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					                 RAIDERS OF THE LAST, INC.

        COUNSELING CLIENTS WHEN
      EMPLOYEES CHANGE EMPLOYERS
            ISSUES OF CONCERN TO EMPLOYEES, THE OLD
                EMPLOYER, AND THE NEW EMPLOYER



        Presented by the Covenants Not to Compete, Trade Secrets and Duty of Loyalty
                                       Subcommittee

                         Individual Rights and Responsibilities Committee
                   Labor and Employment Law Section, American Bar Association


                                          Rancho Mirage, California
                                               March, 2004



Editor:

Bob Blackstone

Contributing Authors:

Stacey Campbell
Tom Christopher
Stephen Fox
Vanessa Kelly
Dan Kinsella
Marc Jacobs
Greg Palmer
Charles Poplstein
Rob Whitman
Robert Wood




I:\ABA2004\00clientABA2004\Load 1\Tab 12\Blackstone.doc   1
                                     INTRODUCTION
The increased mobility of the American workforce, combined with growing competitive
pressures and the fact that for many employers, their most valuable assets walk out the door
every evening, has resulted in a significant increase in litigation involving covenants not to
compete, trade secrets and the duty of loyalty.

These materials examine the concerns lawyers should be considering when they counsel clients
about these issues from three different perspectives:

            •   The old employer who is losing employees to a competitor
            •   The new employer who is trying to hire employees from a competitor
            •   The employees who are changing employers

These materials are intended to help lawyers address questions such as the following:

    •   How far can employees go in preparing to compete with their old employer while still
        employed without running afoul of the duty of loyalty or breaching their employment
        agreements?

    •   What steps can and should an employer take when it learns that key employees will be
        leaving?

    •   How far can employees and a new employer go in communicating with potential
        customers before it becomes solicitation?

    •   What role does the doctrine of inevitable disclosure play in these scenarios?

To provide a factual basis for a discussion of these often difficult issues, we have provided a
somewhat typical scenario that is repeated daily across the country. Here are the players:

    •   Kathy Rogers – Manager of the ABC Insurance Agency
    •   Paul Nash – Sales representative for Best Insurance Agency, a competitor of ABC
    •   Mrs. Jennings – A customer
    •   Jack – Lawyer for ABC

The first scene occurs at an insurance trade show.

A copy of the script follows, as does a copy of Paul Nash’s employment agreement with Best
Insurance Agency.

Also included in the materials are checklists for lawyers to use as a reference in counseling
clients in each of the three categories: old employer, new employer, and employees.




                                                     2
                               RAIDERS OF THE LAST, INC.

                                   FACT PATTERN SCRIPT


                                                  Prepared By:

                                              Robert Wood
                                          Hughes & Luce, L.L.P.
                                       1717 Main Street, Suite 2800
                                           Dallas, Texas 75201
                                            (214) 939-5544
                                          (214) 939-5849 (fax)
                                         woodr@hughesluce.com
                                          www.hughesluce.com



Scene One (Insurance Trade Show)

Kathy (Manager of ABC Ins. Agency)
Paul (Sales Rep. of Best Ins. Agency)


Kathy: Hi, Paul, how’s it going at the Best agency these days?
Paul: I’m doing pretty well. Last year, I was made vice president and got a few shares of the
Company, but my Agency isn’t doing great.
Kathy: Oh?
Paul: Yeah. Off the record, Jim [the manager] doesn’t have any idea what he’s doing, and he
starts hitting the booze around lunchtime every day. None of the other agents produces well, and
I’ve got about half the business in the office.
Kathy: I heard they’re changing the compensation plan.
Paul: Yeah, that’s really going to cost me a lot of money. I’ve got two kids in college right
now, and with the new comp. plan, I don’t know how I’m going to afford it. How are things
going at ABC?
Kathy: Great. We have some exciting new products, and, as I’m sure you’ve heard, agents with




                                                       3
big books of business can make a lot of money with us.
Paul: I have heard.
Kathy: Well, I’ll see you later.

Scene Two (Kathy’s office)

Kathy dials telephone.


Paul: Paul Nash speaking.
Kathy: Paul, this is Kathy Rogers. I’ve been thinking about our conversation a few weeks ago,
and I was wondering whether you might like to get together for lunch sometime.
Paul: I’ve been thinking about that myself. But you should know that I signed some kind of
non-compete agreement when I came to work for Best.
Kathy: I wouldn’t worry too much about that. I’ve heard from my lawyer that they’re not very
enforceable. After all, this is America, right? It’s a free country—you can work where you
want.
Paul: I think I could help you develop some business.
Kathy: Of course you can. That’s a given. How does lunch tomorrow sound?
Paul: Just fine.

Scene Three (Paul in Kathy’s office)

Kathy: I’m very happy you’ve decided to come work for us. We’re both going to make a lot of
money.
Paul: Here’s the agreement I was telling you about. It says that, for two years, I can’t work for
another insurance company or solicit Best’s employees. I also can’t disclose Best’s trade secrets.
Kathy: What trade secrets (mockingly)?
Paul: Well, I think they don’t want me taking their customers.
Kathy: Of course they don’t. But you got them out of the phone book, right?
Paul: Some of them. But some came from lists provided by Best.
Kathy: Then don’t bring those with you. I don’t want you to bring any of Best’s stuff over here.




                                                   4
And, by all means, don’t steal their trade secrets.
Paul: Fair enough. I’ll see you next Monday.
Kathy: Why don’t you resign Friday afternoon so that we can send some announcement letters
on Saturday?
Paul: To whom would the letters go?
Kathy: To whomever you tell us. Just send me a list of people and their addresses.
Paul: What would that letter say?
Kathy: I have it right here:

        Dear __________:

        I am pleased to announce that Paul Nash, formerly with Best Insurance Company,
        will be a sales representative with ABC Insurance Company effective May 1,
        2004. We know Paul to be an excellent and knowledgeable broker of insurance
        and financial products, and we are very happy that he is joining us.
        ABC has over 75 years of experience in the insurance and financial services
        industry. If we can ever be of assistance to you, please let us know.

        Kathy Rogers
        General Manager

Paul: This is your standard letter?
Kathy: Yes.
Paul: Okay.

Scene Four (Paul on the telephone in his office at ABC)


Paul: Mrs. Jennings, this is Paul Nash.
Mrs. Jennings: Paul Nash, how are you? I just saw your boy the other day when I picked up
Beth from school. I can’t get over how much he’s grown.
Paul: He really has. I’ve got a cast on my left hand where he hit me with a football the other
day.
Mrs. Jennings: My goodness. It’s hard to believe, but it’s been ten years since John and Beth
met each other in grade school.




                                                      5
Paul: Time flies, doesn’t it? How’s life been treating you?
Mrs. Jennings: We’re making it, Paul, but I don’t mind telling you that we have faced some
challenges, especially with Fred’s business.
Paul: I know. I’ve heard that. I’m sorry.
Mrs. Jennings: And, as you know, the market hasn’t treated us well the past couple of years.
Paul: It’s hit everybody hard. I just hope that I can help some of my friends in my new position
at ABC.
Mrs. Jennings: I heard about that the other day from somebody who had gotten a letter about it.


                    Kathy walks by Paul’s office and sees/overhears the following:

Paul: Yeah, some people got letters, but some people unfortunately didn’t get put on the list to
get them.
Paul: Well, for one thing, I no longer have a manager who has his second martini by noon.
Paul: And I’d like to think ABC’s products are better and cheaper.
Paul: Well, take your situation [reviewing palm pilot]. The annuity I sold you at Best only
allowed you to invest in a dozen different mutual funds, and the expenses were killing you—over
one percent per year off your return. We offer over a hundred funds, including index funds that
virtually cost nothing to invest in. Plus, Fred’s million dollar term policy at Best could be had
here for a lot less . . .
                                               Kathy leaves

Scene Five (Kathy’s lawyer’s office)


Jack: Let’s see what we have here. Theft of trade secrets, tortious interference with contract.
And Best has also personally sued Mr. Nash.
Kathy: Yeah, what a load of crap.
Jack: What does the non-compete say?
Kathy: I don’t know. But it’s not enforceable, right?
Jack: They’re difficult to enforce, but I’d have to review it to know for sure. How’s Mr. Nash’s
performance?




                                                     6
Kathy: Terrific. It ought to be—we paid him a significant signing bonus.
Jack: Oh?
Kathy: Sure. He’s already converted several Best policies, and he’s only been with me for a
few weeks.
Jack: Where’s he getting his leads?
Kathy: The phone book, I assume.
Jack: Have you seen him use anything else? [Kathy ponders the question]




                                                  7
                    MOCK EMPLOYMENT/NONCOMPETE AGREEMENT

                                             Prepared By:

                                             Marc Jacobs
                                         Seyfarth Shaw LLP
                                  55 East Monroe Street, Suite 4200
                                       Chicago, Illinois 60603
                                       phone: (312) 781-8626
                                     facsimile: (312) 269-8869 -
                                    e-mail:mjacobs@seyfarth.com


         This Employment Agreement ("Agreement") is entered into effective February 14, 2000
(“Effective Date”) between Paul Nash ("Nash") and Best Insurance Agency, Inc., a Delaware
corporation ("Company"). In consideration of the covenants contained in this Agreement, Nash’s
employment by the Company, the compensation to be paid Nash while employed by the Company,
and other good and valuable consideration, the receipt and sufficiency of which is acknowledged,
the parties agree as follows:

       1.      Employment.

                (a)   Subject to the terms and conditions contained in this Agreement, the
Company employs Nash as a sales representative and Nash accepts such employment. Nash shall
report to the Company's Sales Manager or his designee and devote his full time and attention to the
performance of his duties, which shall include the sale of products offered from time to time by the
Company to its customers and all other reasonable duties assigned to him by the Company.

                 (b)   Nash shall faithfully, diligently and competently perform his
responsibilities and duties. Nash shall devote his full business time efforts and attention to the
Company and his duties under this Agreement; provided however that this Section 1(b) shall not
preclude Nash, outside normal business hours, from engaging in appropriate civic or charitable
activities, as long as such activities do not interfere or conflict with her responsibilities to the
Company.

        2.     Term. The Term shall begin on the Effective Date. The relationship between the
parties shall be at-will, meaning either party may terminate the relationship at any time for any
reason.

        3.      Compensation. The Company shall compensate Nash and provide Nash with
benefits in accordance with the Company’s Compensation Plan for Account Executives, a copy of
which is attached as Exhibit A and incorporated by reference. The Company reserves the right to
modify its Compensation Plan at any time but agrees to provide Nash with a copy of any changes.




                                                 8
       4.      Confidential Information.

               (a)     Nash acknowledges that during his employment by the Company, he will be
provided with access to and will become acquainted with confidential information belonging to the
Company, including information related to Company’s customers and business operations. The
term "Confidential Information" means information and data not generally known outside the
Company (unless as a result of a breach of any of the obligations imposed by this Agreement)
concerning the Company’s businesses and technical information, including, without limitation,
information or data relating to: (i) the Company’s customers including without limitation their
needs, purchasing history, contact information, policy expiration dates, policy terms, conditions
and rates, knowledge with respect to the risk characteristics and other information; (ii) the
Company’s trade secrets, financial and marketing data, personnel and compensation information,
and business plans; and (iii) the Company’s research, marketing activities, techniques, and
processes. Nash acknowledges that Confidential Information is solely the property of the Company.

                  (b)    Nash agrees that during the period of his employment, and thereafter, he will
hold in strictest confidence and will not use or disclose to any person or entity without the written
authorization of the Company’s President, any of the Company’s Confidential Information, except
as such use or disclosure may be required in connection with his work for the Company or to the
extent that such information becomes known in the public or trade other than as a result of Nash's
actions or failure to act or the wrongful actions of any third party. Nash understands that this
Agreement applies to computerized and written information and to other information, whether or
not in written form.

               (c)     Nash agrees that he will not take with him any Confidential Information,
whether in written, computerized, machine readable, or other form capable of physical delivery,
upon or after the end for any reason of his employment under this Agreement, whether or not
created by Nash. Nash also agrees that upon the end for any reason of his employment under this
Agreement or at any other time that the Company may request, he shall deliver promptly and return
to the Company all such documents, materials and computer memory, along with any other
Confidential Information and all other property of the Company and property relating to the
Company and its customers and business in his possession or control.

       5.      Restrictive Covenants.

               (a)    Non-Compete. Nash agrees that while employed by the Company under this
Agreement and for a period of one year following the end of his employment under this Agreement
for any reason, he will not, within 25 miles of the Company’s principal place of business, own,
operate, manage, be employed by, consult with or provide services to any business which sells
insurance products.

              (b)    Non-Solicit of Employees and Business Relations. Nash agrees that while
employed by the Company under this Agreement and for a period of two years following the end of
his employment under this Agreement for any reason, he will not on her own behalf or on behalf of




                                                  9
any other person or entity, solicit, induce or attempt to solicit or induce: (i) any then current
employee of the Company to terminate or modify his or her employment relationship with the
Company; or (ii) any then current vendor, service provider or other business relation of the
Company to terminate or modify its business relationship with the Company.

                  (c)     Non-Solicit of Customers. Nash agrees that while employed by the
Company under this Agreement and for a period of two years following the end of his employment
under this Agreement for any reason, he will not on her own behalf or on behalf of any other person
or entity, solicit, induce or attempt to solicit or induce any person or entity who at such time is or in
the one year period prior to the end of Nash’s employment was a customer of the Company and
with whom Nash had contact during his employment with the Company to: (i) terminate or modify
his, her or its relationship with the Company; or (ii) sell to such person or entity products or services
competitive with the products or services sold or offered by the Company.

                 (d)     Nash agrees that the covenants contained in Sections 4 and 5 are reasonable
in scope, area and duration, are necessary to protect the Company’s Confidential Information and
relationships with customers and will not materially affect his ability to find suitable employment
upon the end of his employment with the Company. He further acknowledges that in the event of
an actual, attempted or contemplated breach of Section 1(b), 4 or 5, the Company shall be entitled to
injunctive relief (without the requirement to post a bond) in addition to any legal or other remedies it
may have.

        6.    No Conflicting Contracts. Nash represents and warrants that he is not subject to any
non-compete covenant in any other contract and no contractual or other commitment or covenant
exists which would prevent Nash's full performance of her duties and responsibilities under this
Agreement.

          7.    Successors. The Company may assign this Agreement to any successor or affiliated
entity.

        8.    Complete Agreement. This Agreement is the complete agreement between the
parties and supersedes any and all prior agreements or understandings between them. This
Agreement may only be modified in writing signed by the parties.

        9.      Attorneys Fees. In the event of any litigation brought by either party under or
relating to this Agreement, the prevailing party in such litigation shall be entitled to recover the
reasonable attorneys fees and costs expended by that party in the litigation.

          10.   Severability and Modification.

                 (a)   If any provision of this Agreement is declared void, unenforceable or against
public policy, such provision s  hall be deemed severable and severed from this Agreement and the
balance of this Agreement shall remain in full force and effect.
                 (b)   If a court of competent jurisdiction rules that any restriction of this




                                                   10
Agreement is overbroad or unreasonable, the court shall modify or revise such restriction to include
the maximum reasonable restriction allowed by law.

       12.     Governing Law. This Agreement shall be governed by the laws of the State of
Uncertainty applicable to contracts entered into and to be performed in Uncertainty.


BEST INSURANCE AGENCY, INC.                                  PAUL NASH
By:________________________________
        _________________________________
Title:_______________________________




                                                11
                        CONSIDERATIONS FROM THE
                     FORMER EMPLOYER’S PERSPECTIVE

                                             Prepared By:

                                          Greg Palmer
                                      PALMER & WOOD
                               ATTORNEYS AND COUNSELORS
                                 Bank One Building – Eighth Floor
                                   200 Ottawa Avenue, N.W.
                               Grand Rapids, Michigan 49503-2426
                                   Telephone (616) 459-6700
                                   Telecopier (616) 459-7676


The hypothetical fact pattern (and contract) accompanying today’s presentation raised a number
of issues from the former employer’s (“Best Insurance Agency”) perspective, including the
following. These will be addressed in the order in which they appear in the fact pattern.


I.     BE CAREFUL OF WHAT YOU WISH (“SCENE ONE”)

       A.       First of all, the former employer’s change of a material term of employment – the
       compensation plan (“Scene One”) is something which the former employer’s counsel
       should consider. Although the law obviously does not recognize the compensation
       changes to be a defense to the former employer’s Misappropriation of Trade Secrets
       claim (“Scene Five”) against the departing employee, “Paul,” there is a practical
       implication.

               1.       If the departing employee is able to sustain a counterclaim for breach of
               contract with respect to the change in compensation, his/her damages are usually
               easier to quantify – and conceivably might exceed – the damages on the former
               employer’s trade secrets claim.

               2.      Alternatively, the departing employee could have a claim under the
               relevant state “Payment of Wages” statute that is fairly easy to quantify, as with
               the breach of contract counterclaim.




                                                   12
    B.       Attorneys for these individual employees are increasingly asking for trial by jury
    in these cases. The change in the employee’s compensation – especially when coupled
    with evidence (sometimes “anecdotal” – “me too”) of age-based animus against senior
    sales staff can end up being the jury’s focus, instead of the trade secret issues.


II. THE PROSPECTIVE EMPLOYER’S REFERENCE TO “MAKING MORE
MONEY” (“SCENE ONE”)

    A.      In light of the foregoing concerns, the departing employer’s attorney might want
    to focus more on the prospective employer’s conduct than the departing employee’s
    conduct.

    B.       Because this comment of “Kathy’s” was made before “Paul” made her aware of
    his agreement with his existing employer, this particular aspect of the fact pattern is not
    likely to be admissible. In general, a Tortious Interference with Contract claim requires a
    showing of intentional inducement of a breach of contract: (1) a valid and enforceable
    contract between the plaintiff and a third party; (2) the defendant’s knowledge of this
    contract; (3) the defendant’s intentional and unjustified inducement of the breach of the
    contract; and (4) damages. Dames & Moore v Baxter & Woodman, Inc, 21 F Supp 2d
    817, 825 (ND Ill 1998); PMC, Inc v Saban Entertainment, Inc, 45 Cal App 4th 579, 595;
    52 Cal Rptr 2d 877, 886 (1996).

    C.       In anticipating a motion in limine by the new employer over such comments made
    at the initial contact stage, however, the former employer’s counsel should attempt to find
    out during discovery whether these earlier “sales pitches” were repeated later, after the
    prospective employer knows that there is a non-compete/confidentiality agreement.
    (They often are).

    D.       Despite the likely resultant focus on the new employer in pleadings, motions,
    mediation/arbitration and other alternative dispute resolution, this is not to say that
    former employer’s counsel’s focus should shift from the employee in discovery. The
    employee often provides the clearest account of what the new employer said and did.
    (This is particularly true where the new employer discharges the employee early on, in an
    attempt to free itself from the controversy.)


III. THE PROSPECTIVE EMPLOYER’S COMMENT THAT NON-COMPETE
AGREEMENTS ARE “NOT VERY ENFORCEABLE” (“SCENE TWO”)

    A.      This comment is likely to be admissible. Again, the standards are “awareness,”
    and “intentional” conduct. Comments of this nature are frequently found during
    discovery, through what the lay person claims to have “heard.” Beyond such volunteered
    and otherwise-waived “recollections” of an attorney’s “comments,” the former




                                                13
      employer’s counsel should also ask about articles, seminars, “roundtable” programs by
      chambers of commerce, and human resources group meetings, “President”/executive
      focus groups, and the like.

      B.      Also ask about consultations with insurance agents, outplacement vendors and
      finance personnel, “consultants,” and other non-lawyers.

      C.      “Kathy’s” persistence in “Scene Two” of the fact pattern, beyond her off-handed
      dismissal of “Paul’s” agreement with Best Insurance Agency, should also be helpful
      evidence for Best in establishing a tortious interference claim against the new employer,
      “ABC.”


IV.   THE TWO-YEAR BAR IN BEST’S AGREEMENT (“SCENE THREE”)

      A.      While the vast majority of cases hold that a two-year period is reasonable, counsel
      should be aware of the following cases in which two years was found to be unreasonable.
      See, e.g., Orkin Exterminating Co v Etheridge, 582 So2d 1102, 1104; 6 IER Cases 933
      (Ala 1991)(no employer interest found in customer lists); Bryceland v Northey, 160 Ariz
      213; 772 P2d 36 (Ct App 1989)(two years found unreasonable where schooling and on-
      the-job training for new employees required only 14 weeks); Truly Nolen Exterminating
      v Blackwell, 125 Ariz 481; 610 P2d 43 (1980); Lessner Dental Labs v Kidney, 16 Ariz
      App 159; 492 P2d 39 (1971)(dental technician); Orkin Exterminating Co v Weaver, 257
      Ark 926; 521 SW2d 69 (1975); Metro Traffic Control, Inc v Shadow Traffic Network, 22
      Cal App 4th 853; 27 Cal Rptr 2d 573, 577 (Cal App 2 Dist 1994)(news media traffic
      reporters); Building Inspections, Inc v Paris, 1997 WL 97334 (Conn Super Ct
      1997)(building inspectors); Russo Associates v Cachina, 1995 WL 94589 (Conn Super Ct
      1995)(computer-assisted design (“CAD”) trainer); Bernard Personnel Consultants v
      Mazarella, No. 11660, 1990 WL 124969 (Del Chanc Ct Aug 28, 1990)(personnel
      consulting/employment agency); Shields v Paving Stone Co, 796 S2d 1267 (Fla 4th Dist
      Ct of App 2001)(paving products salesperson); Physician Specialists in Anesthesia v
      MacNeill, 246 Ga App 398; 539 SE2d 216 (2000)(anesthesiologist); Pinnacle
      Performance, Inc v Hissing, 135 Idaho 364; 17 P3d 308, 313 (Ct App 2001)(consulting
      engineer); Springfield Rare Coin Galleries, Inc v Mileham, 250 Ill App 3d 922; 189 Ill
      Dec 511, 620 NE2d 479 (4th Dist 1993)(precious metals dealer); Burk v Heritage Food
      Serv Equip, Inc, 737 NE2d 803, 811-12 (Ind Ct of App 2000)(salesperson); Gateway
      2000, Inc v Kelley, 9 F Supp 2d 790, 797 (ED Mich 1998)(applying Iowa
      law)(manufacturing engineer); Carboline Co v Lebeck, 990 F Supp 762, 767 (ED Mo
      1997)(for lack of evidence as to reasonableness of the time period as applied to departing
      sales manager); one-year provision, Moore v Eggers Consulting Co, Inc, 562 NW2d 532,
      540; 3 WH Cases 2d 1652 (Neb 1997)(employee recruiter); one-year provision, Terry D
      Whitten, DDS, PC v Malcolm, 249 Neb 48, 49; 541 NW2d 45, 47 (1995)(dentist); one-
      year provision, Meadox Meds, Inc v Life Systems, Inc, 3 F Supp 2d 549, 553 (DNJ
      1998)(medical products distributor); six-month provision, Prudential Securities, Inc v




                                                14
Plunkett, 8 F Supp 2d 514, 519 (ED Va 1998)(applying New York law)(securities firm
“financial advisor”); Triangle Leasing Co v McMahon, 385 SE2d 360 (NC Ct App
1989)(vehicle leasing personnel); Morgan Lumber Sales Co v Toth, 41 Ohio Misc 17;
321 NE2d 907 (1974)(salesperson for wholesale supplier); Central Adjustment Bureau v
Ingram, 678 SW2d 28 (Tenn 1984)(nationwide restriction); one-year provision, Posey v
Monier Resources, 768 SW2d 915, 919 (Tex Ct App – San Antonio 1989, writ
denied)(sales; statewide); Central Credit Collection Control Corp v Grayson, 7 Wash App
56; 499 P2d 57 (1972); Moore Business Forms v Foppiano, 382 SE2d 499, 501 (W VA
1989)(per curiam)(salesperson); Torbett v Wheeling Dollar Savings & Trust Co, 314
SE2d 166, 169 (W VA 1983)(bank trust officer); Equity Enters, Inc v Milosch, 247 Wisc
2d 172, 178-79; 633 NW2d 662, 666 (Ct App 2001)(insurance sales representative – 18
month period against “enticing” employees and “doing business with any customer”);
Mutual Service Casualty Ins Co v Brass, 242 Wisc 2d 733, 739; 625 NW2d 648, 652
(2001)(one-year provision; insurance agent).

B.       Some of these cases focus on the lack of training or education required for the job.
See, e.g., Orkin Exterminating Co v Etheridge, 582 So2d 1102, 1104; 6 IER Cases 933
(Ala 1991)(no employer interest found in customer lists); Orkin Exterminating Co v
Weaver, 257 Ark 926; 521 SW2d 69 (1975); Bryceland v Northey, 160 Ariz 213; 772
P2d 36 (Ct App 1989)(two years found unreasonable with schooling and on-the-job
training for new employees required only 14 weeks); Bernard Personnel Consultants v
Mazarella, No. 11660, 1990 WL 124969 (Del Chanc Ct Aug 28, 1990)(personnel
consulting/employment agency employee); Shields v Paving Stone Co, 796 S2d 1267
(Fla 4th Dist Ct of App 2001)(paving products salesperson); Springfield Rare Coin
Galleries, Inc v Mileham, 250 Ill App 3d 922; 189 Ill Dec 511, 620 NE2d 479 (4th Dist
1993)(precious metals dealer); Moore v Eggers Consulting Co, Inc, 562 NW2d 532, 540;
3 WH Cases 2d 1652 (Neb 1997)(employee recruiter); Morgan Lumber Sales Co v Toth,
41 Ohio Misc 17; 321 NE2d 907 (1974)(salesperson for wholesale supplier); Posey v
Monier Resources, 768 SW2d 915, 919 (Tex Ct App – San Antonio 1989, writ
denied)(sales; statewide).

C.      Cases involving insurance sales personnel: Brass, supra; Equity Enters, Inc v
Milosch, 247 Wisc 2d 172, 178-79; 633 NW2d 662, 666 (Ct App 2001)(insurance sales
representative – 18-month period against “enticing” employees and “doing business with
any customer”); Mutual Service Casualty Ins Co v Brass, 242 Wisc 2d 733, 739; 625
NW2d 648, 652 (2001)(one-year provision; insurance agent); Hancock v Fickling &
Walker Ins Agency, 248 Ga 608; 284 SE2d 414 (1981)(two-year covenant upheld for
insurance agency manager). Other cases involving insurance agents struck down the
provision but on different grounds. Hilb, Rogal & Hamilton Co of Arizona, Inc v
McKinney, 946 P2d 464, 467 (Ariz Ct App 1997); Federated Mutual Ins Co v Bennett,
36 Ark App 99; 818 SW2d 596, 597-98 (1991)(question of reasonableness as to temporal
and geographic dimensions not at issue; covenant held unenforceable on grounds that it
sought to protect lines of insurance the former employer did not offer).




                                           15
    D.      Some states regulate this by statute, e.g., LA REV STAT 4th ANN § 28:921.

    E.      Counsel for an out-of-state employer, such as in the law department, will also
    want to look for some of the more unusual statutory provisions:

            1.     Shareholder status creating rebuttable presumptions of time-based
            reasonableness. FLA STAT ANN § 542.335.

            2.    Statutes barring anti-employee rating/solicitation covenants. MO REV
            STAT § 416.031.

            3.     Statutory restrictions to a particular city or county. ND CENT CODE § 9-
            08-06(1).


V.   ARE THERE ANY “INEVITABLE DISCLOSURE” CONCERNS HERE?
(“SCENES FOUR AND FIVE”)

    A.      One aspect of today’s fact pattern is that the employee appears to have already
    disclosed some of the former employer’s confidential information. This should improve
    the former employer’s changes of obtaining injunctive relief for “likely irreparable harm”
    with no adequate remedy of law; but what about future disclosures?

    B.       An excellent starting point for this doctrine is PepsiCo, Inc v Redmond, 54 F3d
    1262, 1269 (CA 7 1995). The Seventh Circuit Court of Appeals upheld injunctive relief
    where the employee did not “steal,” “but just could not but rely” on the former
    employer’s information. 54 F3d at 1270. The Court agreed with the trial court that there
    was sufficient evidence of the employee, a Pepsi North California general manager who
    left to work with Quaker Oats on competing “new age beverage” products, having
    “extensive” and “intimate” knowledge of the former employer’s strategic goals.

            1.     The court distinguished this from the situation where the new employer is
            simply acting on a business plan already in place. 54 F3d at 1271.

            2.       The Seventh Circuit relied on another seminal case, Teradyne, Inc v Clear
            Communications Corp, 707 F Supp 353 (ND Ill 1989)(denying injunction because
            there was no evidence of a “high degree of probability of inevitable and
            immediate use of trade secrets”). Teradyne is also an instructive case insofar as
            the court granted an FRCP 12(b)(6) motion to dismiss because the plaintiff
            corporation did not allege that the employee threatened to use or inevitably would
            do so: “All that is alleged, at bottom, is that defendants could misuse plaintiffs’
            secrets, and plaintiffs fear they will. This is not enough. It may be that little more
            is needed, but falling a little short is still falling short.” 707 F Supp at 361. See,
            also, PepsiCo, supra (“It has been said that federal age discrimination law does




                                               16
                  not guarantee tenure for older employees…. Similarly, trade secret law does not
                  provide a reserve clause for solicitous employers.”), 54 F3d at 1268 (citations
                  omitted).

         C.      Other helpful cases are Cardinal Freight Carriers v JB Hunt Transport Srvs, 336
         Ark 143, 152; 987 SW2d 642, 646 (1999)(a good survey of the existing case law); AMP,
         Inc v Fleischhacker, 823 F2d 1199, 1206-07 (CA 7 1987); Lowry Computer Products, Inc
         v Head, 984 F Supp 1111, 1116 (ED Mich 1997); Lumex, Inc v Highsmith, 919 F Supp
         624 (ED NY 1996).




The purpose of these materials is for discussion during today’s presentation and these materials do not constitute
legal advice. Legal advice can only be rendered by legal counsel, in the context of specific facts, with time for
attorney research in some situations.




                                                         17
               CHECKLIST FOR COUNSELING THE FORMER EMPLOYER

                                              Prepared by:

                                        Thomas H. Christopher
                                        Kilpatrick Stockton LLP
                                               Suite 2800
                                         1100 Peachtree Street
                                     Atlanta, Georgia 30309-4530


        The following is a checklist of considerations for the employer that has lost an employee
to a competitor where wrongdoing is a possibility:

1.      Review agreements between former employee and the Company to determine the
        Company’s rights and the employee’s post-termination obligations and restrictions.

2.      Immediately cut off former employee’s access to confidential information, including the
        computer system.

        (a)     Revoke passwords.

        (b)     Recover keys.

        (c)     Remove former employee from security lists of persons to be given premises
                access.

3.      Preserve departed employee’s telephone records.

4.      Employee’s Computer.

        (a)     Immediately recover any Company computers, Palm Pilots, Blackberries, other
                PDAs and handheld devices, and other property.

        (b)     Preserve all computer files and the former employee’s computer hard drive.

        (c)     Check applicable privacy laws to determine if there are any restrictions on
                reviewing the former employee’s computer files.

        (d)     Make sure that the Company owns or otherwise has the right to review material
                on the computer.

        (e)     Where legally permissible and where there are suspicions of wrongdoing, analyze
                the files, including:




                                                   18
              (i)     the level of deletions;
              (ii)    emails to former employee’s home;
              (iii)   emails to new employer.
              (iv)    copies of files, forms, and other confidential information.

      (f)     Analyze computer files, where permissible, to retrieve communications with
              customers about departure.

      (g)     Analyze computer files, where permissible, regarding plans for departure and
              communications regarding same.

5.    Check for missing files, including paper files.

6.    Recover credit cards, computers (see above), and other Company property.

7.    Determine the new employer’s business and evaluate whether former employee
      represents a threat to engage in improper activities.

8.    Consider interviewing co-workers about suspicious communications that departed
      employee made while still at the Company about his/her plans for departing, including
      attempts to recruit other employees.

9.    Design strategy for communicating with customers regarding departure.

      (a)     Establish message that will help retain customers.

      (b)     Establish message that avoids disparaging or defaming departed employee or
              his/her new employer.

10.   Establish contacts between the Company and customers who dealt with departed
      employee as soon as possible.

11.   Establish plan to obtain information from customers regarding:

      (a)     Pre-departure communications of departed employee about his/her plans to leave.

      (b)     Post-departure communications that may violate a restrictive covenant or indicate
              a violation of departed employee’s other legal obligations.

12.   Design strategy for communicating with remaining employees.

      (a)     Deal with potential morale issues arising from departure.




                                                   19
      (b)     Get feedback on pre-departure attempts at recruitment.

      (c)     Encourage future reports of departed employee’s attempts to solicit the
              Company’s other employees.

13.   Analyze potential corporate opportunities that may have been communicated to departed
      employee and check to see if they have been pirated.

      (a)     Analyze whether requests for proposal or other corporate opportunities were due
              or likely during the period before departure.

      (b)     Check telecopy records for suspicious communications.
14.   Analyze inevitable disclosure issues – will former employee’s new job likely lead to
      disclosure of protected confidential information?

15.   Consider writing former employee to remind him/her of the duty to protect confidential
      information, restrictive covenants, and other obligations.

16.   Consider writing to former employee’s new employer to put it on notice of the
      restrictions and obligations of the former employee.




                                                 20
   CHECKLIST F OR COUNSEL REPRESENTING EMPLOYEES WITH NON-
                     COMPETE AGREEMENTS

                                            Prepared By:

                                        Vanessa M. Kelly.
                                       Schwartz Kelly LLC
                                        Counselors at Law
                                        50 Beaver Avenue
                                   Annandale, New Jersey 08801
                                         (908) 735-2377
                                      (908) 735-2388 (fax)
                                     vkelly@schwartzesq.com
                                      www.schwartzesq.com


At the first meeting with the client, determine the factual information
necessary to provide analysis of the likelihood of the restrictive covenant being
enforced and risk of litigation assessment. In that regard, you may wish to
consider exploring the following subjects :

Obtain copy of any employment agreement(s) signed by the departing employee during the
   course of employment.

       Determine when the agreement(s) was signed? Before the start of the employment
       relationship? Sometime after employment started? Upon resignation?

       What is the law regarding consideration necessary for a non-compete agreement signed
       under the circumstances present in your case?

       Was the departing employee told that he would be required to sign a non-compete
       agreement before the start of his work?

Determine whether there were any previous restrictive covenants signed.

       If so, was any new consideration provided for the signing of the new agreement?

What is the departing employee’s background, education and experience?

       How long has the departing employee been working in the particular industry?




                                                 21
        What other employment skills does the departing employee possess?

        How long was the departing employee working for employer?

        Did the departing employee learn about this industry solely by virtue of his employment
        with employer?

Discuss the nature of departing employee’s position with employer.

        What were the duties and responsibilities?

        What was departing employee’s access to and knowledge of confidential or proprietary
        information?

        What was departing employee’s role in creating and maintaining good will?

Discuss what the departing employee’s duties and responsibilities will be for the new employer.

        Analyze areas of overlap

        Assess areas that are non-competitive

        Assess risk of disclosure of confidential or proprietary information: inevitable??

        Assess opportunity for phased-in responsibilities at new employer to minimize risk of
        disclosure of confidential or proprietary information or use of customer information or
        good will

Review the terms of the agreement and analyze the likelihood of enforcement of each of the
   covenants under controlling law.

Determine whether a court will blue pencil an overly broad agreement and, if so, in what manner
   will it revise an agreement.

        Discuss whether the former employer is likely to be seen as having a legitimate interest to
        protect.

                What is regarded as confidential or proprietary within the industry?         At former
                employer?

                    Are policy terms, rates, and risk characteristics confidential?




                                                     22
                   What measures, if any, did the former employer take to limit access or protect
                   from disclosure its confidential or proprietary information?

                   How did the former employer maintain its customer information?                 Lists?
                   Histories? Contact Information?

                   What did the former employer do to generate leads? Were these derived from
                   publicly available resources? Did the former employer purchase leads from a
                   private resource? Were the leads developed through the efforts of other
                   employees of the former employer? (i.e. telemarketers?)

Discuss the non-compete provision in the agreement.        Determine its reasonableness in terms of
   its scope, geographic area covered and its duration.

       Geographic Restraint is 25 miles from the former employer’s principal place of business.

               How many other insurance agencies lie within a 25 mile radius of the former
               employer’s principal office?

               Where did the departing employee work? Did his office fall within 25 miles of
               the former employer’s principal place of business?

               How far from the former does the typical customer reside?

               Is 25 miles a distance that most customers will not want to travel to continue their
               relationship?

               What is the average distance from the office of most of the customers the
               departing employee serviced at the former employer?

               Where is the new employer located? Does it fall within the prohibited radius?

       Scope of the Covenant

               The agreement restricts certain conduct (i.e. the provision of services relating to
               selling insurance).

                   What types of activities did employee engage in at the former employer (i.e.
                   what types of insurance products)?

                   What is the business of the former employer?         (i.e. what insurance products
                   does the former employer offer)?




                                                 23
                    What will the departing employee be doing at the new employer (i.e. what
                    insurance products will the departing employee be selling at the new
                    employer?)

                Determine whether the scope of this prohibition is overly broad under prevailing
                law. If so, how likely is it that the court will modify the agreement?

        Duration of the Covenant is 1 year.

                Determine whether restraints of one year are reasonable under existing law?

                Determine the burden upon the departing employee if he cannot work for a
                competing company within 25 miles? Are there other viable employers seeking
                his skills? In the same industry? Is this a reasonable commuting distance? What
                is the likely loss of income?

                Determine the likely effect on the departing employee’s family. Is the departing
                employee the only wage earner? How will loss of the departing employee’s
                earning power affect the family unit? What changes will be wrought to their
                lifestyle?

Examine the non-solicitation provision and obtain relevant facts.

        Is a two year non-solicitation agreement enforceable under the law?

        Is two years deemed sufficient time to re-create customer good will?

        Does the law protect customer relationships or must the employer prove confidential
        information first?

        Restriction applies to customers that the departing employee serviced while at the former
        employer’s company. Is this overly broad?

                Restriction makes no distinction between customers that the former employee
                may have brought into the agency. Does the law differentiate between pre-
                existing customers/contacts?

                Discuss whether the former employee had prior experience in the industry and
                brought his/her own customers/clients to the former employer.

                Determine whether the law makes any distinction between customers derived
                through the individual efforts of the departing employee using publicly available
                information and resources versus customers developed through a list provided by
                an employer or through resources provided by an employer (like a lead list).




                                                   24
               Discuss how the departing employee built up his client base at the former
               employer. How much was due to his own efforts using public information? How
               much was derived from resources of his employer?

               What is the standard practice in the industry? Do employees move from company
               to company and take their “book of business” or customers with them?

               Are customers regarded as confidential?

       Is the definition of customer in the agreement reasonable and enforceable? It looks back
       for former customers for a one year period of time. Is this enforceable under the law?

       What comprises “solicitation?”

               Under prevailing law, may the departing employee notify his former clients that
               he has changed jobs?

               What is the practice in the region or industry about this?

               What about clients who contact the departing employee without any prompting or
               contact initiated by the departing employee?

       There is no geographic scope for the non-solicitation provision. Is this is required under
       prevailing law?


Discuss status of law on client’s ability to select financial/insurance professional of his/her
    choice.

       Is the agreement an undue burden on the public?

       Is the agreement harmful to the public interest?

Provide advice about resigning employment to minimize the risk of litigation
or an adverse outcome to litigation. In that regard, you may wish to consider
the following :


Advise the departing employee that he should be cautious when interviewing for with a
   competitor for new position. He should disclose his agreement and its potential restrictions
   on working at the new employer.




                                                   25
        No disclosure of confidential or proprietary information to any prospective employer. No
        promises relating to bringing customers or a book of business.

        The departing employee should obtain information about the nature of the new
        employment with the new employer and determine if it will require him to use any of the
        former employer’s confidential or proprietary information, including customer
        information. Explore inevitable disclosure issues.

                                                                                  ny
        The departing employee must not disparage the former employer or a of its employees.
        (i.e. no discussions about manager’s alleged drinking problem or poor sales results).

Discuss the difference between taking steps to anticipate new employment versus competing
    with the employer or diverting business.

    The departing employee cannot divert business away from the former employer while still on
       the former employer’s payroll. He owes the former employer a duty of loyalty and this
       includes not deferring business opportunities that would benefit the former employer
       while still employed but anticipating resignation.

    The departing employee should not tell customers/clients, vendors or other employees of his
       intention to resign and accept employment with the new employer.

        The departing employee should not make telephone calls or send e-mails to the new
        employer from work or any computer, palm pilot, or phone used for work or supplied by
        the former employer.

Discuss what materials the departing employee may legitimately remove from his office.

        Non-confidential or non-proprietary forms, copies, or information.

        Personal property or personal records and files that he had before you started working for
        the former employer.

        Identify any non-confidential information on the computer, palm pilot, or home
        computer. The departing employee may make copies only of his/her personal documents
        or data and the non-confidential information that identified on these resources.

        The departing employee can retain his original (pre-existing) records of clients that
        he/she had before his employment with the former employer or he/she can create a new
        list of these pre-existing clients with only their names, addresses and phone numbers.

Discuss return of confidential or proprietary information.




                                                    26
        The departing employee should determine whether he/she has any confidential or
        proprietary documents or materials at home that belong to the former employer. If so,
        they should be returned.

        The departing employee should turn over keys, access cards, files, records, or other
        materials belonging to his employer.

Remind the departing employee that telephone records from office, home, and cellular phones
   are most likely discoverable in an action to enforce a restrictive covenant. Similarly, e-mails
   and other forms of electronic information and data may also be discoverable.

Identification of clients serviced by the departing employee.

        The departing employee should identify any clients that he brought to his employment
        relationship with the former employer.

        The departing employee should identify the clients that he/she worked with that were
        obtained by the departing employee’s personal efforts and by using publicly available
        sources. Make a list of these clients and provide it to your attorney.

Before resigning, the departing employee should consider negotiating with the new employer for
   reasonable assurances. (see checklist below).

Additionally/Alternatively, before resigning, the departing employee should consider negotiating
   with the former employer for a waiver or limitation on the restrictions in the restrictive
   covenant. This may be a three-way negotiation between the former employer, the new
   employer and the departing employee.

Before resigning, the departing employee should obtain a valuation of the stock that he was
   awarded by the former employer and negotiate turning over the stock or selling it.

When resigning, the departing employee should of course be truthful about the resignation and if
  asked, provide the name of the new employer.

The departing employee should not be surprised if the former employer goes through any boxes
   he/she has packed containing personal items.

The departing employee should be prepared to be asked to leave immediately or to be escorted
   out of the building.




                                                    27
You should discuss actions to minimize risks of litigation or an adverse
outcome after the departing employee accepts employment with the new
employer. You may wish to consider the following:

After resignation, the former employee can probably (subject to confirmation of the status of
   the law in your jurisdiction), advise clients that he/she worked with that you have changed
   employers – but only in writing after the departing employee has left employment. The
   announcement should be limited to a simple – “I have relocated…” and not make any
   reference to being able to service clients at the new agency.

       Advise the departing employee there may be some risk associated with this approach
       because the former employer may view this as “solicitation.” The former employer may
       also argue that the departing employee used confidential information in making the
       announcements, such as customer list and list of contacts. The departing employee
       should be able to show that he used his own materials that pre-existed his employment to
       make this announcement, or that he obtained address information from a public source.

       The former employer may also argue that the departing employee compiled this
       information or wrote his announcement while still working for the former employer. The
       former employer could argue that this was a breach of his duty of loyalty. The departing
       employee should be prepared to demonstrate that he wrote his/her announcements only
       after resignation and did not prepare the letter during working hours.

Advise the departing employee about working with the former employer’s clients who
   legitimately contact him/her and who have not been solicited by him/her, either directly or
   indirectly, to move their business to the new employer.

       The departing employee should keep detailed records of his/her business transactions
       with the former employer’s customers, being careful to note the source of the contact or
       business.

       The departing employee should be discrete about the new employment, especially about
       working with the former employer’s clients, if the departing employee meets other
       employees of the former employer after his resignation.

Discuss the departing employee’s non-disclosure and non-solicitation obligations.

       The departing employee should not use any confidential or proprietary business
       information belonging to the former employer.

       The departing employee cannot tell others at the new employer about potential clients or
       sources of business based on information learned at the former employer.




                                                  28
       If restricted from soliciting certain clients, the departing employee cannot circumvent the
       restriction by telling colleagues or a manager about the lead or prospect.

       If the departing employee has contact with any of the former employer’s employees,
       he/she should keep a record or log of the contact. The departing employee should refrain
       from asking his former colleagues any information about the former employer’s business
       or clients.

       The departing employee should keep detailed records of generation of new leads and
       business and sources of new business.


Negotiate with the New Employer’s Attorneys to Obtain Reasonable
Assurances to Protect the Departing Employee’s Interests .

Discuss strategy with client first as to what is the desired result and what the departing employee
    is prepared to live with as restrictions. Include discussion of financial implications of these
    decisions.

In the event that the former employer sues the departing employee and/or the new employer, ask
    that the new employer provide the following:

       The new employer will provide and pay for a defense to the litigation. This includes
       payment of counsel fees and costs, even if the departing employee and the new employer
       are required to have separate counsel.

       The new employer will pay any judgment entered against the departing employee or any
       settlement reached in his/her behalf.

       The new employer will continue to pay the departing employee even if a court enters a
       temporary or permanent injunction at the same rate as would be commensurate with what
       he/she would earn through commissions and actively working with your clients. The new
       employer will guarantee these payments during the pendency of the litigation and for any
       period of injunctive relief that may be entered by a court.

       The new employer will not do anything to cause the departing employee to violate the
       terms of his agreement, as modified by settlement or court order, or to violate the terms
       of any settlement agreement or court order.

       These assurances shall be set forth in writing so as to prevent any misunderstandings
       down the road.




                                                29
Discuss the possibility of the new employer negotiating with the former employer up front for a
   waiver or modification of the departing employee’s restrictions.

       Perhaps an agreement can be reached allowing the departing employee to solicit certain
       clients, but not others.

       Perhaps the duration of the restrictions could be modified to lessen their severity.

       Perhaps the new employer can agree to share profits from certain customers serviced by
       the departing employee for a specified period of time with the former employer (if
       permitted under applicable law).

       Perhaps an up front settlement payment and release of potential claims may be negotiated
       with the former employer.




                                                   30
                Summary Of Checklist Items For Counseling Departing
                                   Employees

               LEGAL RESEARCH                                     FACT INVESTIGATION

Is there a statute or regulation that prohibits or    Employee’s education, skills, experience,
limits the use of restrictive covenants in the        tenure in the industry.
jurisdiction?

What consideration is necessary for the               Employee’s work history, duties, customer
execution of a non-compete agreement? Non-            contact, use of confidential information of the
solicitation agreement? Non-disclosure                employer.
agreement?

Does it matter when the covenant is entered           Use and possession of employer’s confidential
into? Before employment or as an after-               or proprietary information or materials. Return
thought?                                              of all materials?

What are protectable interests in the                 All agreements, policies, or handbooks relating
jurisdiction?                                         to restrictive covenants.

What is a reasonable restraint? Duration of the       What is standard practice in the industry?
covenant? Geographic scope? Scope of the                Protection of customers?
conduct or activity prohibited?                         Movement of employees?
                                                        Confidential information?
                                                        Publicly available information?

Are good will and customer relationships              What contacts or customer relationships did
recognized as protectable interests in the            the employee bring with him/her to the
jurisdiction? Must there be confidential              employment relationships? Prior industry
information at stake?                                 contacts?

How does the jurisdiction define customers? Is        Any “unclean hands” on the employer’s part?
there a distinction between pre-existing
contacts/customer relationships? Must the             What does the employer do to safeguard its
employee develop the customer with the                confidential or customer relationships?
resources of the employer? What is the
customer is derived through publicly available
information?

How does the jurisdiction define solicitation?         Circumstances of the employee’s separation
Does it include any contact whatsoever with a         from employment.
former employer’s customers?



                                                     31
former employer’s customers?

What is viewed as an unreasonable burden on         Candor and circumstances attendant to
the employee?                                       resignation. Include discussion of any
                                                    competitive activity pre-dating resignation.

What restraints have implicated the public          What will the employee be doing at the new
interest? What have the courts viewed as an         employer? Overlap of duties and
impairment of the public interest?                  responsibilities?

Will the courts “blue pencil” or modify an          Is it necessary to use the former employer’s
otherwise overly broad covenant? How will           confidential information or customer
the court go about making this modification?        information?

How has the jurisdiction interpreted non-           Burden on employee if the restrictive covenant
disclosure obligations? Is there a durational       is enforced.
limit on non-disclosure restrictions? What
types of information are protected?

Does the jurisdiction apply the inevitable          Litigation aggressiveness on part of former
disclosure doctrine? Will it apply this doctrine    employer?
when there is a written agreement?
                                                    Willingness on new employer’s part to make
                                                    assurances about employee’s new job?




                                                   32
                  CHECKLIST FOR EMPLOYEE: DO’S AND DON’TS

                                        Prepared By:

                                 Vanessa M. Kelly, Esq..
                                   Schwartz Kelly, LLC
                                    Counselors at Law
                                    50 Beaver Avenue
                               Annandale, New Jersey 08801
                                     (908) 735-2377
                                  (908) 735-2388 (fax)
                                 vkelly@schwartzesq.com
                              WWW.SCHWARTZESQ.COM


                                          DO’S


ü Obtain a copy of any employment agreements or restrictive covenant agreements that you
  signed.

ü You should see an attorney and bring copies of all agreements you signed with your
  employer. Some suggestions of what to ask your counsel:

             §   Review issues of consideration for agreements, i.e. When was the restrictive
                 covenant signed? Was there sufficient consideration for your promises under
                 the controlling law?

             §   Review enforceability of agreements under controlling law. Does your State
                 have a statute that prohibits or limits the use of restrictive covenants? What
                 standards have been set for such agreements under your State’s case law?
                 What is considered an undue burden on the employee’s ability to earn a
                 livelihood? What is a legitimate interest that an employer may protect by use
                 of restrictive covenants? What is a reasonable limitation on post-employment
                 activities?

             §   Discuss distinction between contacts/customers that you developed before the
                 employment relationship started versus those developed with the resources of
                 or while employed by your former employer.




                                             33
               §   Discuss industry-standards about confidentiality of customers, restrictive
                   covenants, turn-over of sales force and accounts.

               §   Discuss status of law on client’s ability to select financial/insurance
                   professional of his/her choice. What does your State’s statutory or common
                   law say about agreements impacting the public interest?

               §   Discuss the limitation imposed on your solicitation of customers – Does it
                   apply only to clients that you worked with or does it include all clients of the
                   agency? What about the clients that you brought with you to the employment
                   relationship?

               §   Obtain advice about notifying clients of your change of employment without a
                   direct solicitation for their business.

               §   Talk about whether your attorney can attempt to negotiate with your new
                   employer about protecting you in the event that you are sued: who will pay
                   attorneys’ fees? What if there is an award for money damages? Who will pay
                   any award or settlement? What about your salary/compensation if you are
                   unable to work in the manner anticipated by both of you? Will your salary be
                   reduced? Will you be terminated?

               §   Talk to your counsel about the advisability of attempting to get a waiver from
                   your former employer before you resign or at the time of your resignation?
                   Discuss the possibility of narrowing your post-employment restraints and how
                   that process may be accomplished.

ü You may take steps to anticipate your new employment.

ü You may take non-confidential or non-proprietary forms, copies, or information.

ü You may take your personal property or personal records and files that you had before you
  started working for your former employer.

ü You should identify any non-confidential information on your computer, palm pilot, or home
  computer. Make copies of only your personal documents or data and the non-confidential
  information that you have identified on these resources.

ü You may interview with competitor for new position – but you should disclose your
  agreement and its potential restrictions on your work.

ü You cannot disclose confidential or proprietary information to any prospective employer.




                                                 34
ü Determine whether you have any confidential or proprietary documents or materials at home
  that belong to your former employer. If so, return them to work.

ü Turn over keys, access cards, file records, or other materials belonging to your employer.

ü You should identify clients that you brought to your employment relationship and you may
  keep your original (pre-existing) records of these clients or create a new list of these pre-
  existing clients with only their names, addresses and phone numbers.

ü You should identify the clients that you worked with that were obtained by you through your
  personal efforts and by using publicly available sources. Make a list of these clients and
  provide it to your attorney.

ü Obtain information about the nature of new employment with new employer and determine if
  it will require you to use any of your former employer’s confidential proprietary information,
  including customer information.

ü Before resigning, get assurances from your new employer about defending you in litigation,
  indemnifying against claims, and maintaining your salary. Discuss this with your counsel.

ü You should be truthful about your resignation and if asked, provide the name of your new
  employer.

ü You can advise clients that you worked with that you have changed agencies – but only in
  writing after you have left employment. The announcement should be limited to a simple –
  “I have relocated…” and not make any reference to being able to service clients at the new
  agency. [Obtain advice of counsel first because state law or custom and practice may vary
  about this issue.]

ü You can work with clients of your former employer who legitimately contact you and who
  have not been solicited by you to move their business to your new agency.

ü You should keep detailed records of your business transactions with customers of your
  former employer, being careful to note the source of the contact or business.

ü You should be discrete about your new employment if you meet former colleagues after your
  resignation.

ü Remember: telephone records from office, home, and cellular phones are most likely
  discoverable in an action to enforce a restrictive covenant. Similarly, e-mails and other
  forms of electronic information and data may also be discoverable.




                                                 35
                                       DON’TS
D You cannot take any documents, electronic information, files, or other materials that belong
  to your former employer.

D You cannot make copies in any form of any materials belonging to your former employer
  that are of a confidential or proprietary nature.             This includes customer information,
  especially details about the customer’s business transactions with your former employer.

D You cannot disclose any confidential or proprietary information about your former employer
  or its customers to anyone outside of your former company and where the disclosure is not
  for your former employer’s benefit.

D You cannot divert business away from your employer while still on its payroll. You owe a
  duty of loyalty and this includes not deferring business opportunities that would benefit your
  employer while you are still employed but anticipating resignation.

D Do not tell customers/clients, vendors or other employees of your intention to resign and
  accept new employment.

D Do not make telephone calls or send e-mails to the new employer from work or any
  computer, palm pilot, or phone used for work or supplied by your former employer.

D You cannot circumvent your agreement by telling other employees of your new employer
  about prospective clients or leads, or by providing information that is confidential about these
  clients.

D You should not make disparaging comments about your former employer or any of its
  employees. Comments to employee’s competency, ethics, or the company’s financial status
  should be avoided.

D You cannot take or use customer lists, lead lists, or other customer information derived from
  the resources of your former employer.

D You cannot imply that there is any affiliation between your old and new employers.

             NEGOTIATING EMPLOYMENT WITH YOUR NEW EMPLOYER
¤      Disclose your restrictive covenant and if possible provide a copy of the agreement.
                  Ø
¤      Request that the new employer have its counsel review the agreement and provide
       advice about its enforceability.

¤      Suggest that your new employer’s attorney speak with your attorney about the issues
       and potential impediments to you working.




                                                 36
CONSIDERATIONS FOR THE NEW EMPLOYER:
 Practical Guidelines to Help Employers Minimize
                     Exposure
                              Prepared By:



Stacey Campbell, Esq.                        Robert Whitman, Esq.
Carrie McAtee, Esq.                          Orrick, Herrington & Sutcliffe
Shook, Hardy & Bacon LLP                     666 Fifth Avenue
2555 Grand Boulevard                         New York, NY 10103-0001
Kansas City, MO 64118



Dan Kinsella, Esq.                           Charles Poplstein, Esq.
Rooks Pitts                                  Thompson Coburn LLP
10 South Wacker, Suite 2300                  One US Bank Plaza
Chicago, IL 60606                            St. Louis, MO 63101-1693




                                   37
         HIRING AND MANAGING EMPLOYEES
           WITH RESTRICTIVE COVENANTS

    Ø New employers should proceed carefully when dealing with employees who
       have signed restrictive covenants. Certain hiring and management practices
       may serve as the bases for successful claims including tortious interference
       with contract or business relations and misappropriation of trade secrets.
       However, new employers can often avoid exposure by following a few
       practical guidelines:

•   Recruit With Caution

    Ø Employers should refrain from aggressively recruiting employees thought or
      known to have restrictive covenants. Evidence of insistent recruiting practices
      will help the former employer show intentional and malicious interference
      with the employee’s restrictive covenant.         Furthermore, waiting for an
      employee to approach you about job opportunities will likely refute a showing
      of intentional or malicious wrongdoing. For example, an employer recently
      evaded liability for tortious interference because it offered evidence that the
      employee was unhappy in his previous job and was intending to leave
      anyway. Indiana Health Centers v. Cardinal Health Systems, 774 N.E. 2d
      992, 1000, 1001 (Ind. Ct. App. 2002); see also Innovative Networks Inc. v.
      Young, 978 F. Supp. 167, 180 (S.D.N.Y. 1997) (holding that the plaintiff
      failed to prove tortious interference with contract because it was clear that the
      employee would not have stayed with his former employer even if he had not
      become employed with the defendant).

•   Request These Agreements Up Front

    Ø During the interview or recruiting process, employers should have a practice
      of asking candidates for a copy of any non-competition or non-solicitation
      agreements that the candidate may have signed. After obtaining a copy of the
      agreement, employers should consult with corporate or outside counsel to
      consider the impact such agreement may have on the employer if the
      candidate is hired. This consultation should include a candid and thorough
      review of the candidate’s agreement and potential responsibilities, as it may




                                    38
       later serve as a defense in a lawsuit alleging tortious interference with
       contract. For example, Kallok v. Medtronic, Inc., involved an employer who
       asserted that its interference with an employee’s restrictive covenant was
       justified because it consulted with outside counsel prior to hiring the
       employee in question. 573 N.W. 2d 356, 362-364 (Minn. 1998). The court
       disagreed, however, because it found that the employer had not fully informed
       outside counsel about the “intricacies” of the employee’s agreement. Id. at
       362. The court noted that the e  mployer would have appreciated the likelihood
       of a breach had it adequately provided the employee’s relevant information to
       counsel. Id. at 363. Because the employer failed to utilize these resources,
       the court held that it tortiously interfered with the employee’s restrictive
       covenant. Id. at 363-64.

    Ø Employers should confer with corporate counsel on at least two key issues.
      First, ensure that the candidate can be hired without causing him to violate his
      agreement. Some courts may impose liability against employers for simply
      knowing about the employee’s restrictive covenant and hiring the employee in
      spite of it. For example, in Reading Radio v. WAGO Radio, merely hiring
      two employees who were known to have restrictive covenants constituted
      tortious interference. 833 A.2d 199, 211-12, (Pa. Super. 2003).

    Ø Second, if the candidate can be hired, determine his limitations under the
      agreement and evaluate his credentials in light of these limitations. The
      employee is probably not worth hiring if the limitations will impose a
      substantial burden on management or the employee’s ability to produce.

•      Establish Boundaries

    Ø Before extending any job offer, employers should be sure to identify the
      enforceable restrictions and insist that the employee adhere to them.
      Memorialize the limitations and your expectations in the employment
      agreement, and incorporate strict guidelines. First, affirmatively discourage
      the employee from disclosing confidential information. See Roll-Kraft v.
      Grimes, 200 F.Supp. 2d 916, 924 (N.D. Ill. 2002) (finding that the employer
      violated the Illinois Trade Secret Act because it “encouraged and accepted the
      receipt, disclosure and use” of the employer’s confidential information).
      Employers should minimize the possibility of gaining access to any trade
      secrets or other confidential information. In the employment agreement,
      confirm that the employee has taken no trade secrets, intellectual property,
      confidential or proprietary information from the former employer and that he
      will return or destroy anything he did take. Also, the employee should
      represent that he will not, at any time, use any trade secrets, intellectual
      property or other confidential and proprietary information of the former




                                    39
        employer in the course of his employment. Finally, provide that the employee
        will expunge any copies of customer lists or other confidential information
        from his Palm, computer, cell phone or other electronic devices.

    Ø Employers can further protect themselves by expressly restricting the
      employee’s ability to solicit any former customers in the employment
      agreement. Employers should specify the particular products or services the
      employee will not be involved in due to the restrictions in his non-competition
      or non-solicitation agreement.         Explicitly prohibit the employee from
      affirmatively contracting or soliciting any former customers or anyone who’s
      identity he learned while working for the former employer. Certain industries
      may justify consideration of additional restrictions. For example, insurance
      companies should prohibit the employee from accepting transfers of policies
      from his former customers or even his former employer’s customers.

    Ø Finally, create accountability by expressly providing that the employee will be
        disciplined up to and including termination if he fails to abide by the
        limitations and expectations articulated in his employment agreement.

•   Address Indemnity Issues

    Ø       New employers should sort out indemnity and joint representation issues
        before the employee begins working.            While agreeing to indemnify an
        employee for liability and fees incurred can be a valuable recruiting tool, it
        can also reduce the employee’s incentive to behave properly in his new
        position. Employers who do agree to indemnify should provide that the
        employee will consult with corporate counsel in the event of the slightest
        doubt about whether a course of legal action is appropriate.

    Ø Keep in mind that agreeing to indemnify may also be considered evidence that
      the employer intentionally and maliciously induced a breach. Roll-Kraft v.
      Grimes, 200 F.Supp. 2d 916, 924-25 (N.D. Ill. 2002) (finding the employer
      liable and indicating that agreeing to indemnify the employee constituted bad
      faith).

•   Avoid Sending Announcement Letters

    Ø Mailing personal announcement letters may give the employee an incentive to
        rely on customer lists from his former employer. Even if they seem like
        neutral advertisements, such announcements may be construed as solicitation
        in violation of the employee’s restrictive covenant. Employers should instead
        consider publishing an announcement in a business or trade journal to avoid
        exclusively targeting former customers.




                                    40
•   Monitor Compliance

    Ø Employers should develop a strategy with management about how to deal
      with the employee’s work limitations before he starts the job. It may be a
      good idea to assign the employee to a different line of business during the
      initial period of his employment to avoid a breach of his non-competition or
      non-solicitation agreement. This period should coincide with the actual non-
      competition or non-solicitation period set forth in the agreement or perhaps
      even a shorter period of time that would be the maximum deemed to be
      “reasonable” under state law.

    Ø Additionally, employers should hold the employee accountable for each
       customer lead and regularly check the employee’s sales figures or other work
       product to supervise compliance.              Consider appointing a non-attorney
       ombudsperson (who could testify without waiver of the privilege if necessary)
       to monitor the employee’s compliance with your internal restrictions. Also,
       issue a written notice, with signed acknowledgments, verifying that the
       employee’s colleagues are aware of the restrictions and will not take any
       action to discourage the employee’s compliance.             Finally, discipline the
       employee in accordance with his employment agreement for any improper
       solicitation or use of confidential information.

•   Consider an Offensive Move

    Ø Even before hiring the employee, employers should contemplate filing a
       petition for declaratory judgment. See Roll-Kraft v. Grimes, 200 F.Supp. 2d
       916, 924-25 (N.D. Ill. 2002) (holding that the employer tortiously interfered
       with the employee’s contract and noting that it should have sought a
       declaratory judgment before hiring the employee). Filing first has multiple
       advantages in restrictive covenant cases. First, trade secret and restrictive
       covenant laws vary greatly from state to state, and filing first provides the
       benefit of forum selection. Consider choice of forum and choice of law
       provisions in the restrictive covenant, and evaluate which forum will be more
       likely to declare the covenant unenforceable. Second, filing a declaratory
       judgment can help keep costs down and may prevent you from enduring a
       temporary or preliminary injunctive period.

•   Evaluate Negotiation Opportunities with the Former Employer

    Ø Employers may also want to consider the possibility of negotiating with the
      former employer to avoid the costs of litigation. Consider approaching the




                                     41
former employer up front and suggesting that certain limitations in the
covenant be modified. Perhaps as a last resort, you may want to offer to buy
out the employee’s contract with the former employer.




                           42
     CHECKLIST FOR COUNSEL REPRESENTING AN EMPLOYER
                        HIRING A COMPETITOR’S EMPLOYEE
                                                Prepared By:

                                           Charles M. Poplstein
                                          Thompson Coburn, LLP
                                            One US Bank Plaza
                                                Suite 2600
                                           St. Louis, MO 63101
                                              (314) 552-6095


        The following checklist is provided for attorneys representing an employer in the process
of hiring and employing an individual who is working for a competitor. Some of the following
considerations may not apply in cases where the individual is not currently working for the
competitor:


q   Secure and review any agreements between the employee and his or her current employer.

        §     Determine what particular state’s law will likely apply in interpreting any covenant
              not to compete, or determining what is a trade secret.
        §     Determine the circumstances under which the agreements were signed – i.e., post
              employment, pre-employment, without additional consideration, etc.
        §     Determine whether the contract is reasonably drawn to protect a legitimate
              protectable interest of the former employer.
        §     Determine whether and to what extent the contract as drafted will proscribe the
              individual’s anticipated duties.

q   Determine if there is any type of confidentiality or non competition restriction in any
    handbook, operating manual, or procedure manual.

q   Determine from the client what information is considered confidential in the industry and
    what information is readily ascertainable or generally known.

q   Determine the reasons for the employee’s departure and whether any grounds exist for
    invalidating or limiting the agreement.

        §     Dismissal without cause.
        §     Material adverse change in terms and conditions of employment.




                                                     43
       §   Reduction in commission or territory.
       §   Change in assigned customers.
       §   Creation of house accounts.

q   Ensure initial and subsequent pre employment interviews are conducted carefully.

       §   Make it clear to the applicant that you are not interested in the competitor’s trade
           secrets and will honor valid agreements.
       §   Do not elicit specific information concerning the competitor. Limit discussions to
           general information that is publicly known.
       §   Avoid questions that could be construed as evidence of efforts to secure trade
           secrets.
       §   Discussion of the applicant’s annual sales is appropriate.
       §   Do not review commission reports.
       §   Avoid statements internally and in discussions with the applicant that could later be
           used against the client.

q   If you as counsel become involved after any interviews, then determine what has been said,
    and what information has been exchanged to date.

       §   Any documents provided.
       §   Any specific information about accounts, levels of business with accounts, costs,
           profit margins, financial information or financials provided.

q   Review all written communications between the employee and the new employer.

       §   Caution the new employer not to send any further written communications to the
           employee that are not reviewed by counsel.
       §   Future correspondence with the applicant / employee should be drafted with an eye to
           potential litigation.

q   Caution the new employer concerning the use and content of e mail and other forms of
    written communication with the potential new employee.

       §   No e mails to the employee at the former employer’s site.

q   Ensure all discussions with the potential new employee are conducted after regular business
    hours.

q   Ensure terms of employment offered are not considered as providing an incentive to steal
    business.

       §   Use standard commission plans and arrangements.




                                                   44
        §   Use a minimum or guaranteed draw only on the same terms as granted other new
            sales employees.
        §   Avoid new account bonuses or other incentives for new business that are not part of
            your client’s standard commission arrangements.
        §   Avoid indemnification agreements regarding litigation by the former employer.
        §   Refrain from granting the new employee’s customers special considerations; e.g., –
            automatic credit, any special terms granted by the former employer. Grant these terms
            only if the customer requests them.

q   Have the new employee sign an agreement representing he or she is not a party to any court
    orders or agreements other than specific ones provided.

q   Send the new employee a memo indicating that the employee is not to use legally protected
    trade secrets, should not retain or use any documents of the former employer, and should
    advise the new employer if any assignment calls for the employee to use trade secrets of the
    former employer.

q   Be certain any steps taken are consistent with the new employer’s own agreements, and that
    any information of the former employer is treated the same way as the new employer treats
    its own information of a similar nature. Any information of the former employer of the type
    considered confidential by the new employer should not be turned over to or requested by the
    new employer. If it has been, then it should be returned or delivered to counsel.

q   Instruct the new employee not to take any documents with the employee when they leave.

q   Instruct the new employee to purge all information of the former employer from any personal
    computer after copying to a disk and sending back to the former employer.

q   Instruct the new employee not to “warehouse deals” before resigning, or advise accounts that
    he or she is leaving while still employed.

q   Instruct the new employee not to engage in any work for the new employer before resigning.

q   Ensure the new employee resigns all offices and director or manger positions with the former
    employer. Have this done in writing.

q   The new employee should turn in his or her cellular phone upon resignation and not use it to
    deal with the new employer.

q   Commission statements and reports used to determine commissions owed should be provided
    to employee’s counsel for retention without keeping any copy.

q   Assign the new employee if possible with accounts and territories over and above his or her
    old accounts and territory.




                                                   45
        §   Consider a phase in of solicitation activities as to former accounts.
        §   The new employer should be careful not to have the new employee initially only
            work on his or her book of business. Efforts should be made for the new employee to
            also work on other business if possible.

        §   Consider a phase in of duties and accounts within the territory the new employee had
            with the former employer.

q   Instruct other employees not to discuss information about the former employer with the new
    employee, or assist him or her in soliciting accounts of the former employer.

q   Design strategy for dealing with potential new customers.

q   Draft any communication by the new employee to potential accounts.

        §   Limit communications to an announcement of the new position, as opposed to any
            solicitation of business or sales-type information.
        §   Be careful regarding the use of the term “competitive” prices or other statements that
            suggest knowledge or use of inside information of the former employer.
        §   Be certain that communications do not run afoul of the Lanham Act and its
            restrictions on deceptive advertising.
        §   Focus on the new employer’s products and not disparagement of the former
            employer. Avoid the use of disparaging inside information about the former
            employer.

q   Have the new employee log all unsolicited contacts by former customers.

q   Counsel the new employer and the new employee how to draft internal e mails and e mails to
    customers.

        §   Remind them that the customer is not the only one who may read them – a Judge or a
            jury may also read them.

q   Instruct the new employee not to solicit employees of the former employer and to refrain
    from discussing their activities with his or her former co workers.

        §   Any calls to the new employee by former co workers concerning potential
            employment should be handled by stating the employee is not at liberty to discuss the
            topic with them, or simply referring the employee to the HR director.




                                                   46

				
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