What do you mean, we don’t have a non-compete? Protecting your company in the absence of written restrictive covenants

Even without a non-compete, a company retains powerful tools provided by statutory and common law to protect against unfair competition

For companies operating in competitive industries, the departure of an employee who has inside knowledge of the firm’s strategies and processes, or who maintains valuable relationships with customers and prospects, tends to trigger anxiety and concern. This concern intensifies upon learning that the employee has joined a competitor. In many cases, the rights and responsibilities of the company and the departing employee are spelled out clearly in an employment contract or in a stand-alone non-compete, non-solicit or confidentiality agreement.

However, what if a search through the departing employee’s file reveals no written restrictive covenants? Can the company do anything to stop the employee from working for the competitor?

Generally speaking, in the absence of a valid non-compete, an employee is free to go to work for a competitor after terminating employment with the company. If the individual is a key employee with knowledge of company trade secrets, which would inevitably be disclosed in his or her new position with the competitor, the company could argue that such employment is improper under the so-called “inevitable disclosure” doctrine.

Perhaps the seminal case on “inevitable disclosure” is PepsiCo, Inc. v. Redmond. In this case arising out of the sports drink industry, the 7th Circuit upheld a preliminary injunction against a departing executive employee of PepsiCo (maker of All Sport) from assuming a new role at Quaker (maker of Gatorade). The court grounded its decision in the Illinois Trade Secrets Act, ruling that, because the executive had knowledge of PepsiCo’s trade secrets that he would inevitably rely upon in his new job with Quaker, and because the employee had demonstrated a lack of candor and truthfulness that undermined his assurances that he would not use or disclose PepsiCo’s trade secrets to Quaker, misappropriation was inevitable and a preliminary injunction was proper.

The likelihood of success in relying on the inevitable disclosure doctrine to stop a departing employee from joining a competitor depends on the circumstances of the case and, perhaps even more importantly, the jurisdiction in question, as the doctrine has not been recognized in some courts and has been applied differently in others.

If the facts or jurisdiction do not lend themselves to an inevitable disclosure argument, the company still has a number of ways to keep a departing employee from improperly competing with its business. Many of these remedies arise under state common law or uniform acts, so it is important to understand the governing law in the location where the actions are taking place.

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The company should carefully examine the departing employee’s activities during the period leading up to his or her departure to determine whether the employee was contacting customers and prospects in an effort to funnel work to the new employer. While employed, an employee has a duty of loyalty and must put the employer’s interests above his or her own. If an employee solicits customers or prospects while still employed in an effort to induce them to follow the employee to a new company, the duty of loyalty is likely breached.

Furthermore, while a departing employee may have the right to compete and solicit his or her former customers after termination in the absence of a restrictive covenant, the employee is not free to disparage and make false statements about the former employer in an effort to divert clients. In such situations, the company may have state-law remedies for defamation or tortious interference with contract or prospective business relations.

The company should also thoroughly investigate whether the departing employee has taken confidential company information, such as plans, models or customer lists. An employee generally has a continuing common law duty not to use such confidential information to the former employer’s detriment.

Furthermore, most jurisdictions have adopted the Uniform Trade Secrets Act, which provides protection in cases where the material taken rises to the level of a “trade secret” as defined by the Act.

If the employee engages in unauthorized access of a company’s computer system to download propriety information, the company might also have recourse under the federal Computer Fraud and Abuse Act or state computer crimes acts providing civil causes of action, although these remedies are sometimes construed narrowly.

When a departing employee takes company property without permission, state law remedies for conversion are also available.

In sum, when faced with a departing employee who is not subject to written restrictive covenants, a company retains powerful tools provided by statutory and common law to protect against unfair competition. Prompt investigation into the employee’s activities prior to departure, including review of computer activity, is paramount. If the company is proactive in policing its rights under the law, the risk of damaging unfair competition can be reduced.

These situations also reinforce the importance of maintaining clear policies and protocols regarding the use and disclosure of confidential company information in order to defend against contentions by departing employees that the company has not taken reasonable efforts to maintain the confidentiality of its information and has thereby lost confidentiality and trade secret protections.

Contributing Author

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Andrew P. Sherrod

Andrew P. Sherrod is a partner in the litigation section of Hirschler Fleischer (Richmond, Va.), who has an active practice before federal and state courts,...

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