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How to Keep an Employee From Running Off with Your Business Assets

August 26, 2014

Many employees, particularly ones who see themselves as underpaid, eventually conclude they can run the business better than the owner/boss. While the owner is sipping martinis in Longport, the “Loyal Employee” is making the sales calls, trolling for new customers and keeping the company books. At some point, “Loyal Employee” figures, I know the business, I know the customers and what they want, why not start my own business and do the same thing?

It happens every day. The owner’s beach idyll is interrupted by a frantic call that “Loyal Employee” just resigned along with the three other senior employees and is calling upon “Owner’s” customers.  Owner is sputtering “he can’t do that” when he calls his lawyer at 5:00 on a Friday afternoon.   Or can he?

The short answer is, it depends. If Loyal Employee has signed a valid, enforceable restrictive covenant, containing reasonably defined noncompete and nonsolicitation of customer clauses, you have a good chance of getting an injunction.  Just don’t wait too long. Most judges believe that “actions speak louder than words,” and the business owner and counsel who wait several weeks before pursuing an employee breaching a covenant are less credible than the ones who files suit within a day or too.  This is fast-track litigation, and parties who cannot move fast tend not to be successful. The point is to get into court right away to freeze the status quo and prevent “Loyal Employee” from picking off your customers. The rules of civil procedure and evidence get relaxed a bit in such situations, and a judge can be persuaded to overlook hearsay technicalities if they are convinced that immediate action is necessary. In addition, after filing for a TRO, you are always free to supplement the record as more facts are learned by you, such as the names of other customers solicited by Loyal Employee.

But what if you don’t have the foresight to have your employees sign noncompete agreements. Can you still pursue them? Maybe. You can argue that your customer contact information is a trade secret under the Pennsylvania Uniform Trade Secret Act because it was held in strict confidence by your employees and not known outside the company. The Pennsylvania Act authorizes judges to issue injunctions to prevent the dissemination of such trade secrets and other confidential business information, such as technical processes, and sales and marketing information.

You also can argue that by taking the most senior employees with him, Loyal Employee has engaged in unfair competition by not only starting a competing business but by doing so in an anticompetitive manner that seeks to eliminate you as a source of competition. The test for this theory is not just what Loyal Employee did but why he did it.  While you still might be able to get an injunction against Loyal Employee, virtually all judges will want  some preliminary showing of that anticompetitive intent before he or she issues any injunction.

Obviously, the best way to go is by using noncompete agreements with your key employees, particularly if you rely on others to handle the day to day relationships with your customers or a small number of employees have access to proprietary technology. It’s not rocket science, just advance planning and execution. Employees (and judges) tend not to like restrictive covenants but they are an important part of ensuring that one’s business doesn’t get waylaid by an unhappy employee.       

David F. McComb is a shareholder in Zarwin Baum’s Employment Law Group and can be reached at dfmccomb@zarwin.com, 215-569-2800.


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