[Business 2.0] Ties That Bind

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From: Linda (joelinda1@home.com)
Date: Tue Jun 13 2000 - 20:20:35 PDT


[Along the lines of hiring, some ideas on protecting intellectual capital
in the event that the employee leaves.

--Linda]

http://www.business2.com/content/magazine/indepth/2000/06/13/12379

Ties That Bind

The great dot-com employee shuffle helps a thousand
companies bloom if it doesn't land them in court.

June 2000
David Propson

Jeff Dickey may have helped kick off the Internet revolution, but he had to sit
out a good part of the action. One of the first 10 employees hired at online
ad agency DoubleClick in October 1995, he remembers the glory days
fondly scratching out ideas with adviser and shareholder Dave Carlick,
and partying with toga-clad Kevin Ryan, now president of DoubleClick, at a
Halloween party a week before the launch.
                                     
Memories of 1997 are much less rosy. Dickey found himself embroiled in
a lawsuit against his former co-workers after he and a compatriot, David
Henderson, were fined for hatching plans for a new company. DoubleClick
sued the pair to enjoin them from starting their new business or working
for a competitor. The company never left the ground. Dickey didn't work for
a year.
                                     
"It was time I needed to figure out what was going on," Dickey says. "It's a
lot easier for me to sit back today and look at it intellectually, but back then I
took it very personally."
                                     
While Dickey is back in the game now as chief strategic officer for
advertising.com, his story fills the early chapters of an ever-frustrating saga
for both employers and employees engaged in the frantic scramble for
New Economy talent and ideas. From senior vice presidents to top
salespeople and plain, old middle management, the game of company
hopscotch through the valley and the alley can quickly get nasty when
intellectual property and broken promises are involved.
                                     
Most of the terms used to describe these battles over employees would be
better suited to a safari than a human resources department: Companies
"poach" from one another, hire "headhunters" to do so for them, or offer
"bounties" to employees who can bag the biggest game.
                                     
These sorts of shenanigans inevitably bring lawyers circling. "There's
probably more litigation in this area than there has ever been," says
Richard Reilly, who has handled many such cases with Coudert Brothers
law firm in New York.
                                     
The splits can be bitter, and the two parties can drag each other through
hell, and court, for months. In some states it may be easier and faster to
obtain a divorce than it is to change jobs.

Get ready to rumble

If the average cubicle-bound wage slave switches jobs, the former
employer might look the other way if it feels a court case would be more
trouble than it was worth. But when a key employee leaves with important
information or many employees leave at once, more often than not a
company will take action.
                                     
In July 1999, Jim Bozzini, senior vice president of services operations at
PeopleSoft, the Silicon Valley manufacturer of enterprise resource
management software, quit his position and resolved to take some time
off. He was soon wooed back to the working world, however, by a nearby
firm named Evolve Software.
                                     
In the few months that followed, Evolve hired away 18 PeopleSoft
employees. PeopleSoft dragged the company and its own former
employees into court. The company complained that some of Evolve's new
employees had access to confidential information, that they had been
wooing additional former co-workers over to Evolve, and that some were
doing this pandering and even attending meetings for Evolve while
still employed at PeopleSoft. They said the employees' email records
proved it. The case remains in litigation.
                                     
John Bantleman, president and CEO of Evolve, says he believes
PeopleSoft's suit was primarily a bully tactic. "It's an act of intimidation
against people who have decided to redirect their careers in our company,"
Bantleman says. "It could also intimidate employees who are still working
at PeopleSoft." Steve Swasey, PeopleSoft's director of corporate public
relations, acknowledged the potential effects on current employees. "We've
talked to employees internally, through one-on-one meetings, emails, and
opened a dialogue about it," Swasey says. "If someone is thinking of
leaving, we won't stop them. But we want them to know that they are not
free to pack their files or send emails to their private AOL account."
                                     
But it can be difficult for employees to set aside personal feelings and
recognize that, as far as both companies are concerned, they're simply
protecting their livelihoods. Dickey says he now recognizes that companies
often feel they need to do something. "As a businessperson, I would say
you use whatever tactics you need to do what you have to do," he says. "It's
really just a business tactic. I'm not sure that anyone believes it."
                                     
 "I think there's a tendency to overstate on both sides," says Victoria Cundiff,
a lawyer with Paul, Hastings, Janofsky, & Walker in Manhattan. "The
employer overstates the employee's importance. The competitor swears
up and down and sideways that they don't want anything except the guy's
skills, but it's likely they'll get a lot more. Some of it's posturing, some of it's
heartfelt, and some of it's sort of terror at what could happen."
                                     
In another recent New York case, the IT portal EarthWeb, sued its former
vice president for worldwide content, Mark Schlack, who had moved on to
become editorial director at International Data Group's ITworld.com.
EarthWeb argued that Schlack possessed confidential knowledge of
strategic plans and other company information. It also suggested that
since Schlack had been present during the site's launch, he would know
how to do a better launch the next time. This too, EarthWeb said, was a
trade secret. The judge rejected all the claims, but EarthWeb appealed,
and the case is still in the courts.
                                     
Jilted companies often lay claim to just about every person, piece of
information, or project the employee touched at the company. Workers who
considered these contacts and experience their own get a rude shock. Will
they have to start from scratch? Will their new employers want them if they
can't share what they've learned? "The reason you hire people is because
they have knowledge," Dickey says. "What do you know? Who do you
know? This flies in the face of every rule of hiring."
                                     
Michael Carlinsky, a partner with Orrick, Herrington, & Sutcliffe in New York,
says plaintiffs usually try to prove employees were less than honest with
them. "If you can walk in with a mountain of evidence showing the guy is
scum, you're likely to get a judgment," she says. Employers look for the
smoking gun in phone records and information systems. "Nine times out
of ten, the employee has crossed the line," Carlinsky adds. "Employees
tend to do stupid things and think they're not going to get caught."

States & Cases

In Silicon Valley, leaving your employer is a long-standing ritual. As Dickey
says, "Everything in the valley was founded by someone from somewhere
else." That's due in large part to California's strict prohibitions against what
lawyers call restrictive covenants. Some company-hopping dot-commers
like to think their laissez-faire attitudes encourage a wide-open
environment where the best ideas flourish. California's casual approach
has obviously helped particular companies. Where would Intel be, after all,
if Fairchild Semiconductor had a bright lawyer with a restrictive covenant
agreement? With the exceptions of The Golden State and Georgia, where
such agreements are frowned upon, restrictive covenants are de rigueur,
according to Cundiff. "Many of our clients and the people they're recruiting
see these as quite normal," she says.
                                     
Since California companies can't fall back on restrictive covenants to keep
their employees from moving on, they instead invoke the controversial
legal doctrine of "inevitable disclosure." These employees have
confidential information in their noggins, companies argue, and eventually
it's going to leak out. "It's beyond human capability to separate your brain
into that which is confidential and that which is not," explains Michael
Jacobs, an attorney with Morrison & Foerster in San Francisco.
                                     
DoubleClick's case against Dickey and Henderson is an important
landmark for this particular legal argument. "Almost every case filed since
then has cited DoubleClick," says Carlinsky, the lawyer who argued it. "If
 you don't have noncompete, there's really no other alternative."
                                     
Many inevitable disclosure cases come down to arguments over trade
secrets. Even companies that have noncompetes like to throw in these
allegations for good measure. But aside from secret formulas and other
technical knowledge, it's hard to get two lawyers to agree on what's a trade
secret and what's not. Sometimes companies will try to commit employees
to noncompete agreements, even though they're plainly invalid in the state.
The reasoning is that if the workers don't know, it won't hurt them. Aetna
Insurance was recently ordered to pay more than $1 million to an
employee it unfairly fired after she refused to sign an illegal contract. The
case is on appeal.
                                     
On the flip side, sometimes employees sign their lives away because they
believe the agreement will be unenforceable. Not wise, says one Silicon
Valley veteran of the employee wars who requests anonymity. "To really
know what you're getting, you need to be fluent in the laws [that govern
your] company and [the state] where you live," he says. "You need to know
what they've offered other employees, but imagine even asking for things
like that in an interview."

Courts usually require companies to disclose the secrets they believe are
actually at risk something most companies are reluctant to do. And a
trade secret isn't always a trade secret for long. Things change so quickly
on the Internet, the judge ruled in Schlack's case, that anything he knew
soon would be out of date, anyway.
                                     
Cundiff says the courts and lawyers have been getting creative at finding
ways to protect trade secrets while letting the employee move on. She
recently negotiated a settlement that included a court-appointed monitor
who would check in on the employee over the course of two years. "There
is going to be some leakage, even by very well-meaning, conscientious
people," she says. "You're never going to have a little tape recorder to find
out what people say." For the firms involved, such a babysitter may be the
best answer if the employees can put up with it.
                                     
In most of these cases, the worker gets stuck in the middle. Carlinsky says
he has known cases in which companies sent letters to a former
salesperson's customers and clients asking to be informed if he or she
approached them for business in their new position. Some even send
letters to their own competitors, letting them know about the employee's
departure. "It's like putting a scarlet letter around their neck," Carlinsky
says. "You can really screw people up."
                                     
Companies often resort to litigation to prevent themselves from being hurt
more than they already have been. "Most of the people who use attorneys
use them to create disruption," says Evolve's Bantleman. "Nobody really
wants to go to court."
                                     
Swasey maintains PeopleSoft took on Evolve not as a tactical maneuver or
to spite former employees, but because the company had unfairly gained
access to its intellectual property. Still, he acknowledged PeopleSoft would
have preferred to keep the employees out of it. "This is not about people,
it's about trade secrets," he says. "We have a very strong, people-centric
culture. We're always going to be people-supportive mean, it's in our
name."

How to stop the madness

There's only one thing PeopleSoft and Evolve seem to agree on: The best
way to keep employees from leaving is to run a better company than the
other guys. Both believe they do that. But creating a worker-friendly
workplace isn't easy if you're always keeping an eye on them and making
them sign forms restricting what they can do when they leave usually
even before they've worked a day at your company. Are there ways to keep
employees honest without pissing them off?
                                     
One way is to kill 'em with kindness and cash. Courts have upheld
non-competes with the stipulation that the former employers pay the
worker's salary for the time they are enjoined from working. Many
companies thought this was such a good idea they took to including it in
their contracts. Carlinsky calls these "golden handcuffs"; in England, it's
known as "garden leave," with the apparent implication that the executive
will spend his paid vacation placidly potting petunias.
                                     
Another method that aims at the worker's wallet is the now-popular
arrangement in which a company takes back any profits employees have
made on their stock options when they leave the company. Cundiff says
these agreements are "terribly common," although IBM is the only
organization to publicly acknowledge using them and to defend the
practice in court. "One reason employees may be willing to sign these is
that they are getting equity," Cundiff says. "That means they're looking at it
from an owner's perspective."
                                     
The solution may lie in the fact that these legal battles can begin at any
level of the company. Any employee, even the CEO, could get stuck in the
middle of one of these lawsuits. "With some of these dot-com companies,
a firm will come to us and say, 'We want to preserve our own mobility, but
we don't want people leaving us,'" Cundiff says. "In general, I think that
results in very sensible agreements."
                                     
Still, companies will continue to spar, employees will continue to look
elsewhere, and these disputes will continue to be fought. A system that
should be about efficiently putting the right people in the right places will
prove itself better at forcing them to take sides and turn against one
another. It's enough to frustrate even the staunchest litigant. At one point
during a recent employee/employer lawsuit, Judge Paula Omansky
commented: "It's all so depressing." Anthony Paduano, the lawyer
representing the slighted company, answered, "To us all."

Employee Wars

For good or ill, the terms on which employees will leave their jobs often
must be negotiated before they even start. But thinking hard about these
issues can save a lot of grief later. Employees want to know what they can
and can't do, so they don't inadvertently end up in court. Companies don't
want to waste money trying to enforce contracts that judges will scoff at.
Here's an outline for a prenuptial both can agree on.
                                     
Short Time Restrictions: Most judges won't give the nod to noncompete or
nondisclosure contracts they consider too broad. So it's not worth an
employer's time to try to prevent its employees from ever working in the
field again. Trade secrets, as well, often have an expiration date:
Confidential marketing plans become moot and nascent once products
are brought to market. Even a year can be too long in some fields. In Mark
Schlack's case, the judge ruled that the Internet might be a totally different
industry 12 months after he left EarthWeb.
                                     
Specific Terms: Agreements should spell out beforehand who is
considered a competitor and what is considered a trade secret. And, of
course, companies should check with their lawyers to make sure these
definitions will hold up in court. Many try to make the terms as broad as
possible, but judges may not be willing to pick and choose which they
agree with. The language EarthWeb used in its contract with Schlack is
typical, if not readable. It states that "Confidential Information shall mean
all proprietary information, technical data, trade secrets, and know-how,
including, without limitation, research, product plans, customer lists,
markets, software, developments, inventions, discoveries, processes,
formulas, algorithms, technology, designs, drawing, marketing, and other
plans, business strategies and financial data and information, including
but not limited to Inventions, whether or not marked 'Confidential.'" It then
uses a further 24 terms to define the word "Inventions." So what, exactly,
isn't covered?
                                     
"Golden Handcuffs": It's a good idea to put all policies regarding severance
pay into writing beforehand. That includes what will happen to employees'
stock options when they leave and whether they'll be paid while they sit on
the sideline during the term of the noncompete. This not only makes the
contract stronger, but also shows the judge that the company is not out to
get its former employees. Waiting until after the suit is in court can be too
little, too late: EarthWeb offered Schlack a position as a high-paid
"consultant," but he refused. -DP

Who Gets the Kids?

The technology boom has made spats over employees much more
common, but in many fields they're nothing new. Big financial firms fight
furiously over clients and employees. One firm steals several brokers from
another, which in turn has to raid a third. Key employees are often hired
away with the expectation that their clients and co-workers will soon follow.
                                     
Last March, Joseph Donovan left his job at Prudential Securities in New
York for a position at Credit Suisse First Boston in the asset-backed
securities (ABS) division. While CSFB must have offered him a healthy
paycheck he had just received a bonus of at least $1.1 million from
Prudential that wasn't enough to seduce him. "I need my people," he
told CSFB.
                                     
In the next few days First Boston hired 13 of Donovan's former underlings.
On March 15, Prudential took them to court, charging that they had hired
Joe Donovan for the brokers and clients they knew would come with him.
They asked the judge for an injunction to stop the bleeding while the case
headed to arbitration.
                                     
"In the financial industry, it's usually the whole desk that goes," Cundiff
says. "It tends to be that the loyalty is to teams. Occasionally, people start
referring clients to the new company even before they quit." That didn't
happen in this case, but Prudential says its clients have been contacted by
CSFB. This violates the nonsolicitation clauses of the brokers' contracts, in
which they agreed not to pursue their former coworkers or former clients.
                                     
But what constitutes solicitation? Even if the employee doesn't cut all ties
with his old job, does that mean the company they work for can never hire
anyone from his former company, or work with their former clients? What
about a headhunter who represents them? In the Prudential case,
Donovan provided CSFB with a list of the employees in the ABS division.
His new boss, John Walsh, made the phone calls. But more often than not,
the new employer doesn't even have to lift the receiver.
                                     
"Very often a well-liked person doesn't have to go to them himself," Cundiff
says. "They'll call him up and ask if he has space." Prudential's phone
records show some of its employees did just that. And according to CSFB,
when Donovan first told P. Carter Rise, the head of Prudential's financial
services group, that he was going to meet with First Boston, even he was
interested in jumping ship. "See if they have a place there for me," he says.

These days, loyalty to colleagues may trump loyalty to the company.
Nonsolicitation clauses can be a good alternative to noncompetes,
according to Cundiff. They protect a company's business without restricting
their employees from moving on. But they aren't necessarily any easier to
enforce, so you may still wind up in court. -DP


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