Limiting Damage When a Key Employee Joins a Competitor

Authors: Jeff Edelson

Your top product engineer just announced she’s quitting. Bad news for you, but not as bad as the rumors she’s taking a similar position at your biggest competitor. What’s worse is the fact that she didn’t sign a noncompete agreement. She knows the product specifications and undisclosed launch date for your company’s next big thing. Uh oh.

Oregon law permits employers to protect their secrets and proprietary information with noncompete agreements.

The recently-amended law, effective for agreements entered this year, as well as the older versions of the law for earlier agreements, allow companies to use noncompete agreements to keep former employees from working for competitors for a period of time following employment.

The agreements must be entered when the employee starts work or achieves a bona fide advancement. Under the amended law, additional requirements exist, such as giving the employee at least two weeks’ advanced notice that a noncompete agreement is required upon starting the job.

The Oregon Trade Secrets Act prohibits the unauthorized use or disclosure of trade secrets, such as designs and customer lists, but courts can only stop the conduct if there is actual or threatened misappropriation. What about your ex-engineer? Is merely going to the same job for a competitor enough of a “threat” to convince an Oregon judge to force the employee from her new job?

The answer remains unsettled.

A handful of jurisdictions have considered the so-called “inevitable disclosure” doctrine, but no reported case applying Oregon law has squarely addressed it.

As the name suggests, that doctrine presupposes that someone like your ex-engineer could not perform her job functions for her new employer without inevitably using or disclosing the secrets she learned from your company.

With your trade secrets in impending peril, the argument goes, the employee should be forbidden from taking the new job.

In the landmark case embracing the inevitable disclosure doctrine, a marketing director from PepsiCo left to direct marketing for Gatorade. He had no noncompete agreement, yet he was the architect of PepsiCo’s secret strategy to take market share from Gatorade.

A federal court applying Illinois law concluded that the employee could “not help but rely on” PepsiCo’s trade secrets in his head as he developed plans for Gatorade. The court determined that barring the employee from taking the job with Gatorade was justified to protect PepsiCo from inevitable disclosure of trade secrets.

Given Oregon’s strong public and legislative policies requiring strict compliance with noncompete agreement requirements, it’s unlikely the Oregon appellate courts will ever embrace the inevitable disclosure doctrine applied in the PepsiCo case.

After all, if an employer has legitimate concerns about employees taking their secret-filled brains to work for a competitor, the employer should follow the state requirements for securing noncompete agreements. It is unfair to skip that step, and then surprise the departing employee after he has quit for a new job.

The situation is different if a departing employee leaves with physical or electronic records containing information that she could use to compete against a former employer.

At that point, a court no longer has to concern itself with the inevitable disclosure doctrine. The employee’s conduct would constitute misappropriation and would likely demonstrate a clear threat to use or disclose trade secrets.

The Oregon Trade Secrets Act gives courts broad power to stop threatened misappropriation, and most judges would not hesitate to give the thief a “time-out” from his new job, even in the absence of a valid noncompete agreement.

Similarly, employees who start soliciting business for their new employers before leaving their old jobs, and those who bring to new employers valuable business opportunities they withheld from their old employer, risk being prohibited from taking their new jobs.

The established doctrine of unfair competition requires employees to remain loyal to their employers through the term of their employment.

For employers who need to protect trade secrets, you cannot rely on the inevitable disclosure doctrine. You must take steps to require noncompete agreements from employees who will be exposed to sensitive information.

You also need to limit access to such information on a need-to-know basis. Employers should establish clear protocols for handling physical and electronic records of departing employees, including gathering and searching their laptops, cellular phones, home computers, media devices and the files and papers the employee has accumulated.

For employees, even the appearance of impropriety could spell doom. When you decide to leave, don’t download e-mails and documents. Don’t delete electronic files. Don’t copy records. Ask in writing for a session with the company’s information technology staff to separate personal information that you want to take with you.

Offer to deliver your phone and computers for review and deletion by the company. Bring in that box of company documents you might have forgotten about in your garage. If you are going to work for a competitor, your former employer cannot empty your mind, but it is entitled to empty everything else. Not only does this give you some protection against a presumption of malice, but it also gives you a clear conscience.

This article appeared in the Portland Business Journal on January 9, 2009.

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