Dismissal and Employment Law Digest
Executive Employees Departing With the Company Jewels
BY: Howard A. Levitt & Brian A. Grosman
Information is the corporation’s most important asset. Executive employees are well aware that they enhance their value to competitors if they leave with their employer’s key competitive information. Mediocre performance is enhanced in the eye of the competitor if the executive performer is able to deliver a competitive advantage. Whether it is a formula or just a customer list it will significantly enhance a departing employee’s value to a potential employer, particularly if that employer is plowing the same field where a seed of information turns into a winning competitive crop.
A large U.S. pharmaceutical company was losing its most mobile executive employees to small competitors who set up satellite operations that replicated their best products. The ex-employees departed with key, confidential information, formulas, plans, customer and supplier lists that they shared with their new employers making them a valuable acquisition, no matter the price.
Most departing employees have signed employment agreements that contain standard restrictive covenants; non-solicitation, non-compete and confidentiality clauses. Their departure to a competitor is clearly in breach of their contractual obligations to their employer. Restrictive covenants like non-compete clauses, are, by their nature, overkill. The restriction is usually too broad, covering too much territory and too long in duration, i.e. two years and that often means the individual is unemployable in his or her area of knowledge and expertise for that lengthy term. Courts have grown reluctant to enforce such clauses apart from the confidentiality commitment, which they see as a common law duty that is enforceable.
Senior executives may be restricted by their fiduciary duty to their ex-employer, which duty need not be in writing to be enforceable against the interests of the departing executive employee. Courts are more willing to find a breach of fiduciary duty than support a restrictive covenant that may be contrary to public policy.
Employment agreements that are carefully constructed and which do not overshoot reasonable restrictions are enforced by the courts. Unfortunately, corporate employers too often demand too much when restricting departing employee’s future activities, thereby ending up with little or no restriction at all.
Rather than the threat of dire consequences if an ex-employee breaches his or her agreement, a better route is to enhance the golden handcuffs in place to encourage valuable employees to stick around and not jump ship. Staggered bonuses and equity participation that is triggered after three years employment is a more positive approach to the retention of key employees who have access to competitive information.
Better yet, a combination of reasonable restrictive covenants that are enforceable and golden handcuffs with equity or bonus provisions combined with clear communication to executive employees of their fiduciary duties to the corporation is more likely to succeed in limiting the growth of harmful departures.
Fear does not restrain the loss of competitive information. This is particularly so when the new employer offers to indemnify the departing employee from the legal consequences of such a departure. If the corporation’s most important asset is to be protected, it must be done with careful consideration in advance of the potential departure and not afterwards once the executive employee has sold himself and his information to the highest bidder.