A Key Employee is About to Walk Out the Door Who Doesn’t Have a Non-Compete: What to Do?

Over the years, I have heard from many business executives—usually long after the fact—who felt powerless when a key employee walked out the door to a competitor unencumbered by a non-compete agreement. As a consequence, usually no timely, proactive steps were undertaken by these former employers to protect their company’s interests from unfair competition. I gently advise these executives that their “toolbox” for dealing with such employees is not limited to non-compete agreements.

This is most fortunate, given the simple fact that many non-compete agreements are not worth the paper they are printed on. Why? Most courts consider non-compete agreements to be restraints on trade, and thus subject them to great scrutiny. If a court believes the terms of a non-compete agreement are unreasonable, overbroad and render the former employee virtually unemployable in his or her chosen field, it will probably not be enforced.

In their zeal to protect their employer clients, many employment law attorneys—be they in-house or outside—counsel go overboard and ignore the admonitions of many judges who explain that non-compete agreements must be narrowly tailored to protect only the legitimate interests of the former employer. Translation: non-compete agreements that are designed to eliminate all forms of competition, and not just unfair competition, will not be enforced.

Many non-competes will also fail to be enforced if the term is too long, the geographic scope too broad, or the consideration for the agreement insufficient.

So, when that key account executive or the head of your Research and Development Department walks out the door into the arms of one of your fiercest competitors, after having refused to sign a non-compete agreement or having signed an unenforceable agreement, what other tools are in your toolbox?

There are primarily two: the law regarding fiduciary duties and trade secret laws.

In most jurisdictions, those regarded as middle managers and up, as well as select other employees in certain sensitive positions, will be deemed to have a “fiduciary relationship” with their employer. As a fiduciary, that R&D specialist or senior salesperson owes duties of the utmost candor, rectitude, care, loyalty and good faith in his/her dealings with the company.

A fiduciary can be found to have breached his/her duty when he/she uses corporate assets to further personal goals at the expense of corporate interests, or misuses confidential business information for his/her benefit or for the benefit of a competitor. Most importantly, this duty survives the termination of employment.

Trade secret law is the other useful tool. Most states have adopted the Uniform Trade Secrets Act, which prohibits a former employee from disclosing the former employer’s trade secrets to his new employer for his new employer’s use. Violations of state trade secret laws typically entitle the former employer to injunctive relief, compensatory damages, exemplary damages and attorney’s fees.

State trade secret laws have very recently been supplemented by the Federal Defend Trade Secrets Act, which allows companies, for the first time, to file civil lawsuits for trade secret theft under the Federal Economic Espionage Act in U.S. District Courts. This new law, enacted on May 11, 2016, adds to the employer’s arsenal the potential to seize property “necessary to prevent the propagation or dissemination of the trade secret.”

So, the next time you are confronted with a disloyal employee, do not throw up your hands if that employee is not bound by an enforceable non-compete agreement. And do not reach out to just any employment law attorney. You need—and should desire—lawyers who are experienced litigators in the area of fiduciary duty law, trade secrets law AND employment law who follow every latest ruling and legal trend, and can help protect you from unfair competition. Contact Kaufman & Company to learn more about our deep bench of fiduciary duty and trade secret law experience and how that knowledge can help protect your company’s commercially sensitive information when an “in-the-know” employee departs.