Handling the Competition of Departing Employees (Neal)

8/14/2019 Handling the Competition of Departing Employees (Neal)

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HandlingHandlingthethe

CompetitioCompetition of n of

DepartingDepartingEmployeesEmployeesPresented By

Kathy NealLabor & Employment Attorney [email protected]


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Case Study A John worked for WidgetMart in Tulsa as a salesman for 20 years andfor the past 5 years served as National Sales Manager. He knows thewidget business inside and out. He resigned his employmentunexpectedly and immediately opened a new business calledWidgets-R-Us in direct competition with WidgetMart. Several keyaccounts of WidgetMart have already started buying widgets fromWidgets-R-Us. Two years ago, the Human Resources Manager of WidgetMart decided that all management-level employees needed tosign a confidentiality and non-compete agreement. John signed the

confidentiality agreement and the non-compete agreement in which,following his separation from employment, he agreed that he wouldnot compete directly or indirectly with WidgetMart for two years in a50-mile radius of Tulsa.


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General Rules onRestraints of Trade

Every contract by which any one is restrained fromexercising a lawful profession, trade or business of any kind

is void unless: If the restraint is in connection with the sale of the goodwill of

a business, then a non-compete within a specified county andany contiguous counties, or a specified town or any part of thetown, is valid as long as the buyer is carrying on a likebusiness

Upon dissolution of a partnership, partners may agree thatnone of them will carry on a similar business within a specifiedcounty or any contiguous counties, or a specified town or anypart of the town

15 O.S. 217, 218, and 219


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What is Allowed is aNon-Solicitation Clause:

A former employee can compete in the same business asthat conducted by the former employer or in a similar

business as that conducted by the former employee aslong as he does not directly solicit the sale of goodsand/or services from the established customers of the former employer - 15 O.S. 219A

Can prohibit active solicitation

Cannot prohibit acceptance of unsolicited business - Bayly,Martin & Fay, Inc. v. Pickard, 1989 OK 122, 780 P.2d 1168.

Two-year non-solicitation agreement was held enforceable inInergy Propane, LLC v. Lundy , 2009 CIV APP 8


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Non-Solicitation Clauses Provisions that require a former employee to maintain a

hands-off policy as to the employers customers have

been upheld - Tatum v. Colonial Life & Accident Ins. Co. ,465 P.2d 448, 451 (Okla. 1970) A provision that required a hands-off policy as to the

employers existing or established customers solicited or sold toby the ex-employee during the last 12 months of her

employment was upheld in Drummond American LLC v. ShareCorp. , 29 IER Cases 1482 (W.D. Okla. 2009)

Customer information and customer relationships areprotectable interests that justify reasonable restraint


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Non-Solicitation Clauses Cont.

Continuation of employment is not

sufficient consideration to support a non-solicitation agreement


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Case Study B John worked for WidgetMart in Tulsa as a salesman for 20 yearsand for the past 5 years served as National Sales Manager. He

knows the widget business inside and out. He resigned hisemployment unexpectedly and immediately opened a newbusiness called Widgets-R-Us in direct competition withWidgetMart. WidgetMart is a manufacturer and distributor of widgets. Several key accounts of WidgetMart have alreadystarted buying widgets from Widgets-R-Us. The HumanResources Manager of WidgetMart pushed for several years tohave John sign a confidentiality and non-solicitation agreementbut it was just one of those things that never got done. John didsign a Conflicts of Interest policy acknowledging that heunderstood that outside business interests could be in conflict

with the company.


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Your Potential Remedies 1. The Uniform Trade Secrets Act

2. The Computer Fraud and Abuse Act 3. Breach of common law duty of loyalty 4. Breach of contract

5. Tortious interference with contractualrelationships 6. Oklahoma Deceptive Trade Practices

Act.


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The Uniform Trade SecretsAct

78 O.S. 85 et seq .

A trade secret means information, including aformula, pattern, compilation, program, device,method, technique or process that: Derives independent economic value, actual or

potential, from not being generally known to, and notbeing readily ascertainable by proper means by, otherpersons who can obtain economic value from itsdisclosure or use, and

Is the subject of efforts that are reasonable under thecircumstances to maintain its secrecy


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The Uniform Trade SecretsAct:

Prohibits the acquisition of a trade secret of another or the acquisition by someone whohas reason to know that the trade secretwas obtained by improper means; or

Prohibits the disclosure of a trade secret

without express or implied consent by aperson who:

Used improper means to acquire knowledgeof the trade secret; or


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The Uniform Trade SecretsAct:

At the time of the disclosure or use, knew or had reasonto know that his knowledge of the trade secret was:

Derived from or through a person who had utilized impropermeans; or

Acquired under circumstances giving rise to a duty tomaintain its secrecy or limit its use; or

Derived from or through a person who owed a duty to theperson seeking relief to maintain its secrecy or limits its use;or

Before a material change of his position, knew or had reasonto know that it was a trade secret and that knowledge of ithad been acquired by accident or mistake

Can get an injunction, damages, a royalty for use


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Effective November 1stThere are Criminal Penalties

(Amending 21 O.S. 1732)

Depending on the value of the trade secret, it is eitherpetit larceny or grand larceny if:

A person steals or embezzles an article representing atrade secret; or

Makes a copy of an article representing a trade secretwithout authority

Article means any object, material, device, customerlist, business records , or substance of copy thereof,including any writing, record, recording, drawing, samplespecimen, prototype, model, photograph, microorganism,blueprint, information stored in any computer-

related format , or map


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Computer Fraud and AbuseAct

The Computer Fraud and Abuse Act, 18 U.S.C.1030, prohibits fraud in connection withcomputers and provides for criminal fines andimprisonment with respect to persons: Who intentionally access a computer without

authorization or exceeds authorized access, and thereby

obtains information from any protected computer, or Who knowingly cause the transmission of a program,

information, code, or command, and as a result of suchconduct, intentionally cause damage withoutauthorization to a protected computer; or


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Computer Fraud and AbuseAct

Who intentionally access a protected computer withoutauthorization, and as a result of such conduct,

recklessly causes damage; or Who intentionally access a protected computer without

authorization, and as a result of such conduct, causesdamage and loss

Protected computer includes a computer which isused in or affecting interstate or foreign commerce orcommunication

A civil action may be filed for compensatory damagesand injunctive relief

There is a two-year statute of limitations


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Court Decisions


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International Airport Centers v.Chin , 440 F.3d 418

(7th Cir. 2006)

Former employee in competition with hisformer employer violated the CFAA when,before returning his laptop, loaded secure-erasure program into it to prevent recoveryof deleted files that his employer had noother copies of. His authorization to accessthe laptop ended when he violated his dutyof loyalty to the business.


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Mintel Intl Group Ltd. V.Neergheen , 27 IER Cases 1876

(N.D. Ill. 2008)

Employer showed likelihood of success on the merits

in an action for an injunction with respect to aviolation of the CFAA where the employee copied,emailed to his personal email address and/or printedconfidential and proprietary information form hiswork computer, including client accounts andbudgets, potential client lists, vendor lists, marketingstrategies and overall objectives, and individual clientcost data. These actions exceeded his authorizedaccess.


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Breach of Fiduciary Duty Employees occupying positions of trust and confidence

owe a duty of loyalty to their employer and must

protect the interests of the employer Even in the absence of an express agreement, a key

employee or management or executive employee isbarred from actively competing with his employerduring the tenure of his employment Damages are available and the equitable remedy of

disgorgement of salary during the period of competition


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Tortious Interference withContractual Relationships

For a claim of tortious interference withcontractual relations, the plaintiff must show:

1. That he had a business or a contractual rightthat was interfered with.

2. That the interference was malicious andwrongful, and that such interference wasneither justified, privileged nor excusable.

3. That damage was proximately sustained as aresult of the complained of interference.


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Oklahoma Deceptive TradePractices Act

Remedies:

1. Injunction without proof of monetarydamage.2. Damages, including punitive damages.


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Considerations for YourProtection

Consider having key employees signemployment agreements with confidentialityand non-solicitation agreements

Consider adopting a Conflicts of Interest policyin which periodically employees discloseoutside interests and business interests; getthem signed


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Considerations for YourProtection, cont

Update your policies and procedures and employeehandbooks

Think about a policy telling employees that theft andembezzlement of customer lists and business records is larcenyand that use of unauthorized use of company computers maysubject them to prosecution under the CFAA

Adopt a computer usage policy that makes clear whatan employees authorization for use of the computer is;

If you have a trade secret, make sure you take stepsto treat it confidentiallyUse levels of security for computer processes; security to entry tobuilding; confidentiality policies; restrict access to the trade secret


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Questions?Questions?Kathy R. NealMcAfee & Taft

A Professional Corporationwww.mcafeetaft.com

500 ONEOK Plaza100 West 5 th Street

Tulsa, OK 74103

Phone: (918) 574-3020Fax: (918) 574-3120

[email protected]

Handling the Competition of Departing Employees (Neal)

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