete, while they are still employed. For example, in Nilan’s Alley Inc. v. Ginsburg, 430 S.E.2d 368 (Ga. App. 1993), summarizing Georgia law, the court said the duty not to compete while employed prohibits employees from soliciting the employer’s customers and potential customers while employed.

Similarly, under Minnesota law, an employee violated his duty of loyalty by informing customers that he would be leaving his current employer and that he would solicit their business on his own behalf after his employment ended. Sanitary Farm Dairies Inc. v. Wolf, 112 N.W.2d 42, 49 (Minn. 1961).

Planning to compete together. Employees generally have a right to discuss among themselves the option of leaving their employer and then competing together. However, this right is not without limitations. For example, an employee may not “systematically induce other employees to leave their jobs if his purpose is to destroy an integral part of his employer’s business.” Quality Systems Inc. v. Warman, 132 F. Supp. 2d 349, 354 (D. Md. 2001).

Disclosing information. Employees can neither use nor disclose confidential or proprietary information they have acquired in the course of their employment. This duty applies both during and after employment. If the employer’s customer list is confidential, for example, the employee cannot disclose it to a potential employer. (For a detailed dis- cussion of how to keep company information confidential, see “ Protecting Trade Secrets” in the May 2004 issue of HR Magazine.)

While employed, employees also may not gather confidential information with the goal of disclosing that information after their employment has terminated. For example, an employee violated the duty of loyalty under Illinois law by downloading and copying an employer’s confidential customer information during his employment. The employee planned to use the information to compete with the employer after he left. RKI Inc. v. Grimes, 177 F.Supp. 2d 859, 877 (N.D. Ill 2001).

Diverting business opportunities. Employees cannot divert business opportunities that otherwise would benefit their existing employer. To the contrary, they must continue to pursue zealously business opportunities that would benefit their current employer, even after they have given notice.

For example, employees cannot delay pursuing business opportunities knowing that delays would allow them to pursue those same opportunities later, on behalf of another employer. Gomez v. Bicknell, 302 A.2d 107 (S. Ct. N.Y. 2002) (applying New York law).

These are only a few examples of the applications of the duty of loyalty. For a comprehensive state-by-state overview, check out Employee Duty of Loyalty (BNA, 1999, supplemented in 2003).

Prospective Employer's Liability

Employers have more than just an ethical obligation to respect a prospective employee’s duty of loyalty to a current employer. Employers that encourage or otherwise participate in an employee’s breach of duties owed to a current employer can be held liable under a number of different theories such as inducing a breach of fiduciary duty, intentional interference with contractual relations with customers or employees, civil conspiracy, unfair competition, and misappropriation under trade secrets protection laws or under common law.

No matter which legal theory is involved, the bottom line is the same: If the prospective employer participates in the breach, it may share in the liability. Accordingly, recruiting employers should avoid, directly or indirectly, encouraging applicants to violate their duty of loyalty in any context.

Be mindful, however, that while refraining from anything improper may be a defense in litigation, it won’t necessarily avoid litigation.

The best way to do that is to:

  • State affirmatively that you expect applicants to honor their duty of loyalty to their current employers.
  • Provide applicants specific examples of behaviors they should avoid.

To the extent that you set such boundaries, prospective employees are less likely to breach duties to former employers and, in turn, adversely impact your organization. If litigation does arise, the fact that you gave applicants such directions can demonstrate your good faith, which can help limit damages. And the fact that you have documented proof that you gave such instructions increases its evidentiary value in litigation.

Beyond any legal considerations, reminding applicants to abide by any rules regarding duties to current or former employers can generate responses that reveal a great deal about an applicant’s character. If someone balks at the restrictions, consider the very real possibility that the individual will do the same to you, given the opportunity.

Note: It may be overcautious to advise lower-level prospective employees—who are unlikely to have access to confidential information or customer/client relationships—to honor their duty of loyalty. You may want to limit such warnings to candidates whose jobs are more likely to involve the risks.

Restrictions On Post-Termination Conduct

With some exceptions (such as revealing confidential or proprietary information), the common-law duty of loyalty generally ends when employment terminates. But the duty of loyalty is not the hiring employer’s only concern. Many employees are subject to post-termination restrictions embodied in signed agreements with prior employers. These restrictions may affect whether and under what conditions a prospective employer can hire a particular individual.

Some employers fail to ask whether an applicant is subject to any posttermination restrictions, on the theory that they are better off not knowing. That’s not necessarily a good strategy. While not asking about an applicant’s physical or emotional disability generally is a wise move, the same approach is not equally valuable when it comes to a possible disabling agreement.

While employers probably have no affirmative duty to ask about restrictive agreements, they do have a duty to take corrective action if they learn that an employee is subject to a binding restrictive agreement. Employers that become aware of, but ignore, post-termination restrictions can be held liable under a variety of legal theories, as mentioned previously.

Accordingly, it makes sense to address the issue of employment restrictions before spending time and money to establish an employment relationship. The question is, what are the appropriate questions to ask?

Generally speaking, there are five types of post-termination restrictions that might be contained in express agreements:

  • Restrictive covenants. These covenants prohibit the employee from competing with the employer for a specified period in a specified geographic area.
  • Non-solicitation of customers. Such agreements do not restrict competition, but do prohibit the employee, for a specified period, from soliciting business from the prior employer's customers or potential customers as such terms are defined in the agreement.
  • Non-solicitation of employees. These agreements prohibit an employee, for a specified period, from soliciting certain individuals to leave their current employer and work with the employee.
  • Confidentiality. These agreements prohibit an employee, after termination, from using or disclosing certain confidential information created or acquired in the course of employment.
  • Inventions. Such agreements provide that certain writings, products or other inventions created in the course of employment are the property of the prior employer; they also prohibit the employee's use of such inventions, for personal benefit or for the benefit of any other employer.

 Some employers ask applicants only whether they have signed a “restrictive covenant.” The applicant truthfully answers in the negative, but then the employer discovers—only when served with a complaint in a lawsuit—that the employee is subject to a “non-solicitation agreement.” The problem is not the applicant’s veracity but the employer’s question.

It is dangerous to ask questions using legal terms of art that may be more restrictive than you intended or that are subject to different reasonable interpretations. In other words, you need to be careful not to frame the question too narrowly.

Instead, include a broadly worded question on the employment application asking whether applicants have signed any agreements that include any provisions that could either prohibit employment with you or restrict the terms and conditions of employment with you. Applicants also should be required to certify on the application that no agreement signed with another employer precludes their employment with your company.

With respect to employees who perform jobs that are more likely to be subject to post-termination agreements—for example, sales employees—you may wish to consider including on your application for employment not only a general question but also specific questions as to each type of agreement noted above. Asking pointed questions not only increases the likelihood of securing accurate answers but also supports a defense that you should not be held jointly liable if you were duped.

If you find that applicants are subject to restricted covenants of any kind, be sure to ask for a copy.

On a practical level, however, this may present something of a dilemma for both you and the applicant.

Applicants who signed an agreement when they were hired by a former employer, but who did not retain a copy, may be afraid to ask the employer for a copy, since doing so might show they are seeking a new job and might result in their termination. As a result, applicants may not want to ask for the document until they get a job offer from you.

On the other hand, prospective employers should be reluctant to extend a job offer without establishing that an applicant is not subject to restrictions that prevent meaningful employment.

Consider as one possible solution extending employment offers based on the following conditions:

  • You must receive copies of all agreements containing any post-termination restrictions of any kind that potentially could relate to employment with you.
  • You must conclude, in your sole discretion, that no restrictions exist that would prevent you from employing the applicant in a meaningful capacity.

Scope and Enforceability Of Restrictions

If you extend a conditional job offer and the prospective employee produces the agreement(s), you will need to determine the scope of any restrictions and the extent to which they are enforceable.

Scope. Review any agreement very carefully. For example, assume an agreement includes a non-solicitation-of-customers clause. Questions to be considered in this context would include:

  • Does the restriction cover only current customers or does it also apply to former and potential customers?
  • If the restriction covers former or potential customers, how are they defined?
  • Does the agreement cover all of the former employer's customers, or only certain customers with whom the employee had some contact?
  • Does the restriction prohibit only solicitation of such customers, or does it prevent the employee from working with them for some specified period of time, regardless of who initiates the contact?
  • If the restriction applies only to solicitations initiated by the employee (or the new employer), how is solicitation defined?

Drilling down to this kind of detail is important for avoiding legal risk but also to avoid being too risk averse. That is, if read at 30,000 feet, these agreements are sometimes interpreted more broadly than they actually are.

Enforceability. After determining the scope of the agreement, determine the enforceability of its restrictions. While this article does not examine enforceability in depth, there are three common factors to consider before concluding that an agreement is not enforceable: legal consideration, reasonableness and whether your own business behavior is above reproach.

For a restrictive covenant to be enforceable, it must be supported by considerationan exchange of value. In most jurisdictions, continued employment (as opposed to initial employment) is not sufficient. However, in a minority of states, continued employment may be sufficient. Accordingly, dont automatically assume that an agreement is not enforceable simply because the employee did not receive something extra for signing it.

Generally speaking, for a restrictive covenant or a non-solicitation agreement (with regard to customers or employees) to be enforceable, it must be reasonable in terms of duration, geographic area, the activity restrained, etc. However, even if the agreement is clearly overbroad, courts often will “blue pencil”—excise or narrow the offending parts—to make the agreement enforceable. Accordingly, it is dangerous to assume that an overbroad agreement translates into an unenforceable agreement.

If nothing else convinces you that you need to seek out and fully understand any restrictions placed on potential employees, consider this: What goes around, comes around. Employers sometimes ignore agreements between job applicants and their prior employers—then later try to enforce their own restricted agreements once those same employees leave for a new job. If the law values anything it is logical consistency, meaning judges are unlikely to grant equitable relief to employers with unclean hands—that is, those who previously countenanced the same conduct they now complain about.

For these and other reasons, check with counsel before reaching legal conclusions with regard to post-termination restrictions.

Author's note : This article should not be construed as legal advice or as pertaining to specific factual situations.

Jonathan A. Segal, Esq., a contributing editor of HR Magazine , is a partner in the Employment Services Group of WolfBlock LLP, a Philadelphia-based law firm. His practice concentrates on counseling clients, developing policies and strategic plans, and training managers to avoid litigation and unionization.
Copyright Image Obtain reuse/copying permission
 

 Web Extras

 
  • Citations Illustrating Legal Theories in This Article:
  • Gagan v. American Cablevision, Inc., 77 F.3d 951 (7th Cir. 1996), Arizona law (inducing a breach of fiduciary duty)
  • American Express Financial Advisors, Inc. v. Topel, 38 F.Supp. 2d 1233 (D. Colo. 1999) (intentional interference with contractual relations with customers)
  • Fine Line Distributors, Inc. v. Rymer Meats, Inc., 1994 U.S. Dist. Lexis 8382 (N.D. Ill. 1994), Illinois law (intentional interference with contractual relations with employees-even if the employee is at-will)
  • Rice v. Hodap, 919 S.W.2d 240 (Mo. 1996), under Missouri law (civil conspiracy)
  • Neyer, Tiseo Hindo Ltd. v. Teddy Wayne Russel, et al., 1993 U.S. Dist. Lexis 12011 (E.D. Pa. 1993), Pennsylvania law (Unfair competition)
  • Baystate Technologies Inc. v. Bentley Systems Inc., 946 F.Supp.1079 (D.Mass. 1996). (Misappropriation under common law)