BFV Perspectives, Corporate Matters, Noncompete & Trade Secrets, | Jul 17, 2013

Five Things to Consider When Hiring an Employee From a Competitor

As employers, we often find that hiring employees who are familiar with our products or services and the market in which we sell them provides advantages over hiring employees who have never worked in our industry.  Yet, hiring an employee from a competitors has its risks.  Very often, the competitor will have concerns about restrictive covenants the employee may have signed, confidential information and/or trade secrets the employee may have had access to, electronic data obtained by the former employee and/or actions engaged in by the employee prior to the end of his employment with the competitor.  These situations can lead to costly and time-consuming litigation if they are not managed properly during the hiring process.

In order to minimize the risk of litigation when hiring an employee from a competitor, it is best to keep the following five points in mind:

1. Restrictive Covenant Agreements.  During the interview process, the employee should be asked for copies of any agreements containing restrictive covenants (non-competes, non-solicitation of customers, non-recruitment of employees, confidentiality/non-disclosure).  These covenants should be reviewed carefully to determine 1) if the employee will be violating any of them by accepting the position for which you are hiring and 2)  if the covenants are enforceable under the applicable law.  If the covenants are enforceable and the employee violates them, you could be dragged into litigation not only for the actions of the employee, but also for tortiously inferring with the competitor’s agreement with the employee.

2. Confidential Information and Trade Secrets.  The employee should also be carefully questioned about what types of confidential and proprietary information and/or trade secrets the employee may have been exposed to in his employment with the competitor.  The employee should be instructed that you are not interested in documents or electronic information containing any confidential information or trade secrets belonging to his former employer.  In fact, it is best to include a provision in your agreement with the employee by which the employee represents and warrants that he does not have and will not use any confidential information or trade secrets belonging to his former employer.  To the extent that the employee has been exposed to confidential information or trade secrets of the competitor and has knowledge of them in his head, measures should be taken to ensure that the employee does not use or disclose that information in his employment.  While various mechanisms are available to address this issue, there is rarely one solution that works in all cases and the mechanism to be used should be developed in consultation with counsel.

3. Computer Theft/Fraud.  You should be sure that the employee is advised of the law with respect to electronically-stored information and data and that the employee does not either intentionally or inadvertently violate any of the computer fraud or espionage statutes, including the Federal Computer Fraud and Abuse Act.  In certain jurisdictions, the Computer Fraud and Abuse Act has been found to prohibit employees from downloading or otherwise obtaining through electronic means, data and information which the employee is not authorized to access or obtain for purposes other than the employer’s business.  In addition, many states (including Georgia) have computer theft statutes that make it illegal for someone to download or otherwise obtain electronic information or data in a manner that is contrary to his employer’s interest.  To the extent that an employee unlawfully downloads or obtains electronic information or data from his former employer, and then brings that information to you or uses it in his employment with you, he opens you up to claims (and potentially liability) for aiding and abetting or conspiracy to violate the various applicable statutes.

4. Fiduciary Duty/Duty of Loyalty.  As long as the employee is still employed by the competitor, depending on the employee’s level of authority, the employee likely owes the competitor a fiduciary duty or duty of loyalty.  This means that the employee cannot engage in activities that are competitive with his employer, including soliciting customers, or soliciting or recruiting employees prior to the end of his employment.  The law surrounding fiduciary duties and duties of loyalty varies from state to state, but in general, a prospective employee should be given strict instructions not to engage in any competitive activities until he has severed his employment relationship with his existing employer.

5. Practical Concerns.  Finally, if a prospective employee indicates a willingness to engage in activities that would constitute violation of any of the laws described above, then you should think twice about hiring the employee.  Someone who is willing to act in an unlawful manner or in a manner that is unethical or dishonest with respect to his employer is likely to do the same when he decides to move on from your employment.

There are many details and nuances to consider relative to each of these issues when hiring a new employee from a competitor.  Hopefully, this article provides an overview of the things to think about when you find yourself in this situation.

BFV Perspectives, Corporate Matters, Noncompete & Trade Secrets, | Jul 17, 2013
Benjamin I. Fink
Benjamin I. Fink

Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.