Keeley, Kuenn & Reid

Employee Raiding: What are a Company's Rights?

Absent an enforceable post-employment contractual restriction, a company is generally free to recruit an employee away from a competitor. This right is not absolute, where the disclosure of trade secrets may be involved or where recruiting multiple employees away from the competitor constitutes unfair competition.

Employee Raiding: What are a Company's Rights?

What are a company's legal rights to challenge a competitor's intentional recruitment of one or more key employees, in the absence of any enforceable contractual non-compete restrictions binding upon those employees?

Many courts have noted that the hiring of a close competitor's executive is a usual and permissible practice in any industry. The courts generally have tried to strike a delicate balance between protecting the employer from unfair competition or trade secrets misappropriation, and protecting the employee's right to freely seek employment in a competitive marketplace, without undue restriction. As a result, the outcome of these cases depends on the specific facts in each case, the evidence presented by the parties, and the relative hardship the parties are likely to suffer if the relief sought is granted or denied.

Misappropriation of Trade Secrets

Where a former employee is not subject to any enforceable post-employment contractual restriction, the employer is required to establish the existence of genuine trade secrets, and the misappropriation of same by the competitor, in order for injunctive relief to be warranted against the competitor.

It is generally recognized under state law that at the termination of employment, an employee may not take with him confidential, particularized plans or processes developed by his employer and disclosed to him while the employer-employee relationship existed, which are unknown to others in the industry, and which give the employer an advantage over his competitors. Such confidential information - - or trade secrets - - includes technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers that:

  1. is sufficiently secret to derive economic value, actual or potential, because it is not known to other persons who can obtain economic value from its disclosure or use; and

  2. is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

On the other hand, an employee is free to take with him general skills and knowledge acquired during his tenure with his former employer. Furthermore, while recognizing that a business must be afforded protection against the wrongful appropriation of trade secrets by a prior employee who held a position of confidence and trust, the law generally recognizes the right of an individual to follow and pursue the particular occupation for which he is best trained. One who has worked in a particular field cannot be compelled to erase from his mind all of the general skills, knowledge and expertise acquired through his experience. These skills are valuable to such employee in the marketplace for his services.

To prevail in court, the employer must identify specific trade secrets which are in the former employee's possession and which are at risk. General allegations that the former employee has pricing information, knowledge of distributors or customers, sales information, cost information, knowledge of business strategy or other internal information is usually not sufficient.

For example, in Cincinnati Tool Steel Co. v. Breed, 90 Ill.Dec. 463, the plaintiff alleged that a former office manager/sales manager had misappropriated confidential pricing information, including cost, special discounts and supply information. The court refused to find that the plaintiff had a protectible interest in this information warranting injunctive relief. The former manager had not taken any documents or other material with her when she left the plaintiff's employ, and the court concluded that the fact that the defendant might be able to recollect pricing information that could potentially be used to the plaintiff's detriment while later working for one of plaintiff's competitors was simply too conjectural to establish a protectible trade secret.

Similarly, in Smith Oil Corp. v. Viking Chemical Co., 82 Ill.Dec. 250, the plaintiff alleged that former employees had misappropriated customer lists, customer orders, pricing information, cost information, sample formulas, product formulas, customer correspondence and other special customer information when they left to work for a competitor. Other than the exact formulas for the plaintiff's products, the court held that the information which the plaintiff wanted protected fell into the category of "general skills and knowledge" which an employee is free to take with him when his employment is terminated. The court concluded that the defendants could not be prevented from using their general chemistry or sales skills even if they were obtained or developed while working for the plaintiff, or prohibited from making use of individual items of sales information contained in customer lists or reports which they might happen to recall from their independent recollection. See also Hayden's Sport Center, Inc. v. Johnson, 65 Ill.Dec. 612 (general customer and pricing information did not constitute trade secrets); Midwest Micro Media, Inc. v. Machotka, 32 Ill.Dec. 241, (former employee's knowledge of customer and pricing information too closely akin to his personal abilities and skills as salesman to be considered employer's property).

Compare this with PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), where PepsiCo identified actual documents in the possession of the former key employee, all of which were highly confidential:

The foregoing were considered trade secrets and the court upheld an injunction barring the former employee from working for PepsiCo's competitor for a period of six months based on evidence that the trade secrets would inevitably be disclosed if such employment was accepted. Without such relief, the competitor could anticipate PepsiCo's distribution, packaging, pricing and marketing moves. As the court put it, "PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game."

Also essential to prevail in court is proof that the former employee possesses the trade secrets. Evidence that the confidential information was recorded, copied, compiled or memorized by the former employee, or is otherwise in his possession, is critical.

Unfair Competition

A company may also sue a competitor for unfair competition where the competitor intentionally raids the company and induces the resignations of key employees in order to gain access to the company's trade secrets and other confidential information. It constitutes unfair competition for a competitor to undertake a pattern of solicitation of a company's key employees in order to cripple or destroy its ability to compete, for example, by offering salaries intended not as reasonable compensation but to harm or destroy the company.

Systematic inducement of multiple employees of a single company to leave their present employment is unlawful when the purpose is to destroy a competitor or an integral segment of its business, rather than obtain the services of skilled employees. The very fact that a company targets its recruitment efforts at a single competitor suggests an improper motive, since one company rarely has a monopoly on skilled workers. Evidence that the loss of key personnel will harm the company, and that its rival desired to drive them out of business is important proof in these cases.

Relief

If the company is successful, a court may award the former employer injunctive relief and/or monetary damages. An injunction may prohibit the competitor from employing the company's employees for a specified time period or from engaging in further raiding activity. Damages caused by a competitor's unlawful activity may also be recovered.

 

Keeley, Kuenn & Reid, a Chicago based law firm, is engaged in the practice of business and commercial law, employment law, taxation, antitrust, product liability and legislative matters. Through its affiliates, the firm also meets its clients' needs in protecting intellectual property rights and international commercial law matters.
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