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Your Great New Employee Just Landed Your Company in the Middle of a Lawsuit

When a New Employee Violates a Prior Confidential, Proprietary or Trade Secret Agreement
Lerch, Early & Brewer's Legal Update

Have you asked your new employee how he or she found that new customer, developed that new invention, or recruited that fantastic new employee so quickly? While it may be that the employee has instantly taken to the new position like a “fish to water,” it also may be that your company’s new customer, invention or employee is not yours at all, but instead belongs to your new hire’s former employer. Now, instead of increased profits, your company could face increased legal fees and a court order restricting company operations if your new hire’s old employer comes looking for what it rightfully owns.

Occasionally, new hires looking to make a big first impression on their new employer will do things prior to leaving their former employer that may be harmful and actionable. They may download, copy, or e-mail their old employer’s client lists or technical information, seeing it as their ticket to future success. They might also try recruiting co-workers to leave and join the new employer with them, or try taking the soon-to-be former employer’s customers for their new employer.

When new hires use the confidential, proprietary, and/or trade secret information of their former employer, they subject themselves to various statutory and common law claims. However, by employing the errant new hire, the new employer may also be subject to claims brought by the former employer, including interference with the former employer’s business or agreement with its former employee, who is now your new employee. Such claims may result in a court order demanding that your company immediately cease and desist in pursuing a prospect, servicing a new customer, or allowing your impressive new employee to continue working for you until litigation concludes. Although this restraint may be temporary, it is immediate, and therefore frequently causes more than a little difficulty.

A new employer may be faced with the hard decision to either lose the benefit of its new hire through reassignment or termination or endure the costly litigation that will result from retaining the employee. Although counsel can assist employers in determining the best way to proceed at this point, it is more desirable to avoid this situation from the outset.

How to Avoid New Hire Covenant Agreement Problems

One way to do this is to condition a new hire’s employment on signing an agreement that requires the applicant to disclose the existence of any restrictive covenant agreement that prohibits him or her from engaging in certain business activities. These contracts frequently limit a departing employee’s ability: to work or compete against the former employer, to solicit the former employer’s customers and sometimes, employees, and/or to use or disclose confidential business information learned in the course of the prior employment. Requiring the applicant to reveal any limiting document of this kind allows the employer to assess the likelihood of any contractually based litigation, before it makes a decision to hire the applicant.

In addition, as not all of the law protecting former employers is contractually based, employers should consider taking steps to restrict and monitor a new hire’s activity in order to ensure that he or she does not end up taking actions after being hired that may lead to legal action by the prior employer, such as possessing the former employer’s property. Employers should instruct a new hire that before uploading data from personal or outside sources, including Outlook contacts, he or she must receive permission from a supervisor and human resources. Employers also should monitor a new hire’s computer activity to ensure that he or she has not downloaded a former employer’s information into the company’s computer system. Although it is difficult to completely stop an employee who is intent on violating a non-competition or non-solicitation agreement, or misappropriating a former employer’s confidential, proprietary or trade secret information, by taking these steps, employers are more likely to uncover the threat of this type of litigation before receiving the demand letter or being served with a complaint.

Julie Reddig is an employment and labor attorney at Lerch, Early & Brewer who defends management in a broad range of matters and disputes involving employment and the workplace. For more information about reducing the risks of integrating new employees, contact Julie at jareddig@lerchearly.com or 301-961-6099.

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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