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Robert N. Zausmer Featured in Long Island Herald’s Ask the Lawyer

Publication Source: LIHerald.com

Zausmer_BobQ: I suspect that one of my employees is planning to leave my company and either go with another company which is in the same business as mine, or start his own business in competition with mine. What right does my company have to prevent the employee from doing this, and what can I do in the first instance to protect my company from the employee taking business and/or clients with him if he actually does leave?

A: The problem you describe is commonplace, particularly in companies where the type of business in which they engage, and the clients which they serve, are mobile and readily transferable. For example, stock brokerage firms and insurance brokerage firms often are confronted with employees who hop scotch from one company to another, typically as a result of being recruited by a competing company. In fact, these types of situations have generated a large amount of litigation and a wide body of case law on the subject.

To properly respond to the first part of the question requires a brief examination of certain foundation legal principles. Generally, in New York, Courts favor the right of a person to freely pursue employment and economic opportunities. On the other hand, Judges will enjoin an employee from going into “competition” with his former employer where the totality of the circumstances would make it unfair or inequitable for the employee to do so. In balancing these divergent interests, courts will carefully scrutinize a number of factors.

Specifically, Judges are less prone to restrict an employee’s moving from one company to another where the nature of the current employer’s business is not “unique;” that is, there is nothing so inherently specialized, secretive or out of the general domain of public knowledge as to classify the business, as whole, or any particular aspect of it in which the employee was involved, as “confidential,” “proprietary,” or constituting a “trade secret.” These principles apply to the nature and identity of the employer’s “clients” as well. (These matters are discussed in depth in another “Ask the Lawyer” article by Kevin Schlosser, Esq. which was posted on LIHerald.com on September 28, 2012.)

Conversely where the employee’s conduct prior to leaving his former employer is such as to make it unfair to the former employer to have the employee operate within the same sphere of business, either with a competing company, or in his/her own new business, Courts will step in to prevent an injustice. These situations typically involve conduct by the employee such as (1) effectuating his/her “exit plan” while still employed with his/her former company and, worse still, engaging in these activities on “company time;” (2) secretly photocopying records or, in this age of electronic information, surreptitiously transferring data and information from the employer’s computers to another domain for use in his/her next job (or to help form his/her own competing company); and (3) recruiting other employees to join him/her when he/she departs from the former employer.

If the employer can demonstrate that the employee engaged in conduct which violates his/her basic common law duty of loyalty to his/her employer (while still in his/her employ), Courts may enjoin the employee from going to a competitor or starting a competing business, even if the employer cannot establish the requisite showing (discussed above) that the nature of the employer’s business and/or its clients meet the legal standards of confidentiality, proprietary information, or trade secrets.

Employers can protect themselves in several ways. First, when the employer is initially hired, he/she should be required to sign a written employment agreement, which includes two important clauses: (1) an acknowledgement that the information and/or records he/she will be given access to are confidential, proprietary and was developed over time at great expense by the employer and (2) a “restrictive covenant” setting forth reasonable limits on the employee’s right to seek employment in the same or a competitively related field in the event that the employment relationship is terminated for any reason. While Courts do not always enforce these types of provisions in employment contracts (based on the general legal principles stated earlier), the failure of an employer to require an employee to sign such an employment agreement in the first instance virtually assures that the employer will be hard pressed to sustain a later claim in a litigation that his business and/or client list was unique or proprietary.
Next, the employer also should have the employee receive, and acknowledge in writing to be bound by, a written employee handbook. The handbook should include a section delineating the conditions of, and limitations on, the employee’s access to and use of any information, data or records which the employer legitimately regards as confidential and proprietary. The handbook also should include a provision requiring the employee to agree that his/her office computer can be used solely for the purposes of his/her employment; that the employer shall have knowledge of the password to the employee’s computer; and that the employer has the right, at any time and without notice to the employee, to access and to retrieve all data on the employee’s computer.

Finally, the employer should institute procedures (preferably not known to the employee) for the purpose of protecting whatever information, data and records the employer legitimately regards as confidential and proprietary, and to monitor and regulate each employee’s access to and use of these items. This becomes particularly important when the employer has reason to believe the employee either is planning to depart or is being solicited to leave by a competitor. When the employee begins acting out of character, or the employer’s suspicions otherwise are aroused that the employee “is up to no good,” closer scrutiny of the employee’s activities (i.e., such as monitoring phone calls) is required. Clearly, however, there are legal and practical limits to the degree of “espionage” that an employer can use to monitor the employee’s activities.

All of the prophylactic measures discussed above should be undertaken by the employer in consultation with an attorney who is knowledgeable and experienced in this area. The need to consult with an attorney in this field becomes paramount when the employer suspects that the employee “may be up to something” while still working for the employer.

Click here to view other ‘Ask the Lawyer’ Q&A prepared by Meyer Suozzi attorneys.