Don’t Bring That in Here: Special Considerations in Hiring Competitor Employees

May 08, 2019 - Denny P. Major

Copperheads were fairly common in my yard growing up. One afternoon the family dog came to the door with a live snake flailing around from her mouth. Luckily we recognized this before she came in, but I wonder what would have happened if she had pushed the door open (like usual) without us noticing her and dropped the snake, alive, inside the house?

Some surveys have indicated that a substantial number of employees take information with them when they leave their employment. Employers face a challenge in protecting their own information, but the flip side is the hazard of hiring an employee who has protected information from a former employer. Of course employers should evaluate whether a new employee would be subject to restrictive covenants (i.e., non-compete, non-solicitation, non-disclosure) because the failure to do so may result in liability for tortious interference with such covenants, but too often hiring employers think that if an employee does not have signed restrictive covenants, the coast is completely clear to move forward. That is not the case.

While there are a number of laws that may come into play depending on the particular facts, the South Carolina Trade Secrets Act (SCTSA) is the most common claim against a new employer in the absence of written restrictive covenants. The SCTSA, which is similar to statutes enacted in many states (as well as the federal Defend Trade Secrets Act), prohibits “misappropriation” of a “trade secret” even in the absence of a written agreement between the employee and employer. The term “trade secret” is broadly defined to include any information that “(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means . . . and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” S.C. Code Ann. §39-8-20(5). The term “misappropriation” includes use and disclosure of a trade secret, as well as acquisition of the trade secret through certain improper means (or even acquisition with constructive knowledge of improper means). An employee who takes information with him is potentially exposing his new employer to liability for misappropriation of trade secrets. This could be under a theory that the employer is vicariously liable for its new employee’s acts or under a theory of acquisition by the new employer through improper means. Even if the former employer does not formally sue the new employer, it can be an expensive and distracting endeavor for the new employer to deal with.

For example, let’s say an employee used her personal thumb drive in the course of working for her former employer. She later goes to work for a competitor. A month later, in the process of using the same thumb drive for her new job, she discovers that her thumb drive still contains a spreadsheet of her former employer’s customer names, addresses, pricing and revenues. She thinks it would be useful in her new job, so she downloads the document to her new work computer and the new employer’s network. Several months later, one of the customers on the list tells the former employer that the employee had recited specific pricing and revenue in the employee’s pursuit of that customer. This prompts a cease and desist letter from the former employer along with a request to identify any and all documents that derive from the former employer. The new employer investigates and learns about the spreadsheet.

The spreadsheet is a problem. Even if the new employer doubts that the spreadsheet is trade secret or proprietary, litigating the issue is expensive and unpredictable. Ensuring the document is outside of its possession alone is problematic. It would need to be deleted from the employee’s computer and the network, and then some investigation would be needed to determine if other employees downloaded it from the network (let alone transferred it elsewhere).

The other problem is how many customers on the spreadsheet have been solicited by the new employer? How many have moved their business over? Even if a customer was legitimately going to be solicited and move their business over regardless of the spreadsheet, the spreadsheet creates an argument for the former employer that it is entitled to the profits it lost from that customer. Again, litigating that issue is expensive, distracting and unpredictable.

With today’s technology, employees frequently work from home or on the road aided by personal cell phones, computers, thumb drives, hard drives, cloud storage, tablets, etc. It is not unusual for employees to have information in their possession – inadvertently or intentionally. For that reason, when an employer hires employees from a competitor, particularly key employees, the hiring employer should take active steps toward ensuring the employee does not have any information in his or her possession when the employee leaves the former employer. This should involve a detailed interview regarding work practices at the former employer and potential sources and locations of information, as employees will often forget about (or not take the time to consider) the various locations the former employer’s information may reside.

For cases involving key employees from competitors, consideration should be given to hiring experienced legal counsel to be involved in this process. Experienced counsel should be adept at exhausting the various possibilities and facilitating the removal and return of such information to the former employer. Moreover, the presence of counsel signals the importance of the issue to the employee and should prompt careful consideration by the employee, as opposed to routinely answering questions.

An employee taking a competitor’s information to your business is not unlike a dog sneaking a Copperhead in your house. It often goes unnoticed at first. The dog’s intent may be innocent, but the snake bites just the same. It pays to check your dog’s mouth before letting him in.

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Boyd B. Nicholson, Jr., Managing Director, Haynsworth Sinkler Boyd, P.A., ONE North Main, 2nd Floor, Greenville, SC 29601