Bosses Behaving Badly: Scope of Liability and Mitigating the Risks of Executive Misbehavior. Mark Whitney June 9, 2014

Transcription

1 Bosses Behaving Badly: Scope of Liability and Mitigating the Risks of Executive Misbehavior Mark Whitney June 9, 2014

2 Common Exec Misbehavior - Execs leave to join competitor with playbook knowledge - Execs take key data with them - Execs take business ideas - Raiding ( Pied Piper ) - Execs interfere with client relationships - Usurping corporate opportunities - Harassment - Discrimination Morgan, Brown & Joy LLP 2

3 Primary Sources of Protection Common Law Statutes Contracts and Policies Morgan, Brown & Joy LLP 3

4 Key Common Law Duties Owed by Executives Fiduciary duty Higher level Execs Position of trust and confidence Ends upon termination Duty of Loyalty Broad range Extends to lower-level EEs Continues past termination Morgan, Brown & Joy LLP 4

5 Key Statutes - Misappropriation of Trade Secrets, MGL ch. 93A, sec Unfair and deceptive trade practices, MGL ch. 93A, sec Multiplied damages - Payment of counsel fees - Hard to assert against former EE - Computer Fraud and Abuse Act - Economic Espionage Act - Various criminal statutes - Stored Communications Act Morgan, Brown & Joy LLP 5

6 Policies - EE handbooks - Ethics policies - Codes of conduct - ** Key point you want your policies to bolster your contractual protections. Morgan, Brown & Joy LLP 6

7 Most Common Types of Restrictive Covenants Prohibit employment in job that competes with former ER s business Prohibit solicitation of customers Prohibit raiding of EEs Prevent disclosure of confidential information Protect ownership by ER of EE s inventions and developments Morgan, Brown & Joy LLP 7

8 Myths, Truths and Realities about Noncompetes Many sophisticated EEs believe Noncompetes are unenforceable Many EEs forget that they signed a Noncompete Many EEs sign documents without reading or understanding them Many ER practices perpetuate the above problems Many ERs shocked to find agreements unenforceable Common unrealistic view of position Judges don t like to put people out of work Does not matter if termination involuntary Morgan, Brown & Joy LLP 8

9 Key Legal Principles Restrictive covenants are generally enforceable in Mass. if used thoughtfully Restrictive covenants are subject to the highest level of judicial scrutiny Fairness of ultimate result is critical Courts seek to balance between ER s and EE s interests Courts regularly refuse to enforce the clear and unambiguous terms of restrictive covenants Morgan, Brown & Joy LLP 9

10 What can Employers protect with restrictive covenants? Legitimate business interests Confidential information Goodwill Restrictive covenants cannot be used to protect against ordinary competition Morgan, Brown & Joy LLP 10

11 What is confidential information? Trade secrets Business plans/new product development Marketing/sales plan strategies Intellectual property Software designs Financial and sales information Customer preferences Information that your company expends resources to obtain that give you a competitive advantage in the marketplace Morgan, Brown & Joy LLP 11

12 When an Employee Leaves Conduct exit interview Provide departing EE with a copy of applicable non-compete Ask where they are going» Deception matters Consider letter to new ER Consider language in a separation agreement *** Secure return of company property and data Obtain snapshot of /system Morgan, Brown & Joy LLP 12

13 Preparing to Compete An EE preparing to go into competition may breach his fiduciary duty to his ER. No general duty to disclose plans to ER May not appropriate ER s trade secrets May not solicit customers while employed May not carry away customer lists May not use ER s resources for personal gain Can t act as pied piper Duty exists regardless of existence of noncompete Investigate EE s conduct (and review/preserve EE s computer/ ) if you are suspicious of wrongdoing Morgan, Brown & Joy LLP 13

14 A Competing Former Employee Shot across bow letters Move quickly!!! Be willing to negotiate Litigating restrictive covenants is time-intensive, factintensive process To obtain injunctive relief, must show that ER is 1) it is likely to prevail on the merits of its claims; 2) it will suffer irreparable injury in the absence of injunctive relief; 3) the injury outweighs any harm which granting injunctive relief would inflict on opposing party; and 4) the public interest will be served by the issuance of the injunction. Morgan, Brown & Joy LLP 14

15 Strategies in absence of noncompete Sequester resigned EE Consider severance package with restrictions, enforce confidentiality Remind EE about important company policies (confidentiality, ethics, etc.) Inevitable disclosure doctrine Communicate directly with new ER about specific concerns Monitor important relationships, accounts, product launches Forensics review? Morgan, Brown & Joy LLP 15

16 Electronic Data Issues - Drive Cases / Confound Litigants Vast majority of departing EEs take information Plan to use it at new job Lack of ER policies and best practices contributes to problem Some behavior innocent but looks REALLY bad and can be presented as nefarious Departure from ER should be clean Rarely is clean Non-deletion policy? Morgan, Brown & Joy, LLP 16

17 Exit Processes Out of Date? Return of property? Fail to focus on IP/data/devices Phones? Phone numbers? Fail to focus on actual use of information (home work; remote work) info to personal ? Require return of property/require certification that no longer possess Fail to focus on social media Fail to focus on applicable contracts Morgan, Brown & Joy, LLP 17

18 Crossing State Lines Former EE who moves out-of-state raises unique issues Noncompete law varies state-to-state CA prohibits by statute (OK, and ND) Other states will strike entire agreement if overbroad Costly Morgan, Brown & Joy LLP 18

19 Strategies for Dealing with the Border-Crosser Call in the lawyers early Sue first and ask questions later Make sure contracts have key language: Secure home field advantage Choose Mass law and forum Covenant not to litigate out-of-state Attorney fee payment for out-of-state litigation Potential to box-in EE to foreign state Morgan, Brown & Joy LLP 19

20 Dealing with California Section of Cal Bus & Profl Code Prohibits noncompete agreements Exception: sale of business Can still prohibit customer solicitation Interesting angles: Can try to box in the former EE within CA Sign noncompete for other states Venue and forum selections clauses vital Morgan, Brown & Joy LLP 20

21 NH Non-Compete Law New Hampshire enacted a law effective July 14, The Act reads: "Prior to or concurrent with making an offer of change in job classification or an offer of employment, every ER shall provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the EE or potential EE. Any contract that is not in compliance with this section shall be void and unenforceable." Persons offered jobs or new positions within the company must be made aware of the noncompetition or non-piracy agreements at or before the time the offer is made. Morgan, Brown & Joy, LLP 21

22 Mass Legislative Update TX recently passed the UTSA Only Mass and NY do not have UTSA UTSA bill pending in Mass One version of it will nullify noncompetes Mass noncompete legislation Still in committee Gov Patrick is making big push to ban noncompetes Morgan, Brown & Joy, LLP 22

23 Solicitation Broadened Corporate Technologies v. Harnett (1 st Cir. 2013) Focused on difference between soliciting and accepting business Rejected D s argument that client solicited him Morgan, Brown & Joy, LLP 23

24 Material Changes May Nullify Prior Agreement Lycos v. Jackson Cypress Group v. Stride EE s duties, responsibilities, direct reports, salary change and title changed over time. Material change in employment relationship voids previously signed noncompete agreements. * Recent case law supports clauses drafting around this doctrine Morgan, Brown & Joy LLP 24

25 Mark Whitney June 9, 2014 THANK YOU!