Hiring a new employee who has outstanding work experience and qualifications, stellar performance in multiple interviews with management, and fits a critical part of the firm’s business is an exciting experience, indeed, like a gift. While employers that retain promising new employees may not suffer the same fate as the Trojans did when they accepted the fateful gift from the Greeks in the Illiad, there are safeguards that an employer can utilize when accepting new hires in order to avoid taking on a “Trojan Horse.”
The Free Flow of Talent is Encouraged in California
When an employer hires a new employee, it potentially faces immense exposure to liability regarding issues of trade secrets and intellectual property. There has been a great deal of litigation throughout the State of California involving employees who take trade secrets with them when they transition from one employer to another. This litigation frequently stems from past employers’ claims of theft of trade secrets and unfair competition. A trade secret is generally defined as confidential information that has a value by reason of it being confidential.
California’s legislature and courts have a long history of promoting the free flow of employee talent from one business to another, even when direct competition results. In fact, California Business and Professions Code section 16600 specifically provides that any contract that restricts the free flow of employment is void as against public policy. As a result, it is generally accepted that non-competition and non-solicitation clauses in employment contracts are not enforceable in California.
In contrast to California, the majority of states allow and enforce restrictive covenants. Employers in New York, Massachusetts, and Texas, for example, regularly restrict employees’ ability to leave their employment to work for a direct competitor. These restrictions can even prohibit an employee from working in the same industry if the job duties for the new employer are likely to compete with the previous employer. In these states, non-competition and non-solicitation agreements are enforceable so long as they are “reasonable in time and place.” Protecting the employer’s investment in its employees is the highest priority. The effect this has on employees is not surprising: once hired, an employee will often stay put because if she were to leave, the restrictive covenants in her employment contract could prohibit her from working in her chosen field for up to a year.
California’s Trade Secret Protections
While California employs very narrow exceptions to the prohibition against restrictive covenants, an employee’s ability to freely move between employers does have some limitations. Specifically, the Uniform Trade Secrets Act prohibits employees from taking a former employer’s trade secrets with them to a new employer. (Cal. Civ. Code §§ 3426-3446).
California law seeks to protect confidential information the employer developed to compete with other entities. Customer lists, price lists, specific marketing plans and product engineering have all been deemed trade secrets that are subject to protections from departing employees. Employers that hire new employees who have absconded with trade secrets from their former employers may unwittingly take on a “Trojan Horse.”
Technology and similar industries are replete with litigation stemming from the theft of trade secrets. It is not unusual for former employers who believe their valuable confidential information has been stolen to pursue extraordinary relief measures such as temporary restraining orders, followed by preliminary and permanent injunctions. Such drastic measures often carry enormous legal costs because the motions are made on short notice and require fact intensive legal briefs, declarations and multiple depositions. The litigation often results in bitter and acrimonious battles between competitors who in turn expend substantial financial resources and valuable work time. The unwary employer who hired the promising new employee who seemed like a gift at the time, will likely regret accepting that gift when the employer is served with a temporary restraining order by an incensed competitor.
How Employers Can Avoid a Trojan Horse
In order to avoid the “Trojan Horse” scenario, employers who are onboarding new employees should follow these general procedures:
1. The written application which initiates the interview process should specifically require the employee candidate to affirm that the candidate is not bringing any confidential information from the former employer.
2. The company should have a standard statement reciting that it has discussed with all candidates the illegality of bringing in trade secrets, and specifically informing the candidates that bringing in confidential information from a former employer is strictly prohibited.
3. If the company uses a written employment contract, it should have a specific provision that requires the new employee to affirm that the employee is not, and will not, bring confidential information or any form of trade secrets to the new employer.
A company’s most valuable capital is its employees. The hiring of highly-qualified and experienced employees can lead to the ultimate success of an operation. However, the costs can be detrimental if the employee also comes with trade secrets. The prudent employer will carefully screen and protect itself from potential litigation by implementing the preventative measures outlined above.