Garden Leave: A checklist

Consider this checklist as a work in progress. New cases may come along and change the questions or create new questions.

1. Does the position have a salary or is it commission only?

a. If salary, the go to 3
b. If commission only, then go to 2.

2. Does the position provide health insurance benefits?

a. If no, then this is the end of the road.
b. If yes, then go to 3.

3. Is the position one where the employee acquired information that could damage the employer’s business?

a. If no, then this is the end of the road.
b. If yes, then go to 4.

4. If the employee has information potentially dangerous to the business, then rate the severity of the danger (with 1 being minimal to 10 being catastrophic). If more than minimal, then go to 5.

5. Does the employee have a non-compete agreement?

a. If no, then seriously consider a garden leave agreement.
b. If yes, then consider a garden leave agreement to act with a non-compete agreement.

If you want to read more, in detail, then take a look at my garden leave articles on this blog. I do not have a separate archive for these articles (I keep filing them as non-compete agreements) but there is a search box above and using “garden leave” will take you to all of my articles on the subject.

If you think this is a useful tool for your Indiana business, give me a call.

Trade Secrets: Another Case of Departing Employee Problems - Colorado This Time

Green Patent Blog's Court Orders Ex-Xantrex Veep to Stop Solar Inverter Work for Competitor contains a longish report on this case. By now the factual basis ought to be so commonplace as not to need mentioning:

Xantrex’s complaint (xantrex.pdf) alleged that Thompson breached his employment agreement by leaving Xantrex and immediately starting employment with AE (the non-compete provision prohibited Thompson from working for any competitor within one year of leaving Xantrex). Thompson worked on solar inverter technology at Xantrex, and AE entered the solar inverter market shortly before Thompson joined AE.

While at Xantrex, Thompson was Vice President of Engineering and Product Development and had access to the company’s confidential information. According to the complaint, Thompson had played a leading role in acquiring and integrating certain cutting edge solar inverter technology into Xantrex’s products.

About trade secrets, I found this paragraph particularly interesting:

As to success on the merits of the trade secrets claim, Judge Daniel found enough evidence that the confidential information accessed by Thompson prior to leaving Xantrex rises to the level of trade secrets (e.g., solar inverter product development information and data on the benefits of various product features). The court also found that Thompson’s rapid accessing of trade secret documents just before leaving Xantrex was of particular concern because his ready recollection of possible trade secrets would make their use by AE possible without him actually telling anyone. In other words, Thompson’s mere knowledge of the information would make misappropriation likely.

While only a decision on a motion to dismiss and a motion for preliminary injunction, I still find it interesting if only for providing another detail to the following lessons:

1. Protect your trade secrets - it is cheaper than litigation.
2. Hiring a high profile employee from a competitor is an invitation to a lawsuit that will likely to be successful.
3. Hiring a high profile employee from a competitor with a non-compete agreement is an even greater invitation to a lawsuit that will likely to be successful.

Garden Leave - When to Use

Following up on my , let us go over when to use a gardening leave clause. I read the materials available on garden leave as presupposing a salaried or hourly employer rather than a person paid on commission. Take for an example Gardening leave from Biocrawler:

"For example, the term is frequently used in Formula One motor racing to describe what happens when valued techical (sic) staff choose to move between teams. In an attempt to protect proprietary information about performance and design from falling into competitors hands the engineer in question is placed on gardening leave, sometimes for many months, to ensure that when he is finally able to join his new employer his knowledge is no longer current."

How else would employer or employee know what the first was to pay to the other during the garden leave without a set pay such as a salary? Therefore, positions paying only on a commission basis should find garden leave useless. Non-compete agreements remain the only comparable solution for sales people and others paid solely on a commission.

Trade Secrets - A Good Article to Read

I could not decide how to digest Musical chairs: brokers and insurers must fight to retain their clients when key employees leave. The article covers a lot of territory - some of it focused upon in my earlier posts on trade secrets. Yes, the article focuses on the insurance industry but the following points apply equally to any type of business:

Companies have a variety of ways to protect themselves when employees leave and try taking business with them, said Steven A. Goldfarb, a partner with the Cleveland-based law firm of Hahn Loeser & Parks.

These legal tactics include pursuing violations of common law, fiduciary duty or the Uniform Trade Secrets Act against the defector and rival company. One common tactic is pursuing violations of restrictive covenants, which are contracts that limit what employees can do after they leave a company.

Such documents can include geographical covenants, which restrict an employee from working for a competitor within a certain area for a certain length of time. Another is the non-solicitation covenant, which restricts an employee from soliciting the company's clients or employees for a certain period of time.

Using Garden Leave for Departing Employees

I started writing about garden leave in Thoughts on Central Indiana Podiatry, Non-Competes, Garden Leave, and Physician Employment Contracts as an alternative to non-compete agreements. I make the following conclusions about garden leave:

1. Garden leave has a use in Indiana employment law and no apparent obstacle stands in the way of using garden leave in Indiana.
2. Garden leave compliments but does not replace a non-competition agreement.
3. Garden leave applies only to salaried employees and has no place in commission-only employment situations.
4. Garden leave requires a written contract but then so do non-competition agreements.
   

I have a definition of garden leave in my earlier article, but let me use here this description from Garden Leave: Helping Employers Control The Prickly Landscape Of Employee Departures:

Garden leave, while evoking images of flower-filled paths and rose gardens, is actually an English legal doctrine in which an employer pays a departing employee to stay at home without performing any duties for a specified notice period. During this time, the individual remains an employee and cannot work for a competitor.

Nor am I the only American who thinks these tools have use here. Anthony Cerminaro published Consider Garden Leave Employment Termination Clauses on his BizzBangBuzz blog. Which provides a link to American employers starting to learn how to garden from PLI. Even earlier is one law review article on this subject: Note: Garden Leave: A Possible Solution to the Uncertain Enforecability of Restrictive Covenants, 102 Col,L.Rev 2291 (2002). Columbia University Law School kindly put this article online. This note reviews the then current English law on the subject. From what I have found elsewhere, I think the writer does a good job of examining the law on the subject. All favor importing garden leave clauses into employment contracts.

Some attorney (or more likely some firm) has already begun to implement garden leave provisions in employment contracts. I found the following example of an American garden leave clause in Bear, Stearns & Co. Inc. v. Sharon (Dist. MA, April 4, 2008) (PDF format)

A notice provision of not less than 90 days - which means that although you remain an employee at will, if you decide to leave Bear Stearns you must give prior written notice of your intention to leave. Once notice is given, for the ensuing 90 days ... Bear Stearns will pay your base salary, during which time you may be asked to perform all, some or none of your work duties in Bear Stearns’s sole discretion. The notice period is enforceable by a temporary restraining order which Bear Stearns can enforce in court.

I plan on a bit more discussion of this case in another post, but the plaintiff lost obtaining a preliminary injunction because of the at-will employee language. Which goes directly to a most important point: these clauses must be drafted carefully. I plan another post on drafting issues.

(A somewhat longer, Swiss contract that discusses garden leave is located here but which adds nothing to the discussion in this post).

Because of the Bear Stearns case, one American writer has less enthusiasm for garden leave clauses. Practicng Law Institutes's In Brief Blog published Garden Leave with the following conclusion:

So, while employers may want to send certain employees to the garden, as they do in the U.K., unless the employees are to the manor born, good luck trying to enforce the deal. The employee may just be gardening for someone else.

OneCle has a proposed form including this garden leave clause:

Each SMD shall be placed on garden leave status for a period commencing on the day following the conclusion of the ninety-day Notice Period and continuing for ninety days thereafter (the “Garden Leave Period”). During the Garden Leave Period, each SMD shall continue to receive his or her base draw and benefits, subject to the payment of related premiums, but shall not receive or participate in any profit sharing or bonus arrangements (including participation in the carried interest program). During the Garden Leave Period, each SMD shall not be required to carry out any duties for or on behalf of Blackstone. Each SMD agrees that he or she will not enter into any employment or other business relationship with any other employer or otherwise prior to the conclusion of the Garden Leave Period.

I read the British materials as the issues raised in the Bear Stearns case have already been considered. See Garden leave and JaneE Mulchay's GARDEN LEAVE (PDF format). Let us remember that Indiana's law on non-competition was ultimately derived from English sources.

Looking at this other garden clause, I do not understand why the Bear Stearns' clause contains the at will employment phrase. I see the problem raised by the Bear Stearn's case as going more to the issue of drafting the contract and little to do with the availability of garden leave.

Indiana businesses using non-competition agreements need to consider adding a garden leave clause to their contracts. My next article on garden leave discusses what businesses ought to use garden leave and why.

Trade Secrets - News

The song goes on as before: employees moving between competitors means litigation.

Clean Technology Intellectual-Property Claims On The Rise

Employees moving among these companies will cause more trade-secret lawsuits, said Bob O'Connor, co-head of Wilson Sonsini Goodrich & Rosati's clean- technology practice and a partner with the firm.

"Presently there is a tremendous amount of employee mobility, and with that comes the potential that information employees gain from a prior employer would be the kind of information that prior employer would not want to see in the hands of a new employer," O'Connor said.

The question remains: what has the first employer done to protect itself? Non-compete agreements, garden leave provisions, and the like are a must, but even more importantly are the security measures taken by the first employer.

Read Picture This for an interesting slant on those security measures:

The same urge is felt at businesses such as Samsung Electronics, where the desire to protect trade secrets has led to a ban on camera-phones inside some company facilities. U.S. federal courts also ban the devices, and sports teams are telling fans they can't use them to take videos at games.

Such efforts are, at best, fingers in the dike and, at worst, may fool corporate executives and government officials into believing they've actually accomplished something. Here's why: It takes very little effort to find a "spy shop"—a store selling all kinds of cloak-and-dagger stuff. The proprietor will be happy to sell you a camera that replaces the top button on your shirt, or one that fits nicely into your briefcase, giving you the same hidden-camera abilities that local television news programs so cheerfully demonstrate when they're looking for a ratings boost.

***

Companies also need to recognize that insiders, not outsiders, are the more serious threats. Then they need to work on policies that protect the information that simply must be kept secret without discouraging everyday business.

I'd urge people in authority to consider the possibility that some of the most closely guarded information would be better off in the public sphere. This is unquestionably true for government-held information, where the penchant for secrecy is frequently a tactic to keep taxpayers and political opponents from learning the details of mismanagement, or worse. It's likely true in companies as well, where information that might be used by competitors could well prove more valuable if made available to assist customers and investors in making better decisions. It might even help the company improve its products and services.

Employers, Preventive Law and the Employee Leaving the Business

The best advice I found (lately) is this paragraph from Handle departing employees: When the grass is greener:

There are two lessons from the HISL case: first, listen to your employees when they have good ideas. Second, if you wish to prevent departing employees taking preparatory steps prior to leaving employment to ensure their future income, or competing with you after they have moved on, make sure your contracts of employment are properly drafted.

That last sentence nicely sums up what we lawyers call preventive law. As much as I write about litigation, as much as I do like trial work, preventive law is the best bet for business owners. (Actually, for everyone).

Why most people, businesses, institutions prefer waiting for litigation to hit is something that has puzzled me and has puzzled others. After so many years, I think the reasons are a desire to deny any risk and a desire to save on attorney fees until the lawsuit arrives at the door.

If you look over my articles here on non-compete agreements and trade secrets, you will see my emphasis on preventive law. The article I quoted above dealt with both of those subjects.

Trade Secrets - Michigan Departing Employees Case

Thanks to Womble Carlyle's Trade Secrets Blog for the heads up on a Michigan case of another departing employee trade secrets case. See Trade Secrets Battle in Detroit - MSC Software Corp. vs. Altair Engineering Inc. and Seven Former MSC Employees. I do like the explanation that hiring of a competitor's former employees was a coincidence. Employing a competitor's former employees does seem to have a benefit - it keeps lawyers employed. Here are the good bits from the Trade Secrets Blog:

Crain's Detroit Business is reporting that Troy, Michigan-based Altair Engineering Inc. wants a federal judge to appoint a programming expert to determine whether any computer codes link Altair's new prototype simulation software to a competitor's.

***

MSC filed the lawsuit in July and agreed to dismiss one of the eight former employees from the suit in September."It was people who all worked previously at MSC and moved to the Altair offices," said attorney James Hermon of Dykema Gossett P.L.L.C., one of MSC's attorneys. "They all came out of the Ann Arbor office where this product originates."

The suit alleges that Altair hired more than "20 percent of the MSC Software Adams Group," developed a product using trade secrets and "undertook an aggressive program to induce Adams/Car customers to abandon Adams/Car and adopt Altair MotionView."

Strictly a coincidence, said attorney C. Thomas Ludden of Bloomfield Hills-based Lipson, Nielson, Cole, Seltzer & Garin P.C., who represents the employees. He contends that his clients left MSC at varying times for varying reasons."Our position is — and we've stated as much in the pleadings — that we deny any theft of trade secrets," Ludden said. "We deny that we've done anything to break any laws or even violate a noncompete or confidentiality agreement. The clients moved for all the usual reasons you might change employers."

Remember if you think you have a trade secrets problem in Indiana to contact me.

For other articles on this blog about trade secrets, you need only click the link below next to Label that reads "Trade Secrets".

Trade Secrets and Covenants Not To Compete Basic Law and Procedures - Labor and Employment Law

Just a heads up for those researching trade secrets - the American Bar Association maintains a page with some general materials on trade secrets: Trade Secrets and Covenants Not To Compete Basic Law and Procedures - Labor and Employment Law.

Non-compete Agreements - The Medical Field

Are Indiana doctors restricted by a non-competition agreements?

I say that depends on the case. Indiana lacks any bias favoring restrictive employment covenants in general, and using covenants not to compete with professionals raises some specific objections.

Take a look at Duneland Emergency Physician’s Med. Group, P.C. v. Brunk, 723 N.E.2d 963. (Ind. Ct. App. 2000) (Microsoft Word format).

Interesting to me (and, hopefully, you) was find the following articles online. I suspect Indiana's answer differs from some states.

If are in Indiana and need an attorney to help you with a non-compete agreement, please contact me.

Contracts and Emergency Medicine: Restrictive Covenants. Which has some great advice I wish more of my clients would heed:

These points are frequently moot because most physicians cannot sustain a lawsuit against a corporate entity or hospital for any given length of time, especially without an income while contractual terms are being ironed out in court. It is best to avoid litigation in the first place, and to get these clauses out of the original contract. EPs in general have different issues from other specialties. Covenants invalidated based on public policy tend to be invalidated because the field is highly specialized or geographically underserved.

Update On Covenants Not To Compete: Will They Survive In The Healthcare Industry?:

"Covenants not to compete undergo considerable scrutiny in all industries. In healthcare, however, proponents of covenants not to compete must argue for enforcement of the covenant against the countervailing weight of the rights of patients to be treated by their own physicians at the hospitals of their choice, as well as the community need for the type of medical service the physician provides. It has been argued that the public interest in supporting those hospitals willing to make a financial commitment to establish a medical specialty practice is given little consideration in many recent cases, where courts have voided the covenant not to compete. Courts around the country are starting to internalize this point of view, and increasingly are balancing the equities of the particular facts and circumstances to determine whether the restrictive covenant should be upheld."

AAEM WHITE PAPER ON RESTRICTIVE COVENANTS:

The American Academy of Emergency Medicine (AAEM) opposes the use of postcontractual restrictive covenants, or “non-compete clauses,” in physician contracts. Some contract holders and hospital administrators control emergency physicians through exploitative contractual provisions. These provisions include restrictive covenants that control where emergency physicians may work, violating their professional rights and effectively preventing them from advocating for their patients. The threat of termination from a hospital medical staff as well as a restrictive covenant, may prevent physicians from advocating for their patients if the hospital or contract holder opposes such advocacy.

No, I really do not see Indiana changing its position on using non-compete agreements against physician employees.

Update 4/6/08: I finally got around to posting on Central Indiana Podiatry v. Kenneth Krueger. See: Central Indiana Podiatry v. Kenneth Krueger - The Indiana Supreme Court Speaks and Thoughts on Central Indiana Podiatry, Non-Competes, Garden Leave, and Physician Employment Contracts.

Hiring people with trade secrets

About eight months ago I posted Leaving a job with a non-compete? Got any savings for the litigation expenses? and then I published Non-Competition Agreement and Trade secrets - local news. In those posts I wrote about the dangers of hiring someone with a noncompete agreement or a non-compete agreement and possessing trade secrets.

I would generally say that if there are trade secrets then a non-competition agreement is mandatory. Then today I ran across this article from Business Insurance: Arch misappropriated Gen Re trade secrets: Judge.

Connecticut Superior Court Judge Taggart Adams on Wednesday ordered Arch not to use or divulge any Gen Re proprietary information or trade secrets, including loss cost data that the judge concluded Arch officials were using to compete with Gen Re.

***

None of the four top officials had employment contracts or noncompete agreements with Gen Re. Nevertheless, the Stamford, Conn.-based reinsurer sued Arch and the four executives variously for breach of fiduciary duties, tortious interference with business contracts and violations of a state trade secrets law.

So much for general rules? No. I still want a noncompetition agreement for these type of employees. After all, an ounce of prevention does save the client business in attorney fees. (What is better for good lawyer-client relations than keeping fees reasonable and keeping the business well-protected).

For my other posts on trade secrets just click on the link below that reads "Label: trade secrets". You can do the same for my non-compete agreements posts.

Trade secrets - an overview

USA Today published an article Ask an Expert: Protecting your customer list that is a succinct and simple overview of trade secrets, confidential agreements, non-competition agreements, non-solicitation and non-disclosure agreements.

It has some of the same information as I have published on this blog but is a good starting place. Read the article and then come back here for some more detail on trade secrets, non-disclosure agreements, and/or non-competition agreements.

If you need to hire legal counsel for an Indiana case involving trade secrets or non-competition agreements, please contract me.

Indiana Supreme Court - webcast, non-compete agreements

Last week, the Indiana Supreme Court had oral arguments in the case of Central Indiana Podiatry v. Kenneth Krueger. Follow that link to watch the webcast. The court's website summarizes this case:

Central Indiana Podiatry filed a complaint against Krueger, a former employee, alleging that Krueger had violated the parties’ employment contract, which included a non-compete provision. The trial court denied Central Indiana Podiatry’s request for a preliminary injunction, but the Court of Appeals reversed, holding that the non-compete clause was reasonable and enforceable and that the other elements for a preliminary injunction had been established. Central Indiana Podiatry, P.C. v. Krueger, 859 N.E.2d 686 (Ind. Ct. App. 2007), vacated. The Supreme Court has granted a petition to transfer the case and has assumed jurisdiction over the appeal.

Update 4/16/08: The Indiana Supreme Court has since handed down its decision in this case. See my posts Central Indiana Podiatry v. Kenneth Krueger - The Indiana Supreme Court Speaks and Thoughts on Central Indiana Podiatry, Non-Competes, Garden Leave, and Physician Employment Contracts.

Do remember that this office is taking on non-compete work.

Five Ways to Legally Hurt Your Business

A list of things that a business can do to hurt itself by not taking the proper precautions under the law.

1. Fly Solo.

Business has enough risks, so why risk both your business and your personal assets? Operating as a corporation or a limited liability company protects your persons assets from your business creditors. Setting up a corporation or a limited liability company is relatively inexpensive - far more inexpensive than finding your home and personal bank accounts attached by your business creditors.

2. Not Setting Up a Corporation or Limited Liability Company Properly.

Paying an attorney to set up a corporation or a limited liability company looked like an avoidable expense when you saw that online or computerized program. If you cannot afford an attorney for an incorporation or a limited liability company, then you need to seriously consider whether you have the capital to run your business. Incorporating a business involves more than sending the Indiana Secretary of State Articles of Incorporation and a check. You do not want to wake up on day and find out that your incorporation incorporated nothing. Why not? See #1. An LLC operating agreement is a true retail product and you can find yourself with even more problems than with a stillborn corporation. These kinds of problems lead two kinds of attorney fees: big ones or just one to a bankruptcy attorney.

3. Fail to Protect Your Intellectual Property.

What is intellectual property? Trademarks, copyrights, patents, and trade secrets. The first three require filings with the federal government for full protection. Trade secrets require self-help. More importantly: these are the things that you actually make you money. If someone uses your business name or your business product, this steals from the work you did. Don’t protect it and it is gone and so goes your business. You need an attorney for the work on trademarks and copyrights and patents (you actually need a patent lawyer for patents), and you should have an attorney to review your trade secret protections. If you cannot afford these services, then you better ask yourself if you can afford to stay in business.

4. Fail to Protect Against Employees.

You know to keep an eye on the cash register even if your business no longer has a cash register. What about the other assets of your business? The trade secrets, the company goodwill, the company client list? Ask this about your employees: if any left, which ones could truly harm the business? Now ask yourself about those particular employees: do I have a non-compete agreement? If not, why not?

5. Never Establish a Working Relationship with your attorney.

Here is the best tip I can give any business owner on saving money: get your attorney involved at the start of the process and not at the end. Litigation costs more than a year’s consultation.

A Primer on Indiana's Covenants Not to Compete

Some case excerpts so that one can get a taste of how Indiana courts approach non-compete agreements.

Covenants not to compete are agreements in restraint of trade, and as such, they are not favored by Indiana courts and are to be narrowly construed. See, e.g., Harvest Ins., supra 492 N.E.2d at 686; American Shippers Supply Co. v. Campbell (1983) Ind.App., 456 N.E.2d 1040. If the restriction is reasonable as to the parties and the general public, it is enforceable and not void as against public policy. Fumo, supra 590 N.E.2d at 1103

This court must look to whether the terms of the covenant "were reasonable with respect to (1) the necessity of the breadth of the protection for the covenantee [Faust]; (2) the restriction upon the covenantor [R. Norlund]; and (3) the public interest." Harvest, supra, 478 N.E.2d at 104. In determining the reasonableness, factors to be considered are the scope of the legitimate business interests of the employer and the geographic and temporal limits on the restraint. See Id.; Licocci v. Cardinal Associates, Inc. (1983) Ind., 445 N.E.2d 556; Miller v. Frankfort Bottle Gas, Inc. (1964) 136 Ind.App. 456, 202 N.E.2d 395.

Consequently, courts have held covenants not to compete valid when they protect an employer's interest in trade secrets, Jenkins v. King (1946) 224 Ind. 164, 65 N.E.2d 121, or other confidential information. Conversely, Indiana courts have held that a covenant not to compete which protects an employer's customer list readily available to the public and not regarded as confidential, American Shippers, supra, 456 N.E.2d at 1040, or general practice that could be observed by anyone, cf. Slisz v. Munzenreider Corp. (1980) Ind.App., 411 N.E.2d 700 (former employee's use of similar advertising techniques and selling similar products), is not valid. In Indiana, the law recognizes a protectable interest in the good will generated between a customer and a business. Licocci, supra, 445 N.E.2d at 556; Miller, supra, 202 N.E.2d at 395; See also Field v. Alexander & Alexander of Indiana, Inc. (1987) Ind.App., 503 N.E.2d 627, trans. denied. That good will may be protected with a covenant not to compete.

Non-Competition Agreement and Trade Secrets

From yesterday's Indianapolis Business Journal:

Marion Superior Court Judge Thomas J. Carroll yesterday issued a preliminary injunction ordering an Indianapolis company controlled by high-profile businessman Alan G. Symons to return computer files and other information allegedly taken from a Fishers competitor. The competitor, Product Action International LLC, claimed in a lawsuit filed in May that Symons' company--Fast Tek Group LLC--used Product Action's business blueprint to build a similar company. Both firms sort defects out of parts lots for manufacturers.

Symons filed an appeal shortly after Carroll issued the injunction. "This is two competitors beating each other up," he said, denying wrongdoing.

This story bears some resemblance to other similar cases that I have posted about here and here and here and here.

Carroll's injunction said the former employees, Anthony Roark and Chan Chanthaphone, admitted taking the information, then took the 5th Amendment protection against self-incrimination and refused to testify.

Roark allegedly transferred operating methods, process flow charts, a quality manual and other trade secrets from Product Action computers to a zip drive, and then gave the information to other Fast Tek workers and used the information in Fast Tek operations.

Roark, who started working at a Fast Tek office in Saginaw, Mich., in 2004, climbed to vice president a year later. He resigned in December 2006.

I hate basing anything on a newspaper report and so this may just be two competitors fighting things out in out. However, the bit about the two taking the 5th does make me skeptical about any pleas of innocence.

What I find truly astounding in this story is the aplomb with which the new company took in these former employees of a competitor. These problems ought to have been sorted out before hiring these persons. Instead of resorting to counsel before the manure hit the fan, the attorneys did what they could fix the results of that manure hitting the fan. I have little sympathy for business owners who are in this position - particularly one who sounds as sophisticated as this fellow. If I do accomplish nothing else with this blog, I hope it is instilling this idea in my readers: consult an attorney before doing anything that could sink your business.

Based on the facts from the IBJ, I would have counseled not to hire these people. If hiring, then restrict their activities either in regards to a non-competition agreement (a point on that below) or a strict review of any information that they brought with them or offer for use. Finally, document everything about them and the information they possess and my client uses and how the client used their information.

I speak a little harshly about the company hiring these people but the former employer missed a few points. First, the former employer does not seem to have had non-competition and/or non-disclosure agreements. In the long run, these missing documents did not matter in this case as the former employees' conduct seems to been outrageous. A closer case and the results would differ. Second, the former employer would have avoided financial and business costs with a better method of securing their trade secrets.

4/18/08 update: Trade Secrets: Indiana Court of Appeals Issues Opinion Involving Fast Tek.

Leaving a job with a non-compete? Got any savings for the litigation expenses?

More news on non-compete agreements. This time out of Milwaukee:

A bitter fight between investment firm Robert W. Baird & Co. Inc. and a rival company started by two of its former portfolio managers has been resolved, both firms announced Friday.

Baird and Red Granite Advisors LLC, a company that Joel D. Vrabel and David W. Bowman formed after they left Baird, said they had resolved their differences and that lawsuits pending in county circuit and federal courts would be dismissed.

Baird did not have much luck in court:

Shortly after the first lawsuit was filed, Circuit Judge Patricia D. McMahon denied Baird's request for a temporary restraining order stopping Red Granite from doing business while the litigation was pending.

At a pretrial hearing in November, McMahon dealt Baird another blow, rejecting its request that Red Granite return documents. There wasn't sufficient evidence that the firm's founders took them, McMahon said.

I found another article and this factoid seeming highly interesting:

Vrabel, Bowman and Bosworth left Baird Investment Management, a division of Milwaukee-based Baird, at the end of April 2006 to form Red Granite, Milwaukee. Eight Baird employees also resigned and joined Red Granite. Red Granite, in Milwaukee, now has 14 employees.

I do not practice law in Wisconsin. I have no idea what Wisconsin's standards are for non-competition agreements or preliminary injunctions. I cannot believe that Wisconsin is any more conservative on non-competition agreements than Indiana. So my following comments are purely speculative about Wisconsin:

1. Baird must have had a pretty poor non-competition agreement.
2. Baird must not have had very much in the way of evidence supporting its trade secrets claims.

Red Granite started off with ten Baird employees. They apparently compete in the same trade and in the same geographic location.

In Indiana, a non-competition agreement must be ancillary to an employment contract, it must be limited to a reasonable geographic area or client list, and it must be for a reasonable time. Generally, the non-compete requires no contact of the former employer's clients, no direct competition in the same area of business.

Recently, Dow Agrosciences lost an appeal on a preliminary injunction over a non-compete agreement. The opinion is here. I think that the Baird case and the Dow cases are probably more alike than not. Dow's non-compete agreement lacked the proper restrictions on area and/or clients. Dow's trade secrets argument failed to saved its flawed non-competition agreement. Yes, I think the similarities are there.

I suspect the principals in Red Granite consulted a lawyer before jumping ship. Anyone who has a non-competition agreement who does not consult counsel when they leave that employer to form their own company needs their head examined.

I do not see any other way of putting the matter. Starting a competitive company is a red flag for the former employer. Litigation will follow. So long as the employer avoids the mistakes of Dow and Baird, they will get a preliminary injunction. Getting a preliminary injunction means that the employee's company is stopped from the work that is competitive. Generally speaking, the work infringing on the non-competition agreement is the lucrative, profitable trade. Stopping the profit makes the future of the new company appear bleak. It may also impinge on a person's ability to pay for things like food,clothing and shelter.

Therefore, get legal counsel before challenging a non-competition agreement. Failing to do so may involve more costs than you will enjoy.

Non-competition agreements - who is the competitor?

An interesting story from the International Herald Tribune's business page caught my eye:

BOSTON: An odd legal fight has emerged between TJX and Pier 1 Imports, both of them U.S. home furnishing chains, over what defines a competitor.

At issue is Alex Smith, a 54-year-old TJX executive whom Pier 1 hired last month. Days after resigning, Smith received a letter from TJX threatening to sue him over a noncompete clause. TJX also informed Smith that it would not pay him millions of dollars owed in incentive and retirement plans for taking the job.

Pier 1 got a restraining order Tuesday against TJX to prevent it from suing Smith. Even though Pier 1 and TJX both sell home goods, Pier 1 says TJX is not a competitor.

Why? Because Pier 1 sells full-price merchandise, mostly its own brands, and TJX sells discounted products, usually overruns, off-season or discontinued items, at its T.J. Maxx, Marshalls, and HomeGoods stores.

This scenario seems odder when one considers that non-compete agreements are a way of protecting trade secrets. See my post here about combining non-disclosure agreements with a non-competition agreement. So I have to wonder just what trade secrets belonging to TJX would benefit Pier One?

Also, I find Pier One's striking first with an injunction to be interesting. Aggressive without being stupid is a good thing in my mind. I suppose they could have also coupled it with a declaratory judgment suit. That would give them the benefit of having shield (the injunction) and a lance (declaratory judgment). The former protects Pier One's interest in having an employee at work and the latter to punch a hole in TJX's non-competition claim.

Protecting trade secrets in Indiana

See below for my post below about how Indiana defines trade secrets. Now about protecting those trade secrets.

Remember this: no trade secrets unless the business uses reasonable efforts to keep them secret.

Reasonable efforts do not require a business take "overly extravagant, measures to protect its secrecy." Figure out who must have access to the information, document these persons know that the information is a trade secret, and restrict access to everyone else. Determining those who must have access to the information must depend on the business, but should include employees, vendors, supplier or job candidates.

A non-disclosure agreement accomplishes the documentation. For employees, the business needs a non-competition agreement incorporating a non-disclosure agreement. By signing a non-disclosure agreement, the person given access to the information acknowledges the existence of a business' trade secret. Others need only a non-disclosure agreement. As misappropriation of a trade secret requires the person acquiring the information knew of it as a trade element, a non-disclosure agreement eases proof of a necessary element.

In the past week, the Indiana Court of Appeals handed down an opinion showing how important a well drafted non-disclosure agreement/non-competition agreement can be in a case. See Timothy Glenn v. Dow Agrosciences, LLC . I think the employee presented himself as one who would not misappropriate trade secrets while Dow appears to have bungled its non-competition agreement. With the non-competition agreement being defective, Dow completely lost the preventive effect of its non-disclosure agreement. One can say that Dow only lost its ability to get a preliminary injunction. Consider that at issue here is information in Mr. Glenn's head, that nothing keeps him from using what is in his head other than the threat of monetary damages, and that getting those monetary damages involves costs and the risk of proving those damages. Protecting a business' trade secrets from employees means a well-drafted non-disclosure/non-competition agreement.

The business must do more than execute non-disclosure agreements. Keeping information secret includes securing the information with passwords on computers, a locked area for hard copies, marking things as confidential, keeping the public away from seeing devices or techniques. Accomplishing these goals means the business needs to establish directives on how its employees are to handle this information and educating its employees about these directives. Then the business must consistently enforce these rules.