Many companies accumulate trade secrets, such as pricing schemes, business plans, and production shortcuts, but they don’t want competitors to tap into this private reserve of knowledge. The easiest way for a competitor to obtain these secrets is by hiring one of your key employees. A recent case from the U.S. 5th Circuit Court of Appeals (whose rulings apply to Texas, Louisiana, and Mississippi employers) covers this topic and is currently in progress.
The Basics
Before we get into the case, here are the basics:
First, you can require prospective employees to sign a noncompetition agreement, which prevents them from working for a competitor, and/or a nondisclosure agreement, which allows them to work wherever they want but prevents them from divulging or using your trade secrets.
Second, if information is truly secret—and you’ve maintained it as secret—and harm would result if a competitor gains control of it, you can seek relief from a court.
Third, to obtain relief, you must file a lawsuit—generally against both the employee who left and the company that hired the employee—alleging breach of contract, wrongful interference with a contract, theft of trade secrets, and the like. For relief, you must ask for a temporary restraining order (TRO), which freezes the employee and employer in place for a few weeks, and a temporary injunction (TI), which is issued after a mini-trial and freezes the employee and employer in place until the full trial. If both a TRO and a TI are issued, the employee can’t start work, and the employer can’t hire the employee until the full trial.
This relief can be sought because a monetary award won’t reverse the damage caused by the loss of trade secrets: Once the toothpaste is out of the tube, it can’t be put back in.
The Case in Progress
Adam McQueen, a former executive at Direct Biologics (DB) and now an exec at competitor Vivex Biologics, is on ice because his former employer filed a lawsuit and a TRO was issued when he left to join his new employer.
The corporate fight is over which company would control the market for a new medication. The trial court held a mini-trial and refused to turn the TRO into a TI, but the 5th Circuit decided there was more to be determined before it could uphold that decision.
First, 5th Circuit noted the trial court never determined whether DB’s trade secrets are “likely” to be used by McQueen and the competitor before the full trial. If they are, then a TI should be issued. At the mini-trial, some evidence was provided that McQueen might use DB’s trade secrets in his new job.
Second, the appeals court said the trial court must decide whether the damages DB suffered between the mini-trial and the full trial could be remedied with monetary relief.
As the court put it, a “lost opportunity to create or gain control of a new market may result in unquantifiable losses for which there is no adequate remedy at law,” and therefore, it determined a TI should be issued until a full trial on the claim’s merits could take place. Direct Biologics, L.L.C., v. McQueen et al., (5th Cir. April 3, 2023)
Bottom Line
If key employees leave for a competitor, what should you do?
- On their way out, remind them of any covenants (i.e., promises) they agreed to, such as a noncompete or a nondisclosure.
- Get an independent forensic analyst to image their hard drive and see if they have been communicating with a competitor or sending any information to another e-mail or location in the cloud.
- Keep tabs on the employees. Does the new job title encompass what they did for you? Are the former employees contacting colleagues and trying to convince them to work for the competitor?
- Don’t sit on your rights. Get a lawyer to counsel you on whether to sue and why. Know this: Getting one or both of the “Ts” is very expensive, so get a quote on the range of fees and costs.
- If key employees want to leave a competitor and work for you, what do you do?
- Check to see what types of covenants they agreed to with the competitor.
- Make sure you inform them that you don’t want to know or use any trade secrets, and provide a written statement telling them not to bring or transfer any documents to you.
- Create a screen between the new employees (if hired) and existing employees working on projects that would compete with the new employees’ former employer.
- Be prepared for a possible lawsuit. Talk to your lawyer, and weigh the benefits and rewards of hiring them.
Michael P. Maslanka is a professor at the UNT-Dallas College of Law. You can reach him at michael.maslanka@unt-dallas.edu.