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SOLICITING EMPLOYEES AWAY FROM A BUSINESS: UNFAIR
COMPETITION?
Introduction:
A common
complaint that we hear from angry business clients is that a competitor or,
even more commonly, a former employee is soliciting their best employees
away. The question is always the same: “Can they get away with that?
Can’t I sue?”
And our
answer is always the same: “It depends.”
What it
depends upon and what steps can be taken to maximize your protection is the
subject of this article.
Soliciting a Competitor’s
Employees:
In California, absent an agreement to
purchase ownership interest, one cannot restrict an employee from
competition after termination of employment. See our article
The Employment Noncompete Clause in
California for a full discussion on that issue on our
Retainer Article page.
A
corollary to that firm law is that a business does not commit an actionable
wrong by soliciting a competitor’s employees or hiring away one or
more of the competitor’s employees not under contract with that
competitor. However, if unfair or deceptive practices are utilized to
achieve the hiring, an action may lie. (See Diodes Inc. v. Franzen (1968) 260 CA2d, 244. Merely hiring away
good people from your competitor is entirely appropriate and part of the
competitive business world the state encourages.
Assuming
the employee is under legal employment contract, however, such efforts may
be an
Intentional
Interference with a Prospective Economic Advantage or interference
with a contractual relationship as more fully discussed in that article
on our website.
And if
one engages in wholesale solicitation of the bulk of the employees of a
competing business with the intent to drive that business out of the
market, one may be found liable for unfair business practices or even
violation of the anti trust laws. Metal Lubricants /Co. v Engineered Lubricants Co. (8th Circuit 1969.)
The key is the intent…was the purpose of hiring the employees to
render a competitor incapable of functioning. Such activity could be
considered “unfair competition” under Business and Professions
Code Sections 17200-17209 but the burden upon the plaintiff is to prove the
requisite improper intent on the part of the defendants.
And, of
course, if the purpose of the hiring is to obtain access to trade secrets
or confidential information held by the employee, that would constitute
unfair business practices and additional causes of action would apply.
Implicit in the above is that the employee, if hired, may compete but may
not utilize trade secrets or confidential information obtained from the
previous employer and if the new employer gains access to that information
via the employee, both may be liable. See Bancroft Witney Co. v Glen
(1966) 64 C2d 327.
Soliciting Fellow Employees
Before Leaving
The
legal policy in favor of allowing an employee to leave and compete does
NOT, however, allow that employee to violate the fiduciary duty to the
employer and solicit other employees before leaving. An employee cannot,
while working for one employer, solicit fellow employees to leave that
company and work for a rival. (Bancroft Witney, supra.)
Thus,
while the courts may strike down clauses prohibiting an employee from
competing after termination, the courts have routinely upheld clauses
prohibiting use of trade secrets or confidential information and
prohibiting solicitation of fellow employees. Loral Corp v Moyes (1985) 174 CA3d 268.
Note,
however, that once the employment was terminated, the ex employee is free
to solicit former coworkers and their particular skill sets and talents
have been held not to constitute a trade secret of the employer which can
be protected. Metro Traffic Control, Inc. v Shadow Traffic Network
(1994) 22 CA4th 853. Nevertheless,
the courts have upheld clauses in employment agreements that prohibit solicitation
of employees by an ex employee if the prohibition is reasonable, e.g.
limited in scope and time. The courts have held, however, that such
contract prohibitions cannot stop a competitor from engaging in such action
nor would passively taking job applications from former coworkers who were
not solicited be considered violating that contract. (Loral, supra.)
PROTECTIONS THAT ARE PRACTICAL
If one
has good employees, one must expect that sooner or late the intelligent
competitor will seek them out-or that your own employees will seek greener
pastures. That is simply part of doing business. However, there are ways to
minimize risk of such “raids.”
1.
Obviously, the simplest way to stop efforts to take your employees is to
create a job environment, including pay and benefits that are attractive
enough to the employee to make such efforts futile. In that regard, it is
important to note that a primary reason employees leave is to join a
company in which they can have an ownership interest and stop being
“mere” employees. Creating a buy in procedure, as discussed
elsewhere in this website, may be the most effective and potentially
beneficial way to stop such efforts cold.
2. One
can also limit the ability of existing employees and past employees to solicit
one’s existing employees by written prior contracts and the appropriately worded employment contract
is a vital protection in that regard. Remember, the restriction must be
reasonable and artfully drafted to avoid the various pitfalls imposed by
the court: but if you do it right, you can restrict the ex employee from
raiding your company and, further, during employment such activities are,
themselves, a breach of the fiduciary duty of that employee.
3. Further, if trade secrets or confidential
information are utilized by the ex employee to find the employees or
determine their characteristics that, itself, can create causes of action
if violated thus the more confidential one keeps information about
employees and their requisite skills and contacts, the more one can argue
that the solicitation was inappropriate. Anything that a competitor could
have discovered by looking at your public directory or website is not going
to be considered a trade secret, but if you keep truly confidential
information and evaluations about an employee which are somehow used by the
soliciting ex employee, you have a cause of action.
4. And
if the intent of the competitor or ex employee is vindictive or primarily
an attempt to destroy one’s business, then it becomes an unfair
business practice and actionable.
The key in that situation is to prove inappropriate intent and that
is normally proven by comments, letters or e mails sent by the culprits
thus close review and inspection of all such sources of information may
turn an allowed activity by a competitor into a clear breach of the rules
of fair competition. This office had a case in which the hiring of a key
salesman staggered our client but appeared entirely proper…until the
competitor fired him two months later after getting all of his contacts
(which were confidential to us) and the outraged salesman came back to our
client willing to testify about actual conversations he had had with our
competitor in which the effort to destroy our client was admitted as the
real goal for the solicitation. With that evidence in hand, we were able to
commence legal action that ultimately resulted in a very handsome
settlement for our client. State of mind can be proven; one must be
persistent and consider all ways of developing such evidence.
Conclusion
One
does not “own” employees and sooner or later all of us lose
good employees to tough competitors. One can gain additional protection by
good contracts, good employee relationships, and maintenance of the confidentiality
of critical information. One can maximize that protection by carefully
monitoring the activities of competitors and ex employees after termination
of employment.
But one
client perhaps put it well when we were discussing what action he should
take to stop a competitor from hiring a particularly deceitful ex employee
who was likely to compete in the same territory he had always had:
“Let those bozos hire him. They deserve him and everything he will
eventually do to them. They deserve each other.”
He said
that. But, a month later, he also sued once he found that confidential
customer information was being used by the ex salesman.
Can you
sue? Sometimes. Depends on what they do…and what protections you
created for yourself before they did it!
These Articles are
to give the reader a general description of certain areas of the law. Legal
advice is necessary to apply these legal concepts to your particular
situation. The Reader should obtain competent legal advice before
relying on the Articles.
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