Potential Liability for Employee Raiding or Poaching

Employee raiding or poaching can potentially expose the hiring company to liability under numerous legal theories.  In the modern world, hiring just one employee away from a rival can potentially give rise to liability for tortious interference.  Hiring five or ten employees away from a rival potentially can give rise to numerous causes of action.  The following discussion considers different theories of liability for employee raiding.

1. Employee Raiding and Non-Compete Agreements

When a company hires talent away from a rival, the most clear-cut basis for potential liability is tortious interference.  In the vast majority of states, employee non-compete agreements are enforceable to some extent.  Granted, states fall on a spectrum from California to Florida.  In California, employee non-compete agreements are unenforceable.  In contrast, Florida is the most aggressively pro-non-compete state in the entire country and courts routinely enforce non-compete agreements.  Most of the remaining states fall somewhere in between.  Bottom line:  In most states, employee non-compete agreements are enforceable. Then there is Florida, which is the most aggressively pro non-compete state in the entire country.  As such, when a company hires an employee away from a rival, if that employee has an enforceable non-compete agreement, the company has potential exposure for tortious interference.  The theory is that the company tortuously interfered with either (a) the contract with the employee and/or (b) the rival’s customer relationships.  The second variant is predicted on the notion that the company gained access to the rival’s customers through the employee in violation of a non-compete/non-solicitation agreement.  In light of the foregoing, companies that intend to hire talent away from rivals must implement the following protocol:

• Obtain any agreements signed by prospective hires

The company must obtain every agreement or document signed by prospective hires.  This is not limited to employment agreements but also includes handbooks, stock participation agreements, ERISA plans, etc.  Any or all of these documents might contain restrictive covenants.  Further, certain terms contained within one document may modify or supersede terms contained in a separate document.

•  Review agreements for presence of restrictive covenants

Once the company has obtained all of the relevant documents, the company must evaluate the hiring of each potential employee.  This requires reviewing each document the employees signed and mapping out the restrictive covenants contained in each agreement.

• Determine enforceability of restrictive covenants

Next, the company must determine the enforceability of each of the restrictive covenants at issue under the given choice of law.

• Run a conflicts of law analysis

Even if the results are favorable under the choice of law specified in the contract(s), it is imperative to run a choice of law/conflicts of law analysis.  For instance, during the past year, I have seen numerous non-compete cases in which courts refused to apply a contractual choice of law provision based on conflicts of law principles.  A contract might call for Florida law but the court might determine that Minnesota law applies.  And in the arena of non-compete law, where there is tremendous variation from state to state, choice of law can be dispositive.  If enforceable non-compete agreements are present, the hiring company has significant exposure.  For more on this specific topic, please see this video discussion.

2. Employee Raiding Absent Non-Compete Agreements

Even in the absence of non-compete agreements or other restrictive covenants, the hiring company still faces potential liability for poaching or raiding.

Misappropriation of Trade Secrets

First, regardless of the presence non-compete agreements, the hiring company is always a target for a misappropriation of trade secrets claim.   In Florida, these claims are governed by Florida’s Uniform Trade Secrets Act, Florida Statutes 688.001.  Most states have adopted the same law (the UTSA).  In light of this potential exposure, the hiring company should always:

• Consider the existence of trade secrets
• Run a choice of law/conflicts of law analysis to determine controlling law
• Consider whether or not the that state has embraced the doctrine of inevitable disclosure
• Take proactive steps to ensure there is no actual misappropriation (e.g. require potential hires to declare in writing that they have not/will not bring anything with them from their former company)

Unfair Competition

Even in the absence of non-compete agreements or trade secrets, the hiring company still faces potential exposure for employee raiding or poaching.  In this context, the viability of such a claim will hinge – in large measure – on the numbers.  For instance, if a company hires two employees away from a rival and there are neither non-compete agreements nor trade secrets at issue, there is minimal exposure.  These facts simply do not give rise to a viable claim.  In contrast, if the company hires 15 employees away from a rival  – even without non-compete agreements or trade secrets – this may be actionable as unfair competition.

The real risk of exposure here comes from state statutes governing unfair or deceptive trade practices.  In Florida, the relevant statute is Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”) F.S. §501.201 et seq.  FDUTPA, like many similar statutes in other states, is incredibly broad and vague.  It can be a powerful weapon and difficult to defend against.  Under the case law interpreting FDUTPA, a practice is unfair if it is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.  If a company hires away 15 employees from a rival, there is some risk of exposure.  The extent of that risk depends on the existence of plus factors.

Hypotheticals are always helpful:  ABC is a growing company and uses LinkedIn to do some market research on one of its rivals, Z Corp.  ABC can see all of the Z Corp employees who are listed on LinkedIn.  ABC gets the contact information for all 15 employees and reaches out to each one of them individually.  ABC says that it’s growing and it wants them to be part of the team.  ABC makes each employee a fantastic offer and swears them to confidentiality.  When the time comes, all 15 give their two weeks’ notice, leave Z Corp and head to work at ABC’s new branch in the same city.  Is this unfair competition?   Although there is some exposure here, in my view, this is not unfair competition.  There is nothing unfair, immoral or unethical about out-competing a rival to attract the best talent.

Turning back to plus factors:  In the above hypothetical, there were no plus factors.  Let’s mix it up:  ABC and Z Corp were in talks about a potential merger.  In connection with those talks, ABC had the ability to get inside of Z Corp and talk to a number of Z Corp employees.  Midway through the merger talks, ABC decides that it has no interest in merging, but wants to keep the discussions going so it can continue to gather information about Z Corp.  ABC draws out the negotiations.  Meanwhile, ABC has learned who the key players are within Z Corp.  The negotiations hit a wall, ABC calls off the merger discussions and subsequently hires 15 of Z Corp’s top employees.   Although there was a non-disclosure agreement, ABC insists that it hasn’t used any of Z Corp’s confidential information.  Instead, ABC maintains that it talked to Z Corp employees and figured out who the key players were.  ABC maintains that none of this information was confidential.  Is this unfair competition?  Potentially.  Continuing with the merger discussions in bad faith to gain more access to Z Corp’s people could be consider unfair.  The problem is obvious:  Unfair competition is a grey area.

Employee raiding or poaching can give rise to tremendous liability for the hiring company.  The most clear-cut theory of liability is tortious interference in connection with hiring employees who are subject to restrictive covenants.  Even outside of the non-compete arena, hiring companies face potential exposure under numerous other theories of liability including theft of trade secrets and unfair competition.

Jonathan Pollard is a trial lawyer and business litigation attorney based in Fort Lauderdale, Florida.  He focuses his practice on non-compete and trade secret disputes.  Jonathan routinely advises companies, business owners, and high level corporate executives regarding both potential exposure for employee raiding and potential claims against rivals who have engaged in employee raiding.  Jonathan represents clients in Florida and throughout the country.  He has been interviewed about non-compete issues by reporters from INC Magazine, the BBC, the National Federation of Independent Business and others.