Created January 15, 2009
Your worst fear has been realized: a former employee with access to your trade secrets or confidential client information has joined a competitor, or has started a new firm in direct competition with yours. What can you do to protect your business from this threat? If you act swiftly, with the assistance of legal counsel, there are a host of legal remedies available that may immediately stop the former employee from continuing to harm your business, recover monies lost due to unfair competition, and even sanction the competitor that hired your former employee. Which remedies are available to you will depend on the factual circumstances of each case and the terms of your covenant not to compete.
Perhaps the most crucial concern for any employer in this situation is to move quickly to address the problem. Failure to enforce your rights in a timely fashion can render your claims time-barred under the applicable statutes of limitation. Failing to act expediently also lends credence to the defense that you have failed to mitigate your damages. In other words, the longer you wait to act, the more you exacerbate your own damages and make it harder to recover.
An enforceable covenant not to compete affords the greatest access to legal remedies. Without such a covenant, the options are much more limited. Under the common law, an employee, including an employee-at-will, has a fiduciary duty of loyalty towards his or her employer during the course of employment. In Virginia, the duty of loyalty requires, among other things, that an employee not compete with his or her employer during the course of employment. Hilb, Rogal & Hamilton Co. of Richmond v. DePew, 247 Va. 240, 440 S.E.2d 918 (1994). While not a cause of action in itself, an employee who engages in one of the acts described below while still an employee with your firm is violating their duty of loyalty, whether a covenant not to compete is in effect or not. However, once the employee leaves your company, the duty of loyalty ends and the employee is free to compete against you, with some limited exceptions as described below. Therefore, covenants not to compete afford the employer more legal protections, and also continue to provide protection after the term of employment is terminated.
Here’s an overview of the legal avenues available to employers:
An injunction is an equitable request that a court issue an order preventing the former employee from continuing to act in violation of the covenant or other applicable laws. If the former employee was hired by a competitor, for example, the injunction could prohibit the employee from working for the competitor. If your former employee had access to client records, then left to start his or her own competing business and began contacting your clients, the injunction could prohibit the former employee and his business from contacting your clients. The purpose of the injunction is not to recover damages—it is only to prevent certain conduct that is in violation of the covenant or the law. As such, an injunction is often not the only remedy that an employer might request.
One advantage of an injunction is that the offending conduct may be halted quickly, without having to wait all the way through to trial. “A plaintiff seeking a preliminary injunction must establish that  he is likely to succeed on the merits,  that he is likely to suffer irreparable harm in the absence of preliminary relief,  that the balance of equities tips in his favor, and  that an injunction is in the public interest.” Winter v. Natural Resources Defense Council, Inc., 129 S.Ct. 365, 375 (2008). All four prongs must be independently satisfied before a court will grant the requested injunction.
A preliminary injunction is of particular importance in the enforcement of a former employer’s rights since otherwise the offending conduct, along with the damage caused, will not stop until the conclusion of the trial, at best—something that may take over a year.
- Tortious Interference with Contractual Relations
There are two distinct ways that this claim may be raised: (1) when a competitor induces your former employee to violate the covenant not to compete, and (2) when a former employee induces your client to break their contracts with you.
In either case, there must be an existing contract or covenant with a third party (the former employee in the first instance, the client in the latter), knowledge of the existence of the contract by the wrongdoer, intentional interference with the contract by the wrongdoer, a breach of the contract by the third party induced by the wrongdoer, and resulting damages. Chavez v. Johnson, 230 Va. 112, 335 S.E.2d 97 (1985).
While an action for breach of contract against the third party can only recover those damages contemplated under the terms of the contract, a claim of tortious interference against the wrongdoer can recover additional damages, such as harm to reputation, loss of the benefits of the contract, emotional distress, and, potentially, even punitive damages.
- Intentional Interference with Business Relations
Unlike tortious interference with contractual relations, intentional interference with business relations does not require the existence of a contract, and generally addresses damages to businesses that are more indistinct. To recover, there must be (1) the existence of a business relationship or expectancy; (2) a probability of economic benefit; (3) the wrongdoer must have knowledge of the relationship or expectancy; and (4) a reasonable certainty that absent the wrongdoer’s intentional misconduct, you would have continued in the relationship or realized the expectancy. Glass v. Glass, 228 Va. 39, 321 S.E.2d 69 (1984).
Obviously, a “relationship” or “expectancy” is less definite than an actual contract in hand. One example would be a long-term client that makes a contract with you every month for delivery of goods. Then, after your former employee leaves for a competitor and contacts the client in violation of the covenant not to compete, the client stops making new contracts with you. While the former employee and competitor would not be liable for interference with contractual relations since the client did not breach an existing contract, you would have had an expectation that, were it not for your former employee’s wrongful breach of the covenant, the client would have continued to contract with you in the future. You would then be entitled to damages resulting from the loss of those expected contracts.
- Civil Conspiracy
In some cases where one of the above interference claims can be alleged, there may also be a claim for civil conspiracy against the former employee and the competitor that hires the former employee. A civil conspiracy exists where there is an agreement between two or more persons to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means, resulting in damages. Glass v. Glass, 228 Va. 39, 321 S.E.2d 69 (1984). While there cannot be civil conspiracy between a corporation and an employee of that corporation, since they are considered as one entity under the law, there can be civil conspiracy between a competitor and one of your employees, such as when the competitor and your employee agree to wrongfully cause your clients to break contracts with your company as the employee leaves to join the competitor. Under civil conspiracy, you can recover from the former employee and the competitor any damages proximately resulting from the wrongful conduct, in addition to punitive damages.
Should the conspiracy be willful and malicious in nature, such as by a disaffected employee with an axe to grind, recovery may be had under Virginia Code § 18.2-500, where a prevailing employer is entitled to treble damages (including loss of profits), the costs of litigation, and reasonable attorney fees.
- Misappropriation of Trade Secrets and Proprietary Information
Misappropriation of trade secrets is a statutory basis for relief under the Uniform Trade Secrets Act, with or without a covenant not to compete in effect. The Act describes “trade secrets” as:
…information, including but not limited to, a formula, pattern, compilation, program, device, method, technique, or process, that:
1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and
2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Virginia Code § 59.1-336. “Misappropriation” is defined as:
1. Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
2. Disclosure or use of a trade secret of another without express or implied consent by a person who
a. Used improper means to acquire knowledge of the trade secret; or
b. At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was
(1) Derived from or through a person who had utilized improper means to acquire it;
(2) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use;
(3) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or
(4) Acquired by accident or mistake.
Thus, if a former employee provides your trade secrets to a competitor, you may be able to recover against the former employee and the competitor for any damages that result, along with any unjust enrichment that the competitor earned as a result of the misappropriation, and any reasonably royalties that may exist. For misappropriation that is “willful and malicious,” the courts will award attorney fees to the prevailing party, and for especially egregious conduct, punitive damages up to $350,000 are available.
- Others (Replevin, Conversion, Unfair Competition, Accounting)
Depending on the facts of a particular case, other claims may be asserted against the former employee, with or without a covenant not to compete in effect.
Replevin and conversion involve situations when the former employee steals from your company, such as by physically taking client lists or computer hardware. Replevin seeks the return of the physical goods, while conversion seeks money damages instead of the actual property.
An action for accounting applies when the employee in question had access to the fiduciary matters of the firm, such as when the employee was one of the partners in a partnership. This action forces the former employee to account for the monies in the firm to show that the firm has not been shorted.
Unfair competition arises when the former employee starts a business with a similar name as yours, or sells products that could be confused with yours. When the resemblance between the respective trade names and products are so close as to cause confusion, the courts will find prejudice against the former employee and enjoin the practice.
Consult legal counsel as soon as you discover that a covenant not to compete may have been violated by one of your current or former employees so that you can discuss what remedies may be appropriate in your situation.
This article was written by James N. Markels, Esq., and Merritt J. Green, Esq., of General Counsel, P.C., in McLean, Virginia. Copyright, 2009, all rights reserved.