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Employer's Guide to hiring Employees with Trade Secrets and Non-competition Agreements

By Neil Klingshirn

Contents


Unlock Non-Compete Agreements: Keys to Escape

Introduction

Some of the most qualified applicants for employment are current or former employees of your competition. Whether or not you can hire them depends on trade secret, non-competition and tortious interference laws. 

As a general rule, an employer cannot hire a competitor's employee to obtain trade secret information or customers accounts. In addition, an employer cannot induce an employee to breach a non-competition agreement for an improper purpose. However, an employer can hire employees of the competitor who have non-competition agreements if the employment does not breach the non-competition agreement or, in states that recognize the "fair competition" doctrine, a breach is purely a result of fair competition.  

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I want to hire an employee who used to work for a competitor. Can I do that?

As a general rule, yes. However, the employee must first terminate his or her employment with your competitor and you cannot obtain or use any of your competitor's trade secrets that are in the employee's possession. You also need to know whether the employee has a non-competition agreement, as discussed in greater detail below.

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The employee does not have a non-compete or any written trade secret information. Will I avoid a problem?

Not necessarily. Employees can carry trade secrets in their heads. If they disclose the trade secret to you, they have still violated the trade secrets law. If you use that trade secret information, you have probably violated the trade secrets laws as well. 

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The employee promised not to disclose any trade secret information, including trade secrets that he carries in his head. Am I okay now?

Possibly. Trade secrets law requires an actual or threatened misappropriation of a trade secret. Thus, as a general rule, if the employee does not bring or disclose any trade secrets, you should be okay.

However, an exception to that rule is if the employee's job duties are such that disclosure of the trade secrets is “inevitable.” In that case, courts in some states, including Ohio, treat the inevitability of a trade secrets disclosure as a threatened violation sufficient to bar the employee from working for you.

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What kind of job duties would make disclosure of a trade secret inevitable?

Courts have applied the inevitable disclosure doctrine to high level marketing or engineering executives who have intimate knowledge of their former employer's plans or products. If those individuals accept similar positions with a competitor, courts consider non-disclosure a virtual impossibility. In those cases, the courts have held that disclosure is inevitable.

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The employee is a mid-level sales associate with no knowledge or possession of marketing plans. Now can I hire her?

From a trade secret's standpoint, you appear to be on solid ground. However, you also need to know whether she is bound by a non-competition agreement that she would breach by accepting your employment

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She has a non-compete, but I never signed it. Since I did not sign the agreement, I have nothing to worry about, right?

Wrong. Most states prohibit a third party from improperly interfering with the contractual relationships between two other parties. This is known as tortious interference with a contract. In your case, the non-competition agreement is a contract. If you interfere without justification, your competitor may have a claim against your for tortious interference with the non-competition agreement.

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Have I already tortiously interfered with the employee's contract by talking to her about a position?

No. Your competitor must prove five facts for a tortious interference claim. They are:

  1. the existence of a contract,

  2. your knowledge of the contract,

  3. your intentional procurement of the contract's breach,

  4. lack of justification, and

  5. resulting damages.

Unless you have already caused the employee to breach her non-competition agreement by employing her in violation of it, you have not tortiously interfered with it.

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If the non-competition agreement is invalid, am I liable for tortious interference if the employee breaches it?

Probably not. Most courts agree that, if the non-competition agreement is not enforceable as between the competitor and the employee, then you, the third party, cannot tortiously cause a breach of it. In many cases, but by no means all, courts will not enforce the underlying non-competition agreement.

However, this is a risky strategy and leaves you vulnerable to an adverse court decision. Have a qualified employment lawyer review the agreement before you assess whether the agreement is enforceable or not.

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If the agreement is enforceable, what justifications would allow me to employ my competitor's employee?

Technically, your competitor has to prove that you lack justification. You do not have to prove that you had a justification. 

Proving that you lacked justification requires evidence that your interference was “improper.” Courts evaluate whether your interference is improper based on:

  • the nature of your conduct,
  • your motive in interfering,
  • your competitor's interests in its contract with its employee,
  • the interests that you are pursuing
  • the social interests in protecting your freedom to employee the fellow and the contractual interests of your competitor
  • how directly you interfered and
  • the relations between the parties.

For example, suppose you hire the employee to fill a position that you would have filled for normal competitive purposes and neither you nor the employee has any of the competitor's trade secret information. If, despite your best efforts to avoid a breach of the non-competition agreement, the employee breaches it anyway, your competitor will probably be unable to carry its burden of proving that you lacked justification for hiring the employee.

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Are there any other defenses to a tortious interference claim?

Yes. If the contract with which you would interfere is "at-will" and you can prove that hiring the employee merely amounted to “fair competition,” then your competitor will not, as a matter of law, be able to prove that you lacked justification.

Fair competition occurs when, despite knowledge of the non-competition agreement between the employee and your competitor:
  • you do not employ wrongful means to procure the breach,
  • your action does not create or continue an unlawful restraint of trade, and
  • your purpose is, at least in part, to advance your interest in competing with the other employer.

Importantly, the defense of fair competition is only available with respect to claims brought by a competitor and, again, applies only to agreements that are terminable at-will.

Fair competition thus means that, if the employee answers an advertisement for an opening and is the best qualified employee without regard to his or her employment by your competitor, you may fairly compete with your competitor by hiring the employee to engage in your normal business activities. However, if you use improper means or have an improper motive, such as obtaining trade secrets or unfairly obtaining your competitor's customer accounts, you will probably not be able to establish a fair competition defense.

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What is the worst that could happen if I hire my competitor's employee?

You could owe your competitor for its lost profits and other foreseeable damages. In addition, if your competitor proves that you acted with malice or in conscious disregard of its rights, you could owe punitive damages and attorneys' fees as well. In some cases, awards for tortious interference reach into the millions of dollars.

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I would still like to hire an employee who used to work for my competitor. Can you make some suggestions?

I suggest that you:

  • Consult a qualified employment lawyer. Mistakes in this area are easy to make and expensive to fix.
  • Do not solicit your competitor's employees, let them find you.
  • Ask applicants whether they are currently a party to a non-competition or similar agreement.
  • Examine any such agreement and decide if you can employ the applicant without breaching the agreements.
  • If the job may cause the employee to breach an existing non-competition agreement, consult a qualified employment attorney to explore available justifications, such as fair competition.
  • Upon hiring the employee, assign only those duties that do not breach the agreement or fall within the realm of fair competition.

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