When Employees Leave for a Competitor

From the immediate aftermath to trial


When Employees Leave for a Competitor

The departure of employees to a competitor can raise legal and strategic issues requiring immediate attention by both the former employer and the employees. The employees’ actions, both before and after the move, may give rise to allegations of breach of fiduciary duty, the duties of fidelity or confidence, breach of restrictive covenants, or failure to provide reasonable notice of resignation.

Moving swiftly and with a clear appreciation of the law governing employee competition issues is critical for the employer. For employees, proper counsel early on can be decisive in avoiding significant liability and legal costs.

Immediate Steps Once the Employees Leave

If the former employer suspects that its confidential documents, such as client databases, may have been taken by the employees, it should immediately secure the former employees’ electronic footprint by way of preserving all emails and electronic devices used by the employees that remain in its possession.

A review of employment agreements for any restrictive covenants should be undertaken right away, including an assessment as to enforceability. If the new employer is known, a letter making it aware, for example, that the individuals are subject to a non-solicitation clause may provide a measure of protection. The new employer may not have been advised of the clause by the employees and may be concerned to avoid a claim for inducing breach of contract.

Consider the Wisdom (or Folly) of an Injunction Application

An initial decision needs to be made very quickly as to whether to seek interlocutory injunctive relief against the departed employees. Here, there will be a critical distinction between injunctions which seek to restrain competitive activity as opposed to those which seek the immediate return of confidential information.

In applying the test for an interlocutory injunction to restrain competitive activity, the courts have imposed a more stringent requirement of a “strong prima facie” case, as opposed to the lesser standard of a “serious issue to be tried,” given that an injunction may have a devastating impact on an individual’s ability to earn a livelihood. Counsel should therefore consider carefully whether obtaining an injunction to restrain competition is realistic, given the significant time and cost entailed in bringing on such an application.

By contrast, the lesser “serious issue to be tried” standard will apply to injunctions seeking the return of confidential information. Where the possession and use of such confidential information by the departed employees is particularly sensitive, an immediate application for an injunction may be warranted.

From the perspective of the defendant’s former employees, it will usually be prudent to immediately collect and return any confidential information in order to ward off an injunction application or to satisfy the court that relief is not necessary.

Claims for Monetary Relief

While the outrage of the aggrieved former employer may lead it to seek substantial damages or, alternatively, a disgorgement of the defendants’ profits, counsel is wise to caution the client of the dynamic it will face at trial. The courts are mindful that, in the absence of an enforceable non-compete agreement, employees are entitled to compete with their former employer. Further, their ability to attract former clientele may be attributable more to their skill, experience and reputation than to any breach of duty or contract that may be established at trial. In the end, while an employer may establish unlawful activity by the departed employees, the remedy awarded may be outstripped by the cost incurred to pursue the action to judgment.

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