Lessons I Learned Today 6/4/09 – Non-compete Agreements in Never Never Land

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

 

*Motorola Sues Four Former Employees in Massive Alleged Trade Secret Theft With Chinese Connections by Todd 

This article from the Womble Carlyle law firm deals with litigation in which Motorola Inc. named four former software engineers alleging the theft of $600 million in trade secrets with plans to take them to China. One of the defendants was indicted by a federal grand jury on three counts of theft of trade secrets and is facing charges of computer fraud and abuse, misappropriation of trade secrets and breach of fiduciary duty in the lawsuit.

Federal authorities said U.S. customs agents seized sensitive proprietary information from one defendant as she attempted to board a flight to China at O’Hare International Airport. That included more than 1,000 documents, both electronic and paper, belonging to Motorola. Authorities said they also found $30,000 in her luggage. “The release of the classified engineering information on three computer networking products would have cost Motorola $600 million over the next three years, officials said.”

 

*Risks of Enforcing Noncompetition Agreements – The Former Employee Countersuit by Todd

“Maryland recognizes the tort action for wrongful interference with contractual or business relationships in two general forms: inducing the breach of an existing contract and, more broadly, maliciously or wrongfully interfering with economic or prospective relationships. A cause of action for tortious interference with an existing contract is fairly easy to establish under Maryland law. In order to prove a case for tortious interference with an existing contract, a plaintiff must establish: 1) the existence of a contract between plaintiff and a third party; 2) the defendant’s knowledge of that contract; 3) the defendant’s intentional interference with that contract; 4) a breach of that contract by the third party; and 5) resulting damages caused to the plaintiff by the breach.”

“In order to prevail on a cause of action for tortious interference with prospective advantage, under Maryland law a plaintiff must establish: (1) intentional and willful acts; (2) calculated to cause damage to the plaintiffs in their lawful business; (3) that were done with the unlawful purpose to cause such damage and loss, without right or justifiable cause on the part of the defendants (which constitutes malice); and (4) with actual damage and loss resulting.”

There is well established, long standing law in other states holding that a former employer may be liable if a potential new employer withdraws an offer of employment based on the threat of litigation. In some jurisdictions, the former employer will be liable, but only to the extent that the employer failed to act in good faith and with a reasonable basis to believe that the restrictive covenant was enforceable.

In West Virginia, a former employer may be held liable for tortious interference with prospective relations if the restrictive covenant is unenforceable, even if the employer had a good faith reason to believe that the restrictive covenant or noncompetition agreement was enforceable.

It is “imperative that employers and their counsel consider carefully whether a restrictive covenant or noncompetition agreement is likely to be enforceable before threatening a new employer with a lawsuit if it does not refuse to employ a former employee. Employers that insist on moving forward to interfere with a former employee’s employment, when it is unclear whether the applicable agreement bars that new employment, must be cognizant of the risk that their threat of litigation might well result in a successful tort claim back against them by the employee whose ability to earn a livelihood has been adversely affected.”

 

* Massachusetts Judge Modifies Injunction – Permits Executive with Noncompete to Work for Hewlett-Packard in Limited Capacity by Todd

“Donatelli … signed a contract with EMC stating that if he left the company, he would wait 12 months before taking a job at a competing firm. Donatelli sought to get out of the contract by filing a lawsuit in California, where HP is headquartered and where courts generally refuse to enforce noncompete agreements. EMC filed a countersuit in Massachusetts, where Superior Court Judge Stephen Neel (my cousin) issued an injunction barring Donatelli from taking the HP job.

His Honor later modified his injunction, allowing Donatelli to work for HP as long as he steers clear of the company’s storage business. “It is not common for a judge to modify an injunction – but it happens.”

 

* Attracting Top Talent

“In today’s competitive talent marketplace, you need to think about attracting new employees to your business the same way you think about attracting new customers. It’s not enough to just post a job ad anymore – you need to think carefully about how you want to convey the values and unique benefits of your business, and then create consistent messaging that will reach the kinds of people you want to attract. This notion of “employment branding” has become crucial for large and small businesses alike.”

Don’t let submissions go unanswered.

Brush up on your interview skills, and coach your employees who may be interviewing as well.

Tell candidates what you like about them.

Let candidates know if someone else was picked for the job they wanted.

 

* How to Hire and Retain Good Employees

“Employees are the mechanism by which a business is able to run. If you want your business to run at a high caliber, then those employees need to also be of a high caliber. Having a company with good employees doesn’t just magically happen overnight, though. It requires you to meet their needs at the hiring stage and continually evolve to meet their needs throughout their employment.”

“Getting quality people into your company from the start will set the tone and get things moving in the right direction, which is why the hiring process deserves time, effort and most importantly, careful consideration. In order for you to be able to hire quality people, however, quality people need to apply. The way to attract them is through marketing, which is done in much the same way as you market to customers.”

Here is a simple six-step process to hiring good employees:

1. Create a detailed ad and job description that accurately reflect the position.
2. Sift through the resumes.
3. Perform preliminary phone interviews.
4. Conduct face-to-face interviews.
5. Run a background check.
6. Select the candidate who is the best fit.

Bringing good employees into your company is only half the battle; keeping them there is the other half. Now that you’ve got them, you’re going to have to put a little work into keeping them happy.

 

* Do You Need Some New Perspectives?

“John W. Gardner, the former Secretary of Health, Education, and Welfare, once said, “‘We are continually faced with a series of great opportunities brilliantly disguised as insoluble problems.’”

“The idea that opportunities are disguised as problems demonstrates how, by looking at a situation in a different way, you can see new possibilities. Creating new perspectives, or frames, can help you think beyond your own experiences and look at things in new and more positive ways, but what kind of perspectives should you consider?”

“Reframing or looking at things from positive perspectives will enable you to overcome your negative thoughts and feelings. It will also help you discover new ways of approaching situations that might have overwhelmed you in the past. Where some people see problems, others see opportunities.”

“Looking at situations from a positive perspective is a good way of turning your problems into opportunities, and a way of making sure that you get the best out of the situations you face.”

 

What I Think

I think it is hard to maintain a positive perspective if your former employee is breaching his or her agreement with you not to compete. Attracting the top talent is clearly a critical factor in building a successful business. This is most important in smaller or start-up company, since the early personalities often set the stage for the company’s corporate culture and ability to innovate.

Retention of top employee talent is correspondingly important. The term, garbage in – garbage out, is subject to more than one application. Most businesses make a relatively large investment of their resources into the process of recruiting, training, and managing employees. This is particularly important with key employees.

Given what the articles posted on this date suggest, departure of a former employee can have far reaching implications. The Chinese Connections case points out the sorts of things that can happen if the soon to be former key employee decides to take some of the R & D notes or customer lists with them when they leave. This often leads to a situation which is really only good for the lawyers. The employer will loose and the former employee will loose.

One thing that makes this area of non-compete litigation so great for lawyers and so bad for the parties, is the misinformation about what is or is not binding, and the nuances of how these issues are treated in different jurisdictions. In Kentucky, of instance, there are substantial differences in how non-compete cases are treated in the same town, depending upon whether they are brought in federal court or state court.

In New York, some courts have tended to limit the term of enforcement of non-compete agreements to relatively shorter periods than in many other states. In California, where the legislature declared them to be against public policy, the employer can actually be subject to damages and other remedies as a defendant for even engaging in an employment agreement containing a non-compete provision. The Maryland and West Virginia cases outlined in the articles posted on this date simply add to the uncertainty of this area of the law.

Perhaps the New Perspectives article is the way to go on this. It may be time to look at this issue another way, including looking at your retention efforts.

 

If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.

Lessons I Learned Today 5/28/09 Take this Cupcake and Shove it!

This is a digest and recap of highlights, quotes, and comments from articles and discussions posted on this date on the Applied Entrepreneurship, LinkedIn group site.

 

 *Cupcake Trade Secrets Allegedly Stolen by Todd Sullivan

The Las Vegas area’s trendy and fast-growing Cupcakery business is suing a California cupcake entrepreneur, charging she stole trade secrets and infringed on trademarks when she opened two gourmet cupcake shops there.

The Cupcakery, in a lawsuit filed in U.S. District Court in Las Vegas, says Ballus is now profiting from the Cupcakery’s intellectual property assets.

“Upon information and belief, Defendant Ballus used Plaintiff’s trade secrets and confidential information obtained during the course and scope of her employment at The Cupcakery to develop a competing cupcake business,” the suit charged. “Upon information and belief, Defendant Ballus procured her employment with The Cupcakery under false pretenses and in order to obtain such confidential information and other trade secrets regarding Plaintiff’s business model to aid in the development of her own gourmet cupcake business.”

 

*The Trade Secrets of Luxury Hotel Concept Allegedly Stolen: Starwood Hotels v. Hilton Hotels by Todd Sullivan

Hilton Hotels was sued by Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company, over claims it stole trade secrets to improve its luxury brands.

“This case involves corporate espionage and the looting through computer fraud of a mountain of information,” the lawsuit claims.

 

*Reasonable Efforts to Maintain Secrecy – Learning from the Bad Experiences of the Brits by Press Millen

Virtually every trade secrets statute in the U.S. requires the owner of a trade secret to take “efforts that are reasonable under the circumstances to maintain its secrecy.”

Yet there’s not a lot of guidance about what that means or what is required.

One source that courts might well consider authoritative is the U.S. government’s own regulations regarding the handling of secret information. These are found at 32 CFR Parts 2001 and 2004 from the National Archives and Records Administration and they are quite extensive.

Among other things, they describe in detail how classified information is to be classified, marked and safeguarded.

 

*From Nuclear War to Net War: Analogizing Cyber Attacks in International Law by Scott J. Shackelford

On April 27, 2007, Estonia suffered a crippling cyber attack launched from outside its borders.. It is still unclear what legal rights a state has as a victim of a cyber attack. For example, even if Estonia could conclusively prove that Russia was behind the March 2007 attack there is no clear consensus on how Estonia could legally respond, whether with armed force, its own cyber attack, or some other measure.

There scholarly literature dealing with these questions, as well as the ethical, humanitarian, and human rights implications of information warfare (“IW”) on national and international security is scarce. Treatments of IW outside the orthodox international humanitarian law (“IHL”) framework are nearly non-existent. This underscores the tension between classifying cyber attacks as merely criminal, or as a matter of state survival calling for the same responses as conventional threats to national security.

International law has been slow to adapt. The facts on the ground, and the widespread, amorphous use and rapid evolution of the internet in many ways challenge state sovereignty. I will advocate that the best way to ensure a comprehensive regime for cyber attacks is through a new international accord dealing exclusively with cyber security and its status in international law. Yet, the international community lacks the political will to tackle this issue directly. Until such an accord becomes politically viable, it is critical to examine how existing treaty systems may extend to cover the novel facts presented by cyber attacks.

The main failings of existing international treaties that touch on cyber law though are that most do not carry enforcement provisions. Nor do they specify how the frameworks change or fall away entirely during an armed attack. Nevertheless, regardless of whether or not cyber attacks fall below the threshold of an armed attack these bodies of law have a role to play in forming an appropriate regime. The cyber attack on Estonia in April, 2007, presents an example of the dire need for clarity in the international law of non-conventional warfare using modern technology.

 

*Neuromarketing, Subliminal Messages, and Freedom of Speech guest blog by Marc Jonathan Blitz, Associate Professor of Law at OKLAHOMA CITY UNIVERSITY SCHOOL OF LAW  on the Neuroethics & Law Blog

One of the underlying themes in America’s First Amendment jurisprudence is the idea that speech (and other expression) can be strongly insulated from government regulation – because it is, at least in the typical case, a whole lot less likely than other activity to have coercive effects.

If pure speech were … like the imperius curse that allowed evil wizards in the Harry Potter novels to exercise total control over their victims, or like the display of the Queen of Diamonds card that similarly transformed a brainwashed soldier into an unwitting and robotic agent in “The Manchurian Candidate” – then we could not feel as safe leaving such a powerful instrument of coercion in people’s unregulated hands (which are, indeed, not only unregulated, but constitutionally-shielded from regulation).

First Amendment scholars have also grappled with the issue of subliminal advertising or expression.  In a 1979 piece on the philosophical foundations of First Amendment law, for example, Thomas Scanlon cited subliminal advertising as an example of speech that undercuts or circumvents individual autonomy rather than enabling it:  “What is bad about it is not just that it is ‘subliminal,’ i.e. that we are influenced by it without being aware of the influence . . . [but also that] if it works, it causes us to act – to buy popcorn say, or read Dostoevsky – by making us think we have a good reason for acting, even though we probably have no such reason.”

“[T]he rise of neuromarketing – and the decades-old worry about subliminal advertising that preceded it – threaten these judgments about speech’s “non-coercive” nature.”

“[W]hat makes subliminal speech or stealth neuromarketing unsettling for us is not that might enter our mind outside of our awareness, or that it might even subtly influence us in ways we can’t easily take control of, but rather that it is doing so to fulfill a certain kind of design that is intended to cause us – in our own minds – is a certain kind of harm.  A message that is carefully calculated to make us buy a product we wouldn’t otherwise buy (and to do so without us knowing why) is a deeper violation of our autonomy than a hidden element that powerfully influences the way we perceive a work of art (again without us quite knowing why) and changes our emotional response to that artwork, but doesn’t “program” us to engage in any behavior benefitting the speaker or an ally of his.”

 

*Non-Compete Agreements: Friend or Foe? by Rayna Gokli

The existence of a non-compete agreements can make or break an individual’s career. If a non-compete agreement is found to be valid, an employee may find himself looking for work in a new field. However, if the employee takes steps before signing the non-compete, such as making sure it is narrowly tailored, it will be less likely to interfere with the employee’s next job search. Additionally, before signing any contract, including a non-compete agreement, an employee should consult with an attorney who has the appropriate specialty.

 

*Business methods need patents by Wayne P. Sobon

From now on, only those methods that involve “specific machines” or transformation of “articles” from “one state to another” can qualify for patent protection.”

“The effect of Bilski has been felt almost immediately at the U.S. Patent and Trademark Office (PTO), where applications for business method patents are down and rejections are up.”

 

*Employment lawyers predict that furloughs may lead to lawsuits  by Tresa Baldas

In a recent survey of 245 large companies by Watson Wyatt Worldwide Inc., 10% of employers said they had offered unpaid time off, and an additional 9% said they planned to do so in the next year.

Furlough-related lawsuits are only a matter of time, predict management-side attorneys, who believe that the temptation for some employees to work outside the office will get too great, exposing an employer to liability. Blackberry use, checking emails or voice mail — anything that employees do while on furlough-leave can be considered work, they warn. And if it’s work that’s benefiting the company, it has to be compensated under the Fair Labor Standards Act.

“Be very cognizant of the fact that a lot of employees — your good employees — have a hard time letting go. They’ll check their e-mails.”

 

*Furloughs may be smarter than layoffs by Eric Bellafronto and Blaire Cleveland

Because reduction of exempt employees’ work hours poses significant legal risks and reduction of exempt employees’ salary can be seriously demoralizing, employers might consider implementing furloughs or shutdowns on a workweek basis.

 

* Fears rise over new fraud law by Marcia Coyle

“Obama signed a new law that, besides mainly targeting economic stimulus fraud, broadens the liability of businesses for defrauding the government in a host of other areas.”

“The Fraud Enforcement and Recovery Act of 2009 embodies the most significant changes in 23 years to one of the government’s most effective and financially remunerative fraud-fighting weapons — the federal False Claims Act (FCA). The law expands the potential liability of companies and institutions receiving federal funds, extending the act’s reach to subcontractors and subgrantees and enhancing the Justice Department’s investigative tools, among other provisions.”

“The law contains “qui tam” provisions that allow private citizens to sue on the government’s behalf those who defraud the government and to share the recovery — usually 15% to 25% of the total. Since the act was amended in 1986, the government has recovered more than $20 billion, with more than $5 billion in the past two years, according to the Justice Department.”

“Ambiguous definitions and a key change that Congress made retroactive likely will enmesh business in years of litigation…”

“The new law also expands liability to include the knowing retention of overpayments, even if the overpayments were innocently received. And liability for retaliatory acts against a whistleblower is broadened by removing the requirement that the retaliation be by an employer. The conduct covered extends to action taken against a contractor or agent.”

 

What I Think

I think this assortment of legal horrors should be enough to keep you awake for many nights. Horrors for you, heaven for me. After more than thirty-five years counseling entrepreneurs on how to set up and run their businesses, to have the best chance of avoiding such legal entanglements, while also enjoying litigating the cases of those who either didn’t heed such advice or ignored the counsel of “Mr. Goodwrench,” I am in my element in such turbulent legal waters.

For the entrepreneur, however, concerned with achieving the best bottom line with the least personal discomfort, these legal tales spell a disaster, no matter how they come or go. Aside from those pirates who would use and abuse the legal system to ambush the unsuspecting, deep-pocketed entrepreneur, none of the articles posted on this date can make any honest entrepreneur do anything but quiver.

All of these scenarios mean money lost from the bottom line, energy diverted from the business plan, creativity diluted, and opportunities lost due to the pressure from the legal department. I would be remiss in failing to remember that for every threat or crisis there is often a corresponding opportunity, but the eternal “black hole” of legal issues can easily suck the cash out of even the peripheral businesses, let alone the main parties.

Certainly, when one sees a competitor embroiled in any of the litigious situations presented in these articles, thoughts of how to profit from it may occur. On the other hand, risking having to even call the lawyers over a “former” key employee of a competitor can substantially diminish the return on investment made in recruiting such an individual. The same can be, and in my experience, often is true of even acquiescing to his or her presentation of a resume to your HR department.

I strongly suggest to my clients that they incorporate a provision in the offer letter, engagement letter, or employment packet, to the effect that the prospective employee is not bound by any non-compete or non-disclosure which would negatively impact their employment with my client. Whether or not this is effective to fully insulate an unknowing client depends upon the circumstances, including the jurisdiction. If nothing else, when combined with a proper offer and hiring protocol, it should provide an easy and efficient way to at least screen for such legal land mines in a prospective employee’s resume.

At the other end of the employment time line, clearly legal minds can differ on the usefulness of such downsizing tactics as furloughs, mandated time off, reduced hours, and other, more creative methods of reducing personnel costs. Once again, the good news may be that for every employee you lay off, there may now very well be several unemployed individuals you could find to replace that individual, and at the same time achieve a much better, and less expensive employee in return. The unfortunately unemployed talent now on the street is staggering. It should make you take a long, hard look at your own bevy of beauties from a retention and enterprise growth perspective.

Clearly, in a troubled economy, the possibility of unscrupulous competition cannot be ignored. You may very well be the last one in your business to recognize the corporate espionage, computer fraud and other forms of looting going on throughout your organization. If your business is slow, make sure it is not because you failed to take steps to plug a leak, of talent, data, of customers.

The articles posted on this date range from cupcake wars to cyber attacks and premonitions of nuclear war, all revolving around legal diligence, enforcement, and continuous monitoring of your legal environment. That leaves quite a bit of room in between the goal posts. Considering how hard you work to maintain or improve your bottom line in these turbulent economic times, how much sense does it make to fail to actively secure your defenses from a breach, which could totally put you out of business?

One of the first things I offered my clients, as the economy declined, was a free, 360-degree self-audit form. My decision was that I would rather see my clients start to recognize, and hopefully self-correct the areas in which they were short on compliance, vision, or protection, than to let them suffer the potentially catastrophic results of ignorance of such risks. How well do you understand what is coming and going through the e-mail and copy machines in your business, and the impact it may have on the viability or profitability of your company?

 

 

If you enjoyed my impression of these articles, why don’t you read them for yourself and see what you and I missed or hit? Join the Applied Entrepreneurship group on LinkedIn. Membership is free and I try to post about ten articles a day there. We have some great discussions going and if you are an entrepreneur, we hope you will join us.