August 15, 2000

Avoiding Lawsuits is a service of the employment law training and consulting firm of Counsel Consulting Group LLC and the law firm of Powell, Trachtman, Logan, Carrle & Lombardo, P.C.

MEMO TO THE BOARD: OUR TOP EXECUTIVES - THE ONES WHO KNOW EVERYTHING ABOUT OUR BUSINESS - JUST LEFT AND ACCEPTED JOBS WITH OUR PRIMARY COMPETITOR WHAT YOU CAN DO BEFORE IT HAPPENS

We keep seeing situations like this. The Jones Company notices that the Smith Company is getting a leg up in the market. So Jones hires a headhunter to recruit Smith's key people, at a substantial raise in pay. Along with the defecting employees, Jones acquires a sophisticated knowledge of Smith's customers, pricing, margins, business methods, sales and marketing plans, competitive strategies - all of the things that Smith spent hundreds of thousands of dollars and man hours developing. Before Smith can recover, the turncoats are recruiting Smith's other key employees to work for Jones (Jones offers a recruiting bonus), and they have contacted Smith's key customers and suppliers.

And the lawsuits follow, for years to come.

Chalk it up to the tight labor market, the booming economy, the dissipation of employee loyalty, the decline of society as we know it, whatever. The simple truth is that litigation involving key employees defecting to the competition, and taking their knowledge of their former employer's business with them, is rampant. Minimizing these defections and their effects is, obviously, one of the most important and challenging problems facing businesses today. Solving it cuts across all manner of disciplines, from employment law to intellectual property law to creative contract and benefits drafting, and much, much more. It will be a key, recurrent topic in future issues of Avoiding Lawsuits.

For now, we offer a checklist of some of the alternatives used by businesses who have successfully confronted this issue, and urge you to consider these methods, before it's too late, and before you find yourself in a pro sports-like free agency war. Here are some of the techniques that we find to be the most effective:

1. Employment agreements with "covenants not to compete" that prevent departing employees from immediately accepting a job with a competing company;
2. Employment agreements that, as a deterrent, require a departing employee to repay certain sums to the employer (i.e., for training excesses, for tuition payments, etc.), or to make other payments to the employer in the event the employee leaves before a stated period;
3. Employment agreements that include state-of-the-art confidentiality and non-disclosure provisions, and provisions prohibiting the solicitation of your employees, customers and vendors;
4. "Golden handcuff" benefit plans that create financial incentives for key employees to stay with you by delaying their receipt of certain financial rewards into the future - such as deferred compensation plans and split dollar life insurance plans;
5. Making your business information and methods legally-enforceable "trade secrets" so that you can prevent disclosure by former employees to competitors;
6. Use of copyright law to prevent former employees from disclosing your business information to the competition;
7. Use of recent developments in patent law to create patent protection for "business methods";
8. Use of compensation techniques that create positive incentives to stay - like longevity bonuses, stock options, stock appreciation plans and/or profit sharing plans that increase and accumulate with longevity;
9. Developing a no-nonsense and consistently-enforced litigation strategy to let your employees know that if they decide to go to the competition, it won't be easy.

SUMMARY - The most valuable assets of almost every business are people and know-how. When key employees defect, it's a double hit - you not only lose, but your competition gains these assets. Retention of key employees, and efforts to keep them and your know-how from the competition if you cannot retain them, have to be a high priority. There is no perfect solution but, depending on the individual and circumstances, the creative use of the techniques noted above, properly packaged and presented, can make a huge difference.

Powell, Trachtman, Logan, Carrle & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.

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