Morris Manning & Martin, LLP

The Departing Employee

A technology company has two great challenges with its human resources -- attracting talented employees and retaining them. Many companies focus on the former objective, only to lose their talent by ignoring their most important resource -- their existing employees.

From a legal perspective, there are a growing number of court cases based on defecting employees. The cases highlight the severity of the problems confronting a business as a result of departing executives. The lawsuits also highlight the time required to resolve these disputes and the expense of litigating against a former employee. 

Let’s examine several recent cases of employer versus former employee and the practical lessons from these decisions.

Trade Secrets - In DoubleClick v. Henderson, a New York court issued an order preventing two former executives of DoubleClick from using proprietary information to launch a competing business. The case highlights the sensitivity of trade secrets and the risks run by a technology company in trying to protect its proprietary information from departing executives.

In this case, the employees had access to key information of DoubleClick -- revenue projections, plans for future projects, pricing and product strategies and client databases. Confidential information also included the number of times an advertisement was visited on a website and financial information regarding the business arrangements with clients.

Two employees of DoubleClick left the company with this proprietary information in hand. The former employees had even prepared a "Stakeholder Positioning Analysis" which showed how they planned to use the proprietary information. One such use was to advise DoubleClick’s largest customer that the company was taking too large a cut of the profits from the customer’s website. The court also found proprietary information was included in the defendants’ proposed business plan. This document included information about the number of hits various websites had received and the current sales for each site. DoubleClick sued the former employees, and the New York state court issued a preliminary injunction against them. The court found that DoubleClick was likely to succeed in its case against the former executives. The court noted that there was a high probability of "inevitable disclosure" of DoubleClick’s trade secrets. Also, the defendants would be unable to wipe all of DoubleClick’s trade secrets out of their minds, and they had demonstrated a cavalier attitude about their duties to their former employer.

The DoubleClick case highlights several practical considerations --

For certain senior-level executives, it may be virtually impossible to leave a company without having access to trade secrets. Thus, a former technology executive may be exposed to trade secret liability if it is "inevitable" the executive will use the trade secrets in forming a new company. 

To protect trade secrets, a company must take affirmative steps to prevent disclosure of proprietary information. For example, DoubleClick was successful in maintaining in confidence certain Internet-related information, such as the number of visitors to a website and financial arrangements with its clients.

Criminal Violations - Employers have resorted to the criminal code to protect their computer assets from departing employees. Consider for example the following court cases from New Jersey and Maryland relating to computer crimes committed by disgruntled former workers.

A former employee of a New Jersey engineering company was recently indicted under the Federal Computer Crime Statute for sabotaging his employer’s computer system. The employee had been the chief network program designer for over eleven years when he was dismissed. His employer manufactured highly specialized industrial equipment and contracted with defense agencies of the U.S. government. Following his departure, the former employee allegedly activated a $10 million computer "bomb" which permanently wiped out his former employer’s critical design and production programs. 

In a case from Maryland, an employee was charged with a criminal offense of unauthorized access to a computer system maintained by his former employer. The employer, a securities investment company, had hired the employee as a computer systems administrator. He was to program and design software to maintain the company's computer systems, and his responsibilities included password-protecting files to secure the company's data.

Following a dispute about the terms of his employment contract, the employee resigned. Shortly after leaving the company, the employer realized that some of its computer files were secured by passwords known only to the departed employee. The employer filed a civil suit against the former worker and contacted the county police. The State then charged the former employee with unauthorized access to the employer’s computer system. The employer alleged that the former computer operator had changed the passwords before leaving the company and had placed them in a subdirectory named "ha-ha he-he". 

These two criminal cases are examples of the damage which can be caused in the wake of a departing employee. There are several lessons to be learned --

Periodically, an independent consulting firm should review a computer system to verify the absence of computer viruses, Trojan horses, and similar self-destruct programs. In certain cases, these programs may have been placed in a computer system by a dissatisfied employee who is awaiting the point in time to pull the trigger.

More than one employee should be knowledgeable about password-protected files and should be aware of all password changes and capable of overriding passwords, especially those created by departing employees.

Restrictive Covenants - A recent court decision in Georgia provides some interesting guidance in using restrictive covenants in employment agreements. In this case, two software developers left the employment of EDS and the next day formed their own company. The new company sold software which performed the same functions and in the same way as EDS’s computer programs. The day after leaving EDS, the former employees contacted a customer that had submitted an RFP to EDS. The former employees also promised that they could provide a program with the same functionality as the EDS product. 

EDS filed suit charging the former employees with misappropriating trade secrets and violating restrictive covenants included in their employment agreements. A jury found that the former programmers had misappropriated EDS’s trade secrets, that they were using the trade secrets in their own products, and that they had violated the restrictive covenants in their EDS employment agreement. However, the court refused to prevent the sale of the infringing software program. Instead, the court imposed a 7% royalty for four months, requiring the former employees to pay over revenues from their licensing of the infringing software. 

The court did enforce the restrictive covenant precluding the former employee from soliciting customers of EDS for two years. Since the court case dragged on for almost two years, there were only three days beyond the court’s order that the employee was prevented from soliciting EDS’s customers. The court refused to "restart" the two year time period during which the employee was precluded from soliciting EDS customers.

There are several practical lessons from this case --

A well-drafted employment agreement will include language directing the court to issue an order precluding a former employee’s continued use of misappropriated software. A royalty payment by the infringing employee will generally not be a sufficient sanction.

If a departing employee is suspected of taking trade secrets or violating a restrictive covenant, prompt action must be taken. Failure to move quickly could preclude an employer from getting a court order limiting the activities of the former employee. 

An employment agreement should provide for a "tolling" (or postponement) of restrictive covenants during any court proceeding. In this way, the restrictive covenant will be "restarted" when the court order has been granted.