Thursday, September 11, 2008, 9:41 AM

Computer Forensics Playing Bigger Role in Noncompete and Employee Defection Litigation

By Todd
The Philadelphia Business Journal has just published a great piece on the impact that computer forensics is playing in employee defection and noncompete cases. We thought you'd like to read it:

Cozen O’Connor attorney David Walton recently won a $7 million award for a client based on evidence that wasn’t there.

In hiring certain employees, Walton’s client had put in place a noncompete clause. The new hires promised not to compete directly, or for that matter unfairly, should they depart the company.

The employees in this case broke the deal, squirreling away confidential data on their computers before leaving. Walton hired experts to pick apart hard drives, where they found big blank spots — places where vital company information had first been hidden and later wiped away.

It’s called computer forensics and it’s the next big thing in noncompete clauses. Employers who ask new workers to sign noncompete documents now can dig deep into e-mail and other records to discover whether trade secrets have been swiped on the way out the door.

“I have seen an explosion in the availability of forensic experts, especially people who are retired from the federal government, the FBI, Secret Service and so on,” said Walton, a member in Cozen’s labor and employment practice in West Conshohocken.

At Littler Mendelson in Philadelphia, noncompete law expert Marguerite Walsh said she has seen at least 10 cases in which forensics played a major role in resolving noncompete disputes.

“We had a situation with a client in the insurance industry, where one of its key salespeople had left and gone to a competitor,” she said. “Once we got into not just the number of files but what the files stored, it was clear he had been transferring all the sales contacts, all the sales records that he could use at his new company.”

Forensics are without doubt the big news in noncompete clauses after the fact. They offer a way to enforce a claim that a former worker has walked off with client names and other significant sales data.

For many employers, though, the noncompete is more likely to come up at the time of hiring.

Their objective in bringing on board a new employee will be to write a noncompete that sticks, especially after repeated court challenges around the nation calling into question the enforceability of these documents.

Noncompetes are enforceable. As a matter of hiring practice, though, recent trends suggest they must be crafted with care.

Foremost is the trend toward judicial discretion, a nice way of saying that nothing is set in stone here.

“The law is so fuzzy and nebulous that judges will basically rule out of a sense of fairness,” said attorney Michael Wietrzychowski, vice chair of the labor and employment practice at Schnader Harrison Segal & Lewis’ offices in Cherry Hill and Philadelphia. “Courts want to see something that is fair to the departing employee so they can continue to put food on the table, and fair to the employer so they can protect their interests.”

In practice this means that noncompete clauses are getting narrower and more specific, or at least the good ones are. At the time of hiring, employers are (or should be) taking a hard look at what exactly they are trying to protect, and then drawing up agreements that specify just that narrow area.

Take for instance geography. Is it “fair” to prohibit an employee from working for a competitor anywhere in the nation, if your business is purely regional?

Is it “fair” to tie an employee’s hands when it comes to data anyone else can access? “You can’t call everything in the workplace ‘confidential,’” Walton said. “If you call everything confidential, and then you put a list of customers on your Web site, then nothing is really confidential.”

Courts want limits that show a genuine business interest on the part of the employer, an interest that goes beyond merely keeping this employee out of the game, should the two part ways.

“You have to be reasonable. You can’t make an employee sign a noncompete just to quell competition. You have to have a legitimate business interest,” Walton said. “That means either the protection of customer good will — ‘I don’t want you to take my customer relationships to the competition’ — or the protection of confidential information.

“Unreasonable on the other hand would be something that is too long: A noncompete that runs for two years, when you only really need the protection for six months.”

For the human resources professional making the actual hiring offer, “you need to talk to your business people about why they want this” before drafting the noncompete, said Christopher Stief, a regional managing partner at Fisher & Phillips in Radnor.

“Ask them to identify the specific harms, as specifically as they can, that a person in this position could do if he or she leaves. That is your starting point and then you work backwards to say, ‘What is the least restrictive clause we can identify to restrict that possible harm?’”

When it comes to fairness, the courts also had been looking favorably on deals that are tangibly equitable: That is to say, noncompetes in which the employee is directly compensated for his or her end of the bargain.

“It’s not only the stick but also the carrot, the concept of golden handcuffs,” said employment attorney Jonathan Wetchler at Wolf Block in Philadelphia. “I might say to you: ‘I am giving you stock options and the options will vest over five years, if and only if you remain employed with me, or, the options will vest if and only if you don’t compete with me if you leave.’”

Courts have a certain respect for such quid pro quo.

The ultimate golden handcuff is known as garden leave. Long practiced in Europe, this type of noncompete contract has begun to appear sporadically in the United States. Typically it refers to a high-up worker being paid to sit at home, not working, for the duration of the noncompete period.

Many employers balk. Six months’ pay for doing nothing? But consider the alternative. Just the first 30 days of a noncompete legal dispute will typically run $20,000 to $60,000 in legal fees.
Finally, there is the perspective of the new employer, who will have a whole other set of hiring headaches to think about when bringing on board a worker saddled with a noncompete.

“Companies that hire employees from a competitor take a significant risk when they turn a blind eye,” Walsh said. New hires must be told up front that their misappropriated data will not be welcome, that their undue competition with any former employer is out of bounds. Otherwise the new firm could find itself on the receiving end of litigation.

“The minute confidential information that doesn’t belong to your company hits your system, you have a risk,” Walsh said.

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