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.
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!