Editor’s Note: Jason D’Cruz has written this article from the insurance company’s prospective. The Summer 2008 edition of the MMM Review will address the scenario of departing executives from the executives’ perspective.
You are the CEO of a successful insurance company. Every week is tough, but this last week was especially trying. Imagine that it is Friday afternoon at 4:30 p.m. The weekend is almost here. In fact, you are finally getting away for the weekend. Just as you start to envision your relaxing weekend, one of your company’s Senior Vice Presidents walks into your office. He is a thirty year company veteran, and the head of your property facultative (Prop Fac) reinsurance division. He has come to inform you that today is his last day and that he will be leaving the company to take advantage of “other career opportunities.” Though you are disappointed that he is leaving, you thank him for his service and wish him luck in his future endeavors. Fortunately, you have a strong bench of other employees to replace him.
By the following Friday, however, thirty of your Prop Fac reinsurance division’s key employees, including the people you had in mind to replace your former Senior Vice President, have submitted their resignations effective immediately. In other words, your division has been gutted. According to a loyal employee, your former Senior Vice President and several others had been discussing their dissatisfaction with the company for almost a year, and had been looking for opportunities to work together at a competing corporation. Your loyal employee tells you that the others left to join your former Senior Vice President, who is currently employed as the President of the Prop Fac division of an insurance company which previously had no Prop Fac division.
Naturally, you are concerned that these employees have intimate knowledge of your company’s customer lists, customer information, trade secrets, business strategies, profit ratios, employee information, salary information, and information on employee productivity. What do you do? Will the employment covenants agreements your former employees signed protect the company’s interests?
A recent decision from the Connecticut Superior Court should yield some hope to companies as they continue to operate in a climate in which it is increasingly attractive and easy for employees to leave their employers, to invite thirty of their favorite co-workers to join them, and to take the valuable confidential information/trade secrets of their former employer to a competitor.
The facts of General Reinsurance Corporation v. Arch Capital Group, LTD. et al., Conn. Super. Ct., Case No. X05CV0740116685 (October 17, 2007), are remarkably similar to those recited in the scenario above. It is critical to note that none of the thirty employees had signed an agreement not to compete with Gen Re or not to solicit Gen Re’s customers or employees.
The court, however, decided in favor of Gen Re and issued a temporary injunction against the former employees and their current employer. Even though the employees argued that they did not physically take documents containing Gen Re’s information, the court determined that much of the business information the employees took to their new employer rose to the level of trade secrets. The court disagreed with the premise that information retained in an employee’s memory is not subject to trade secret law protection. The court reached this decision because the information taken gave Gen Re a competitive advantage, had independent economic value, had been adequately preserved as confidential, and was not shared with competitors or otherwise publicly available. Further, Gen Re used passwords and limited the distribution of much of the information.
Gen Re was lucky. The outcome could have been dramatically different had there been a different judge or had the case been in a different state.
So what can your company do to avoid this situation? First, take steps to monitor employee satisfaction. Keep the lines of communication open to address dissatisfaction. Second, make sure that employees who have contact with company customers, customer information, confidential information, and trade secrets have signed enforceable employment covenants agreements restricting their ability to solicit company customers, disclose company trade secrets and confidential information, disclose customer information, and recruit company employees. These types of agreements are usually governed by the state law in which the employee lives. Third, the agreements should be reviewed and updated on a regular (annual) basis. Finally, protect information the company intends to keep confidential by:
- limiting disclosure to employees who have a business need to know the information;
- periodically re-evaluating which employees have a business need to know the information;
- using passwords;
- periodically changing passwords;
- monitoring which employees are accessing the information;
- regularly communicating to employees that the information must remain confidential; and
- imposing penalties on employees who disclose confidential information to unauthorized persons.
As a side note, what really sank the departing employees was email records. All companies should routinely monitor email traffic (in accordance with applicable law and published company policies). In addition, when an employee departs, the Information Technology department should capture all data relating to the departing employee (from hard drives, Blackberrys, servers, phone records, expense reports, etc.), review the activities of the departing employee, and maintain the data in a safe place. As Gen Re found out, you never know when you may need this information.
Jason D’Cruz is a partner in the firm’s employment law practice group. Mr. D’Cruz practices in the areas of employment law, executive compensation, and restrictive covenant litigation. Mr. D’Cruz received his bachelor’s degree from St. Louis University and his law degree from Wake Forest University.