June 21, 2019

California strongly favors employee mobility. Laws enabling employees to work for direct competitors help drive California’s economy. The ability of talented employees to better their careers and lives by seeking new opportunities fuels every segment of California’s economy. However, departing employees must leave their former employer in a way that is fair and lawful.

Here’s a road map for departing employees and the companies hiring them, particularly in competitive fields. Managing these issues should help reduce the risk of litigation and unnecessary friction between competitors.

Understand who owns what. Employees often spend countless hours working on projects for their employer. There is a common misconception that an employee “owns” what he or she has developed. For example, sales professionals often mistakenly believe they own the customer relationships. However, under California law, the employer owns the relationships with the customers. Furthermore, the employer owns “everything which an employee acquires by virtue of his employment.” As a result, the information developed by employees belongs to the employer. As an added safeguard, many employers in tech fields have employees sign intellectual property assignment agreements conveying ownership to the business.

Beware of diverted opportunities. In the time just prior to their last day, departing employees may redirect opportunities to their new employer that should go to their current employer. For example, if there is a new customer or new project coming in the door, departing employees occasionally avoid disclosing that opportunity to their current employer, hoping the customer or project will be brought to their new employer. Transitioning over customers and clients in California is a complex matter, but departing employees should not divert opportunities while gainfully employed. When onboarding employees, supervisors should pay close attention to whether a new hire has landed a new client or project. An abnormal influx of new clients or projects can be a red flag that the new hire diverted opportunities from his or her prior employer.

Make expectations clear to new employees. Employers routinely tell new hires to arrive “empty-handed,” expecting these individuals to take absolutely nothing that belongs to their former employer. Employers should set the expectation that new hires are not to use USB devices, cloud-based storage or hard-copy records to remove any information from their previous employer. Before exiting, departing employees should ask for approval to copy personal photos, contacts and documents.

Understand California’s law around memory. In 1985, California adopted the Uniform Trade Secrets Act (UTSA), which protects confidential information that gives a company a competitive advantage. For example, formulas, design schematics, business plans, customer list information and pricing information can be protected as trade secrets under the UTSA. Since its enactment, the UTSA has afforded protection to trade secrets whether they are embodied in hard-copy records, electronic files or an employee’s memory. Before the UTSA’s enactment, California’s courts said employees could not be expected to “wipe clean” their memories of trade secret information. However, since the UTSA’s enactment, that has not been the law in California. Thus, for trade secrets, even if an employee arrives “empty-handed,” the use of the new hire’s knowledge of the trade secret can create liability for the new employer. It is important to have supervisory personnel monitor the efforts of new hires to evaluate whether they are using or disclosing trade secret information. Again, employees are free to leave to work for a direct competitor, but they must proceed in a manner that is fair and lawful.

Understand the digital footprint. Data theft is a major concern for California employers. One of the few ways former employers attempt to derail a hiring process is to assert that their trade secrets have been misappropriated. Through computer forensics, employers can tell virtually everything done on a work computer, tablet or phone. Employers can determine whether departing employees inserted USB devices, accessed cloud-based storage, used Web-based e-mail or printed records. Thus, it is imperative that workers who leave to join a competitor do so in a fair and lawful manner.

Develop an exit process and encourage participation. Exit interviews afford employers the opportunity to comply with internal processes and to make certain the employer’s human resource compliance concerns are satisfied. Employers often walk departing employees through the myriad documents they signed when the relationship started, including confidentiality agreements and intellectual property assignment provisions. Employees who skip out on the exit interview process deny employers the ability to raise these important issues.

Take cease-and-desist letters seriously. Some employers routinely send cease-and-desist letters or other letters to former employees reminding them of confidentiality and trade secret obligations. Employers should ask new hires to notify them when they receive such letters to ensure that the company is aware of any issues with potential trade secrets or other proprietary information from a former employer.

In summary, by following this road map, employees and businesses can continue to help drive the engine of California’s economy and hopefully avoid expensive litigation.

Dylan W. Wiseman is an attorney with Buchalter in San Francisco and Sacramento, Calif.

Article Link: https://www.shrm.org/ResourcesAndTools/legal-and-compliance/state-and-local-updates/Pages/Hiring-Employees-from-Direct-Competitors-in-California.aspx