Employee Exits Raise Competition, Trade Secret Issues

(Originally published in The Business Journal)

Most small businesses have encountered a situation in which a key employee indicates he is leaving, either to start his own competing business or to take a similar position with a competitor. 

How an employer responds to this announcement is significant, and may create a situation that is either fairly smooth or hostile, depending on what is said.

The initial concern of the employer is to remind the employee of two concepts – the employee’s obligations under a non-compete agreement and the employee’s obligations to preserve the employer’s trade secrets.  These are separate but important topics to discuss with your departing employee.

A non-compete agreement (or covenant not to compete) is generally a promise by the employee that he signed upon hire that he would not compete with his employer for a period of time (usually one or two years) within a geographical area, after the termination of his employment. 

If the employer has a non-compete agreement, he should give the employee a copy and go over the obligations assumed by the employee when he signed the agreement. 

If the employee’s proposed new employment is contrary to the prohibited activity set forth in the non-compete agreement, the employee should be told that the company intends to enforce the agreement and his new employer should be put on notice of the existence of the agreement.. 

Unless some accommodation can be reached with the new employer concerning the scope of the work that he will be doing, litigation is probable at this point between the old employer, the employee and the new employer to enforce the terms of the non-compete agreement.

Non-compete agreements are generally not favored under Ohio law, although they will be enforced where they are “reasonable.”  What is reasonable is determined on a case-by-case basis, and involves elements of public interest where the employee has unique skills. 

The second point to make with your departing employee is the existence of your trade secrets and his duty to preserve them.  Trade secrets are broadly defined under Ohio law and include not only technical information, designs and programs, but also business plans, financial information and customer lists.

To qualify as a trade secret, the information must have independent economic value because it is not readily available by proper means.  Most importantly, the information must be the subject of reasonable efforts to preserve its secrecy. 

As long as the employer can establish information as a trade secret, the employee is prohibited from using that information, either for himself or for another employer.  Note that the trade secret issue is not dependent upon a written agreement. 

Ohio law prohibits the misappropriation of trade secrets and permits the recovery of monetary damage from the wrongdoer and, in some cases, his new employer.

Triple damages and attorney fees are recoverable if the wrongdoer’s acts were willful or malicious.  Injunctive relief is also available to prevent the use of misappropriated information. 

By reminding your departing employee of his obligations under Ohio law, you may be able to minimize or prevent his solicitation of your clients and his use of your information. 

At a minimum, you will alert your ex-employee and his new employer that there are issues concerning his new employment which need to be monitored and which may head into litigation if they are not. 

You need to send a signal to your employee and his new employer that you take his obligations seriously and expect they will do the same.  This activity may open a dialogue, which may prevent litigation or at least bring the matter to a head through litigation in a fairly early phase.

By understanding these concepts and by taking the time to understand these distinctions, employers can maximize their chances to retain customers, information and know-how when a key employee says goodbye.

Hawley can be reached at whawley@hhmlaw.com or at (330) 392-1541.