From the September 2000 issue of Entrepreneur

Your biggest competitor may have stolen valuable assets from your business without ever setting foot on your premises. If your competitor is hiring away your employees, you may be losing more than the cost of hiring and training replacements.

"The assets of a business are no longer its plant, property and fixtures," says employment-law attorney Jeffrey Pasek of Cozen & O'Conner in Philadelphia. "The assets of the business walk home each night in the hearts and minds of the employees." Which is precisely why your competitors may want to raid your work force, either to take advantage of the talent you've worked so hard to nurture or to gain access to confidential information about your business.

What can you do about it? Your first line of defense is a contented work force, in which employees feel valued and receive fair compensation. Satisfied employees are far less likely to jump ship. Still, in today's economy, competitors can tempt employees with compensation packages that are hard to refuse. That's when you may need to know what protection you have in the law.



Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Employment Agreements

The first question is whether the employees had an employment contract. If you hired them on an at-will basis, don't expect to be able to sue their new employers for wrongful interference with a contractual relationship. "The hallmark of at-will status is that either the employer or the employee can terminate the relationship at any time, for any reason, and with or without notice," Pasek says. "The courts will not tolerate an employer's complaint based on interference with contractual relations if the employer has preserved its own right to end the relationship."

If you do have an employment contract, you may have some protection in a binding non-compete clause, which states that the employee may not work for a direct competitor within a given geographical area and for a given period of time. That kind of agreement is pro-hibited in some states, however, and in states where they're allowed, they're not always enforceable in court. Courts require first that the non-compete agreement be reasonable, which generally means limited in scope, time and duties. You can't demand that the employee never work for any competitor anywhere. But a court may enforce an agreement that prohibits the employee from working for competing companies within 50 miles of yours within the next year, or for soliciting the company's customers within the next two years.

What contractual limits a court considers reasonable depends on the type of business. "In a Web-based business, what's the geographic limit?" asks Pasek. Internet companies reach the whole world. And technology changes so rapidly that the traditional one- or two-year limit may be unreasonable. "For Internet businesses, one or two years is like a generation," he says. Pasek notes that, in some states, courts are allowed to "blue line," or edit, an agreement in question to make it reasonable, rather than refusing outright to enforce it. If that practice is allowed in your state, you can include a provision in the non-compete agreement asking the court to blue-line the agreement if the court considers it unreasonable.

For a non-compete agreement to be enforceable, the employee must have been given some "consideration" for signing it. That means you have to give the employee something in exchange for giving up the right to work for competitors. In some states, the only consideration needed is continuing employment-in other words, sign this and you get to keep your job. In other states, you have to ask for the signature at the start of employment or along with a promotion or pay increase.

Trade Secrets

Of course, drawing up your non-compete agreements after your competitor has hired away a flock of employees is like locking the barn door after the horse gets out. Is there anything you can do to keep your company from being damaged? Maybe there is, under certain circumstances.

If hiring your employees means your competitor stands to gain confidential information about your business, you can sue to stop the leak. It might be trade secrets about your product or your organization, or it might be lists of cus-tomers. You have a legal right to protect confidential information that your competitors could use against you.

For instance, a plant manager at a bakery in Ellsworth, Iowa, quit to work for a competing bakery near Chicago. The Iowa bakery sued, charging that the employee could reveal, among other things, its secret for keeping bagels fresher longer. A court ordered the former plant manager to quit his new job and banned him from working for any competing company operating within 100 miles of any of his former employer's marketing outlets.

In another case, two employees of a California roofing-repair business left to form their own roofing business. Alarmed by the new business soliciting its former customers, their former employer sued, claiming that the collection of customer business cards that the two had taken with them comprised a trade secret because they represented nearly 80 percent of the employer's customer base. The court prohibited the use of the cards, awarded over $39,000 in damages, and permanently enjoined the new company from doing business with 32 customers who had been illegally solicited.

While courts are willing to protect confidential information, it only counts as such if you treat it as confidential. You can't leave business plans lying around in plain sight, publicize the names of your customers on your Web site and post your pricing structure on the Internet, then claim all those things are trade secrets.

Predatory Hiring

A landmark case in 1997 established another circumstance in which a company might have legal recourse to stop its employees from being hired away. While retailer Montgomery Ward was in the throes of bankruptcy, rival Sears Roebuck set out to hire away its managers. That's in accord with long-standing business practice. But when Ward sued, its attorneys uncovered in-ternal e-mail circulated among Sears employees plotting to "put them out of their misery" by hiring away key Ward managers. The court ruled that one company may not hire away employees of another company with the intent of crippling that company.

Pasek describes a case involving a client of his whose start-up business was on the verge of becoming a serious competitor of a rival company. "To prevent that, they hired away the key employee," he says. "It set [my client] back six months." The legal challenge will be to prove predatory intent.

In another case, Pasek says, a company suffering serious decline had one prosperous division. An outside company conspired with the division's vice president of marketing and some of its sales reps to recruit other employees, jump ship and start their own company. High-tech sleuthing uncovered a chain of e-mail and voice-mail messages showing that the employees had breached their duty of loyalty to their employer, and the outside company would likely lose a lawsuit over tortious interference with a contractual relationship. Both the insiders and the outside company settled with the employer for a significant sum of money.

"All businesses have to worry about whether they're hiring a lawsuit," Pasek says. He describes a client that hired a sales rep who brought boxes of sales records with him. He didn't use them, but the former employer found out and sued. Accordingly, if you're hiring, ask whether there's a non-compete agreement, and if so, what the terms are. Ask the new employee not to bring along confidential information. If new employees are likely to know so much that they'll inevitably disclose or use something confidential, consider putting them in a non-competing division.

Employees are your most important asset, so do your best to retain them through fair treatment rather than fear. When you hire new ones, make sure they don't come in dragging lawsuits behind them.


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