Non Competes & Trade Secrecy

Recruiters are paid to find people from competitors, for clients who hope the new hires can bring some knowledge along with them to make them a quickly productive addition to their staff.

When the same thing happens to the recruiting firm itself, the howls and screams are deafening.

Is this hypocrisy? Of course it is! Is it ever justified? Almost always!

When a recruiter leaves one firm to join another or to go solo, it is far more disruptive and financially damaging than if one of several dozen mid-level people is recruited from one large employer to join another.

When a person leaves a recruiting firm, they take a skull full of knowledge with them. This intellectual property, as well as files on clients and candidates, can give them a quick leg up in their new endeavors. This potential damage is exactly what the non-compete agreement is meant to prevent.

An informal telephone survey of readers indicates that about 60% of independent contingency firms have non-compete contracts. Far fewer in the retained area have them for some reason.

Now that the recruiting business is on a dramatic upswing and many firms are reporting more business than they can handle, expansion is the word of the day. Now, many of our readers’ firms are swelling their ranks by recruiting the recruiters of other recruiting firms and the question on everyone’s mind is “How do we protect ourselves from being raided?” – “How valid is the non-compete agreement signed by the consultant who’s going to work for my competitor?” or “Am I hiring a lawsuit?”

With the exception of the franchises, who zealously guard their turf by regularly enforcing non-competes against defectors, courts during the late 90’s and into the most recent recession were increasingly less willing to penalize turncoats for a number of reasons, not the least of which was the fickleness of the economy and their reluctance to keep someone from taking a job in what was then a job-starved economy.

One problem arises, however, from the fact that judges and juries don’t understand our business. On the face of it, to the lay person, the information a recruiter purloins from you is merely an extraction from directories which are generally available to anyone, or information that might be duplicated by making phone calls, placing ads or surfing the Internet. Company information is available to anyone who can read a phone book, an industrial directory or tap into a computerized database. And, if you think it’s easy to place a value on a resume, dig out and re-read the 8/93 cover story “What’s the Value of a Resume?”

Fact is, the value of the information taken is usually the result of thousands of hours of research and calling to determine (1) what they do, (2) how they do it, (3) who are the key contacts, (4) do they deal with third party recruiters, (5) do they pay fees, (6) how much, (7) how often, etc., etc. It is the distillation of the employer and candidate preferences which makes it valuable.

It used to be that consultants would surreptitiously tote off copies (or originals) of job orders, candidates, etc. Nowadays, a consultant with a minimum of know-how can misappropriate a firm’s entire business-dealing records on easily concealable computer flash drive.

We’ve looked at dozens of these non-competes, mostly home-made monstrosities full of deficiencies likely to be laughed at by judges.

A frequent shortcoming of most of these agreements is the geographical restriction spelling out prohibitions within “X” number of miles from the former employer. In a telephone-intensive business such as ours, where much of the business is long-distance, what possible difference (other than the inconvenience to the departing recruiter) could it make to have them open up or join a firm which is next door? Propinquity only makes it easier to serve legal papers but usually has no real effect on a recruiter’s ability to compete against you.

But is it fair to hire someone, pay them fairly, spend time and money to train them and get them productive in a new or existing specialty only to have them take their knowledge and skills elsewhere? Of course not, but the outcome of attempts to protect this information vary widely depending upon your jurisdiction.

Some states vigorously enforce them; others ignore them altogether. Those which are poorly drafted, ambiguous, overly-restrictive as to prohibitions or overly broad as to geographic considerations, time frames, etc. will fail in most states. Another criterion frequently seen, is that the agreement may not be harmful to the public, something that’s hard to imagine in our business. The key is reasonableness.

Also, they should be presented at the time of employment and made a part of the employment agreement. Those foisted upon employees after they have been employed awhile can be iffy unless it’s a condition for a promotion, raise or other consideration. You can’t use negative consideration such as “Sign or be fired.”

Most of the contracts we’ve seen contain a non-compete clause. Better ones for our business are non-solicitation clauses and non-disclosure clauses which are far easier to enforce and much more sensible for our business.

Search and placement business tends to follow the consultant rather than the firm. Owners and managers can preempt this from happening by techniques previously discussed in TFL (regular management interaction and communication with all client companies), but a well-written non-solicitation clause can prevent the encroachment for awhile.

Other possible clauses prevent the disclosure or use of proprietary, confidential or trade secrets (often hard to define and prove), the return of all company materials, a repayment of training costs, a pledge not to steal former co-workers and an agreement to pay your attorney’s fees in any relevant enforcement litigation

The ideal would be the ability to periodically present a “protected client list” for signature by your consultants which would effectively put these firms off limits under the terms of the non-compete agreement. The problems arise in the logistics since the list can change almost daily, but a weekly sign-off to a revised list could be a powerful persuader that you take your trade secrets rights seriously . . . a regular reinforcement that many courts seem to require.

The key phrase for courts seems to be “legitimate business interest” and that is frequently unclear.

Attorney and columnist Jeff Allen covered the four major ways to protect yourself through consultant agreements in a past issue. His four points were (1) Either have the agreement signed immediately upon employment or pay the consultant to sign it, (2) Be certain every consultant has signed the identical agreement, (3) Make the agreement as concise, simple and reasonable as possible, and (4) Identify and protect the client and candidate lists. He wrote:

Your data base should be prominently marked ‘CONFIDENTIAL,’ and written policies should specify their safeguarding and use. They should be enforced consistently and publicly.

You should also periodically write memos and announcements to remind your staff that you intend to enforce the rights you created in the names, addresses, phone numbers and preferences of clients and candidates.

In Rockwell Graphic Systems, Inc. v. Dev Industries, Inc. (925 F2d 174) the U.S. Court of Appeals wrote:

[T]he more the owner of a trade secret spends on preventing the secret from leaking out, the more he demonstrates that the secret has real value deserving of legal protection, that he really was hurt as a result of the misappropriation of it, and that there really was misappropriation.

This is good advice. A cavalier attitude towards your stock-in-trade will probably be treated scornfully by the courts.

You may decide not to require non-competes. So be it. That’s a business decision you need to carefully examine. The person you thought was honest and loyal when you hired them may become your worst nightmare.

A word to those of you who are still laboring under the misapprehension that you can compensate your people as independent contractors and still bind them to trade secrecy. You can’t . . . period!

Since a quick injunction is the best way to de-fang your miscreants, we have asked Jeff Allen to address the topic of injunctions in his Placements & The Law column

This is not an area for do-it-yourselfers or boilerplate duplicates. You need a lawyer conversant with the process. It’s a small price to pay for business protection.

TRADE SECRETS ARTILLERY: FIRING THE INJUNCTION STUN GUN

“Injunction.” The word strikes fear in the heart of every consultant.

Don’t worry — I won’t discuss your trade secrets rights publicly. No need to blow your cover. But if I talk about how injunctions work, it might stun a few contemplating consultants out there for you. It should, too. Injunctions are stun guns that can paralyze former employees. Sometimes permanently.

The ammunition is the law, but the procedure for firing the gun is important for a direct hit. That’s what we’ll review.

Here’s all you need to know (and all I’ll tell them). Ready — aim – fire!

An injunction is a court order that either prohibits someone from doing something, or mandates that they do it. Conveniently, these are called prohibitory and mandatory injunctions respectively. Prohibitory injunctions enjoin (stop) an ex-consultant (along with his new employer, coworkers, etc.) from using your employer and candidate contact information. Mandatory injunctions get the employer and candidate files returned.

Nowhere in the civil procedure system do judges have as much power or discretion as they do in this area of injunctive relief. I’ll be citing the Federal Rules of Civil Procedure for your lawyer, but the state court is probably where you’ll be filing. So check with your lawyer for the neighborhood news before proceeding.

There are actually three rounds in the stun gun — three types of injunctions:

1. TEMPORARY RESTRAINING ORDER

TRO’s are issued ex parte (at the request of one party) without any notice or opportunity to be heard by the defendant (the consultant, their employer, coworkers, etc.). Since the due process safeguards required by the Fifth and Fourteenth Amendments to the U.S. Constitution are not present, the court must find a compelling reason to issue the injunction immediately “without notice” (or within only a few hours by telephone, telegram, express mail, etc.).

The burden of proof is high on the plaintiff, who must convince the judge that irreparable harm will occur if the status quo (prior to the wrongful taking or use) isn’t preserved (Tanner Motor Livery, Ltd. v. Avis, Inc., 316 F2d 804). The overriding consideration is that there is no time for a duly-noticed preliminary injunction.

The Federal Rules of Civil Procedure state (FRCP 65):

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A temporary restraining order may be granted without written or oral notice to the adverse party or his attorney only if (1) it clearly appears from specific facts shown by affidavit or by the complaint that immediate and irreparable injury, loss or damage will result to the applicant before the adverse party or his attorney can be heard in opposition; and (2) the applicant’s attorney certifies to the court in writing, the efforts, if any, which have been made to give the notice and the reasons supporting his claim that notice should not be required.

Unlike most people think, these proceedings are almost always done in camera (in the judge’s chambers) rather than in open court. They’re done solely on declarations (under penalty of perjury) or affidavits (notarized declarations) from employers, candidates, your employees, etc., points and authorities (arguments and citations of statutes or cases), compliance with certain other procedural items, and submission of a proposed order (that can be granted, modified or denied).

A judicial bond must usually be posted so the consultant can recover against it if the order was issued erroneously, causing damage to them. Under the Federal Rule [FRCP 65(c)]:

No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant in such sum as the court deems proper, for the payment of costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.

Unless prohibited by statute, the judge can set the potential damage to the consultant at “0” and dispense with the bond entirely.

A TRO is not necessary to obtain a preliminary injunction. In some situations (no, I won’t discuss them here), you may not even want to try for a TRO. But if you do and obtain one, the chances are much greater that you’ll get the preliminary injunction.

Under the Federal Rule (FRCP 65), a TRO cannot last longer than 10 days. Most states extend this up to 30 days, but it “self-destructs” after that time unless the parties stipulate (agree) to it remaining in full force and effect.

That’s so notice can be duly served on the defendant, along with an Order to Show Cause or Motion Re: Preliminary Injunction.

In the meantime, violation of the TRO is punishable by contempt of court. It makes judges very angry too. They fire fines liberally and even stun overzealous consultants with jail time.

2. PRELIMINARY INJUNCTION

A preliminary injunction is often called a “noticed TRO.” That’s because it is issued only after a hearing (again usually in the judge’s chambers). The moving papers (declarations, affidavits, points and authorities, notices, etc.) are virtually identical. It takes time to serve the consultant and obtain a court date. (That gap is filled by a TRO or left unfilled until the hearing.) It also allows the defendant to file responsive pleadings (usually called an Opposition).

As with a TRO, the PI is designed to preserve the status quo pending a trial “on the merits,” Since there has been notice and opportunity, judges (highly conservative by nature) are more inclined to grant the relief.

Contempt is more likely to be imposed too, since the judge has already seen the consultant’s face (or mouthpiece) and ordered him to do or stop doing certain things.

Technically, a preliminary injunction should remain in full force and effect until the trial, when it “ripens” into a permanent injunction. A bond may be required as with a TRO.

3. PERMANENT INJUNCTION

Although technically a permanent injunction can be granted at the trial with a preliminary injunction in place, it won’t be. There are five reasons for this:

a. If you didn’t move for a preliminary injunction, the judge will be easily persuaded that you waived (relinquished) your right to it by not “so moving.”

b. If you did move for a preliminary injunction and lost, the judge will not be likely to alter the earlier ruling of their fellow judge. (It’s bad “judicial relations” — political heresy.)

c. In either case you have your remedies of compensatory (actual) punitive (punishment), and exemplary (to set an example) damages. They hit six figures regularly.

d. It’s extremely difficult to prove irreparable harm (your burden of proof for an injunction) when you’re still alive and often years after the alleged injury.

e. Since the permanent injunction is relief requested at the trial, the actual appearance of witnesses is necessary. Employers change personnel; candidates change jobs, relocate, become incapacitated, die, etc. If those left like you, they probably continued the relationship with you. Great for you, ungreat for your case.

But if you’ve obtained a preliminary injunction and can show it worked to keep the consultant from crossing the legal line, it’s natural for the judge to make it permanent. Then the preliminary injunction is dissolved.

In no other area of placement law is the selection of an attorney as important as it is when you’re seeking an injunction. Courts have jealously guarded their judicial discretion in deciding whether to grant this equitable relief. This means the outcome depends greatly on preparation and presentation of the case. The courtroom is no place for your brother-in-law.

In Mongogna v. O’Dwyer (204 La. l020, 16 So.2d 829) the Louisiana Supreme Court said the two sentences (!) that every judge thinks when it comes to limiting his injunction authority:

We know of no case, and have been referred to none, upholding a statutory provision granting the absolute right to private parties to close a business by means of a restraining order issued through the instrumentality of the trial judge whose mandatory duty under the statute is to sign the order whether or not in his opinion it meets the exigencies of the case.

The affirmance of such a proposition implies that the judge is nothing more than a rubber stamp whose only duty is to place his stamp of approval upon the demand of private parties.

Now everyone in your placement plant can see how effective firing the injunction stun gun can be. And it is when loaded with the law. Contemplating consultants beware.

Jeff Allen, J.D., C.P.C. may be reached at: Law Offices of Jeffrey G. Allen, 9601 Wilshire Blvd., Suite 1400, Beverly Hills, CA 90210, (310) 559-6000.

More than thirty-five years ago, Jeffrey G. Allen, J.D., C.P.C. turned a decade of recruiting and human resources management into the legal specialty of placement law. Since 1975, Jeff has collected more placement fees, litigated more trade secrets cases, and assisted more placement practitioners than anyone else. From individuals to multinational corporations in every phase of staffing, his name is synonymous with competent legal representation. Jeff holds four certifications in placement and is the author of 24 popular books in the career field, including bestsellers How to Turn an Interview into a Job, The Complete Q&A Job Interview Book and the revolutionary Instant Interviews. As the world?s leading placement lawyer, Jeff?s experience includes: Thirty-five years of law practice specializing in representation of staffing businesses and practitioners; Author of ?The Allen Law?--the only placement information trade secrets law in the United States; Expert witness on employment and placement matters; Recruiter and staffing service office manager; Human resources manager for major employers; Certified Personnel Consultant, Certified Placement Counselor, Certified Employment Specialist and Certified Search Specialist designations; Cofounder of the national Certified Search Specialist program; Special Advisor to the American Employment Association; General Counsel to the California Association of Personnel Consultants (honorary lifetime membership conferred); Founder and Director of the National Placement Law Center; Recipient of the Staffing Industry Lifetime Achievement Award; Advisor to national, regional and state trade associations on legal, ethics and legislative matters; Author of The Placement Strategy Handbook, Placement Management, The National Placement Law Center Fee Collection Guide and The Best of Jeff Allen, published by Search Research Institute exclusively for the staffing industry; and Producer of the EMPLAW Audio Series on employment law matters. Email him at jeff@placementlaw.com.

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