January 15, 2014

When a Key Employee Departs


From the Jordan Ramis Archives

What are an employer’s rights and remedies when a key employee with no contractual restrictions leaves? For purposes of this article, we assume (a) that the employee has not entered into an employment agreement, i.e., there is no noncompete, confidentiality, nondisclosure, technology protection, or other employment agreement in place and (b) that the employee is a common law, at-will employee.

Under Oregon law, restrictions on departing key employees can be categorized as pre-termination and post-termination. Termination is the date on which work for the company ceases, not the date of notice.

Prior to termination, employees have fiduciary duties and obligations to their employers. Pre-termination obligations are based on balancing the fiduciary duty of loyalty with the employee’s right to pursue a living. Generally, an employee may take preparatory steps to compete, as long as the steps do not interfere with the employer’s interests, i.e., the action does not involve a conflict of interest.

Three particular areas of concern are soliciting of customers, soliciting of fellow workers, and informing the current employer of plans to compete. During employment, it is a violation of the employee’s fiduciary duty to solicit customers or fellow workers. The duty to disclose an intention to compete is less clear, because there is conflicting case law. The prevailing view is that there is no duty to disclose an intention to compete unless the failure to disclose is harmful to the employer.

After-hours work may not be objectionable, depending on the nature of the work, but whether or not objectionable, it will be discoverable, because the employer will want to verify that the employee was not violating his fiduciary obligations and the obligations with respect to confidential information and trade secrets. Competition after hours is a violation of the employee’s fiduciary duties.

Oregon law also provides protection for implied at law confidential relationships and trade secrets. In Oregon, specialized knowledge of a company’s relationship with its customers is protected confidential information. Kamin v. Kuhnau, 232 Or 139 (1962); Uniform Trade Secrets Act, ORS 646.461,et seq. The company’s customer list, customer information, pricing information, customer contacts, contract information, negotiating strategies, pricing strategies, and systems information are often protected information under Oregon law.

In contrast to pre-termination activities, post-termination activities are generally not restricted, as long as the employee is not subject to employment agreements. A significant exception, however, is that implied at law confidential relationships and trade secret protections extend beyond the termination of employment. The employee is not authorized to share any confidential information or trade secrets with the employee’s next employer or to use that information in any way with a third party. In particular, customer lists, vendor lists, and pricing or marketing strategies are often considered confidential.

In practice, the information must be analyzed in each situation to determine whether it is confidential or a trade secret, and these determinations will turn on how the company treated the information. Common law exclusions also apply, i.e., information that is already in the public domain, is already known, has been received from third parties, is independently developed, or is general business information. Determining whether information is protected and whether exclusions apply is fact-specific, often difficult to document and prove, and may vary depending on the nature of the employee’s relationship.

It is also noted that violation of common law obligations or the Oregon Uniform Trade Secrets Act will often subject both the departing employee and the new employer to a substantial risk of litigation. It is not uncommon for the old employer to sue the new employer or start-up company for assisting the departing employee.

To enhance an employer’s ability to protect information, several strategies are suggested:

  1. Within the company, identify confidential information, label it as such, limit access, limit use offsite, and develop a confidential document program. If information is critical to the success of the company, treat it as confidential and document that treatment.
  2. When key employees are hired or promoted, consider the use of noncompetition agreements. While discussion of the implementation and terms of noncompetition agreements are beyond the scope of this article, a noncompetition agreement can be an effective tool.
  3. Confidentiality agreements, nonsolicitation agreements, and nondisclosure agreements can be entered into at any time. Unlike noncompetition agreements, they do not require bona fide advancement or execution prior to initial employment. Consider using these agreements especially when expanding an employee’s access to key information.
  4. Participation in pricing, use of specific knowledge regarding sales to specific customers, and access to the vendor or client list is often key information. Again, treat it as confidential, label it as such, and limit access.
  5. Identify all company property immediately upon an employee’s terminating employment. Prohibit use of personal computers for sensitive company information.
  6. If possible, conduct a termination interview with the employee and remind him or her of the legal limitations, the value of the confidential information to the company, and the company’s expectations.
  7. The employer should always be alert to signs that a key employee is preparing to leave.
  8. Once the employee has left, monitor his or her activities as much as possible.
  9. If there is unfair competition, you may have claims against both the employee and the new employer. Legal action requires a careful examination of the facts, extensive discovery, and the use of substantial resources in a short time. Plan for substantial costs and discovery, and be ready to engage legal counsel at the earliest possible time.

In summary, companies have substantial rights with respect to departing key employees. Companies can also enhance their rights and protections against unfair competition by identifying the company’s confidential and proprietary information, implementing safeguards, and entering into appropriate employment contracts.

For more information on this topic, please contact marketing@jordanramis.com or call (888) 598-7070.

Tags: Business, Employment

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