Lesson Learned
So you Think a Noncompete Will Protect You?
by Tim Bostwick | Published in April 2007 Event Currents
The last thing I expected the morning of August 12, 2004, was a call from my director of sales resigning after one week on the job. What was worse was that I had heavily recruited “Brad,” let’s call him, after he had left our company, AMI, the first time two years before. A star during his first tenure, he had left on very good terms, and we wanted him back. I had broached the subject several months ago, explaining that we had never rehired anyone, but I would go out on a limb to bring him back because I felt he was the right fit. Brad agreed and returned to AMI at the beginning of August.
I was dumbfounded by his call — but that sinking feeling paled in comparison to what came next. Brad’s so-called return to AMI appeared to be a carefully orchestrated act of industrial sabotage: We found evidence that files and databases had been copied, current clients had been contacted — and there was even evidence that some of these contacts took place while Brad was still working at AMI.
Protecting account relationships and information is critical for conference management firms like our company. But, as we learned, we didn’t have the protection we thought we did.
It’s a popular misconception that noncompete agreements will solve the problem. However, agreements containing “restrictive covenants” not to compete with a former employer are usually void and unenforceable. Agreements that impose a penalty on a former employee for competing are also invalid.
The main exception is when a business owner sells his or her business and agrees not to compete with the buyer for a certain period of time as a condition of the sale. This direct connection forms part of the “consideration” for the sale and is thus looked upon favorably by the courts.
Confidentiality agreements are more enforceable than restrictive covenants, but they are hard to craft effectively. You can write an agreement that says, “Employee can’t do business with our client ABC Corp. for two years after separation from the company.” If the employee explicitly agrees to this as a direct condition of employment, the agreement is most likely enforceable. The problem is that, obviously, you don’t know in advance what accounts the salesperson will bring into the company, so you can’t be specific, and a broad agreement that says “thou shalt not compete” strays into the realm of the unenforceable.
Protecting property and relationships is hard, but unfortunately, mounting a successful legal action against a former employee after the fact can be daunting.
First you have to prove that the ex-employee actually stole something. Did the ex-employee use stolen account lists or did he rely on memory? Stealing “stuff” is never okay with the courts, but relying on memory may be considered “practicing one’s trade,” which is okay with the courts.
In AMI’s case, we were able to obtain an injunction against Brad that allowed us to examine his company’s computers. We hired a forensic computer expert and uncovered a treasure trove of highly incriminating files that he thought had been deleted. We were lucky.
Second, you have to prove that the confidential information was used to the benefit of the ex-employee and to your detriment. If the employee solicited clients, you may be able to get sworn statements from them that prove that accounts were “converted.” In our case, we found strong evidence that Brad had solicited our clients. Again, we were lucky.
Third, you have to prove damages. The court may agree that the ex-employee acted improperly, but without substantial damages, the court may agree with a defense counsel who says, “No harm, no foul.”
As we headed to trial, Brad stopped pretending that he hadn’t stolen our property and adopted the no-harm-no-foul defense. This became our highest hurdle. At the court-ordered settlement conference, the judge agreed that our account lists and proposal formats had been stolen. He agreed that Brad had relied on stolen information to convert accounts. But he believed that a jury was unlikely to return a verdict awarding substantial actual and punitive damages. We knew that going to trial meant potentially getting nothing, so we opted for the large settlement that was offered.
What did we learn? Noncompetes don’t protect client relationships. A much more productive approach is to protect your information. Rather than try to restrict employees’ activities, then, restrict their use of information and ensure that you can prove that such data is highly confidential.
For example, for sales databases in, say, ACT! or Salesforce.com, you must show in a court setting that you possess more than just the company name; you must have the names of the people with whom you did business or solicited business. You must show that the ex-sales rep could only have known about these individuals by stealing the database and couldn’t have found them through, for example, the MPI directory or Google. You need to document that the client relationships existed over time and that the nature of each relationship was extensive and unique. This can be done by carefully documenting every contact in your sales databases.
It’s also crucial to show that you took active steps to protect the data. The courts put the burden on the plaintiff to show that you wrote procedures and spent money to safeguard it.
There’s no way to guarantee that an ex-salesperson won’t scheme to steal your accounts — but if you take the right steps, your information will be more secure and you’ll be better prepared if court is unavoidable.
About the author: Tim Bostwick
Tim Bostwick is an executive vice president with AMI, a conference management firm located in the San Francisco Bay Area.
Contact: tim@amotive.com