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Ten Tips for Avoiding Litigation: Tip #5 – Treat Your Employees Fairly and Consistently

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The lifeblood of every business – big, small or in-between – is its employees, aptly called its human resources or human capital. A company can have the most innovative product or service idea in the world, along with a recognized market and an excellent strategy for capitalizing on it, but, without the right people to implement the idea and the right managers to train, supervise, and motivate that staff, the idea is likely to fail. That is why your employees are your most valuable resource. At the same time, however, employees are also frequent sources of litigation for businesses, including claims for wrongful discharge, discrimination, harassment, hostile work environment, failure to accommodate a disability, wage and hour violations, failure to properly pay overtime, breach of non-compete agreements, and theft of company trade secrets, to name just a few.

Employees are much more challenging to manage than any other resource your company uses to conduct its business. Your inventory, for example, is, for the most part, fungible. If one source dries up or becomes prohibitively expensive, chances are you will be able to find a replacement source. Similarly, your equipment is generally easily repairable or replaceable if something breaks. Not so with your employees. They require training, motivation, and incentives. They take sick days, personal days, and holidays. They go on vacation, care for sick or disabled family members, and sometimes they do not get along or work well with each other. And they sue their employers with increasing frequency.

In addition, studies show that the replacement of just one key employee can cost your business hundreds of thousands of dollars. Think about the down time and lost productivity associated with the departure of the former employee, internal and external recruitment costs to find a replacement, costs of training and orienting the new employee, and the down time and lost productivity involved in getting the new employee up to speed. These are just a few of the costs associated with losing an employee.

In short, you have invested a huge amount of your company’s resources in your employees. Doesn’t it make sense that you should protect that investment by implementing policies to keep your employees productive, motivated, safe, healthy a relatively happy? Here are some things you can try to help accomplish that goal.

First, always treat your employees respectfully, honestly, and fairly. This suggestion might sound obvious, and it is, but it is also frequently forgotten or ignored in the normal stress of the business world. It might also sound inconsequential, but it might just be the key to reducing claims against the company by its employees. Every employee wants to feel like his or her work is valued and essential for the success of the business. Finding ways to recognize and honor all your employees’ contributions will pay significant dividends. Even simple gestures will reap rewards in areas like better employee morale and increased productivity among your staff.

Second, don’t BS your employees. They know what is going on in the world and how outside events affect the company. They also know far more than you think about changes the company is considering, especially changes that could affect them negatively. Silence and secrecy may be necessary, but outright lying to employees is never a good idea. It is guaranteed to produce a cynical, untrusting, and equally secretive staff.

Third, have clear, well-defined company policies to let employees know what behavior you expect from them, what behavior you will not be tolerate, and the consequences of engaging in that behavior. These policies should be memorialized in a written employee manual or, even better, easily accessible to employees on the company website. You should hire an experienced employment lawyer, who is knowledgeable about the current state of constantly changing employment laws in your jurisdiction, to draft your employee manual. The manual should also contain procedures for addressing problems when they arise, and for reporting violations. Whom do you call when X happens? To whom do you report violations of Y policy?

Fourth and finally, once you have those company policies in place, enforce them as consistently as possible. One of the most difficult management tasks is balancing the goal of fairness and consistency versus the desire to be flexible and treat people as individuals rather than as interchangeable parts. Rigid, unthinking, and blind adherence to rules can not only damage employee morale by stifling creativity and employee innovation, but also lead to unsatisfactory and inappropriate results. On the other hand, any perception by your employees that you are showing inconsistency or, even worse, favoritism in your enforcement of certain policies can lead to divisiveness and be equally damaging to employee morale. Inconsistently enforced rules are, in some ways, worse than no rules at all.

The safest, but perhaps most difficult path to follow, is to treat rules as sacrosanct except in unusual and rare cases that require special empathy and flexibility. If you conclude that a large number of your employee could qualify for the same exception if they were to ask for it, then you should either deny the request for an exception or consider scrapping the rule. Before making any exception to a policy or rule, consider the potential consequences down the road. What will you do the next time someone else asks for the same exception, particularly if that person is someone you do not particularly like? Reward your best employees with raises, promotions, stock options, and the like, not with exceptions to company policies. The former will motivate your good employees to try to be better; the latter will make them cynical about following company rules.

There are other ways to enhance and retain your human resources, such as training your managers to know and follow the applicable federal, state, and local employment laws,  and minimizing the use and severity of non-competition agreements. I will cover these topics in future installments of this blog, so stay tuned!

Click here for Tip #1: Always Have a Strong Written Agreement to Govern Your Business
Click here for Tip #2: Avoid Doing Business with Members of your Family
Click here for Tip #3: Check Your Insurance Coverage Frequently to be Sure it Protects Your Business from Exposure and Risk
Click here for Tip #4: Every Significant Business Transaction Should Be Documented

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

 

Ten Tips for Avoiding Litigation: Tip #4: Every Significant Business Transaction Should be Documented

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There is a nostalgic notion among traditional businesspersons that the best deals are sealed by a hand-shake (or an elbow in this COVID-19 world in which we live), and you don’t need fancy lawyers and contracts to be successful in the business world. That approach to reaching agreements seems to work well in John Wayne and Clint Eastwood movies, but it can lead to problems in the real world. Robert Frost famously said: “Good fences make good neighbors.” In the business world, good contracts make good deals.

So why should you insist on – and pay the expense of creating – written contracts to memorialize your significant agreements? Consider the myriad of psychological research studies, which show that memories fade with age and the passage of time and that, even under the best of circumstances, we tend to remember what we want to remember. The corollary to that rule is that different people will tend to remember different things, depending upon their varying interests. Next consider that, according to the natural order of the world, otherwise known as “Murphy’s Law,” if something can go wrong, chances are it will go wrong. Finally, consider what will happen when you and the other party to the deal have differing recollections about the terms of the deal but nothing in writing to confirm either party’s position.

For example, suppose you understood that your customer was going to pay shipping costs for the goods it purchased from your company. Your customer, to the contrary, is certain that shipping costs were included in the price it paid for the goods. Similarly, what if our customer thinks it is entitled to receive a 2% price discount if it pays your invoice within 20 business days of receipt. You recall discussion of a discount but swear the terms you agreed to required payment of the invoice within 10 days and a resultant 1% discount.

How will you resolve such disputes without a definitive written agreement that includes provisions for shipping, payment and price terms? To paraphrase Yogi Berra: If you don’t know where you are going, how will you know when you get there? More to the point, if you don’t have a contract, how will you know what the deal is?

Faced with such a disagreement about the terms of the deal, you will either negotiate a new deal to resolve the disputed issues, stop doing business with the other party, or end up in court. If you end up in court, without a written contract, it will be your word against your adversary’s. Unfortunately, that kind of litigation, which depends upon either a jury or judge deciding whose testimony is more credible – a so-called “credibility contest” — is one of the most expensive and unpredictable kinds of contract disputes to resolve. Moreover, even if you are fortunate to prevail in the litigation, you will most likely be responsible for your own attorney’s fees and costs, which could be enormous. Under the so-called “American Rule,” which is followed, with rare exception, by every state and federal court in this country, each side bears its own costs of litigation, regardless who wins. One exception to the American Rule occurs when the contract that is the subject of the litigation contains a “loser pays” provision. But, of course, without a written contract containing such a provision, you will be out of luck and will probably have to bear your own litigation costs.

One additional reason to insist upon a written contract to memorialize significant transactions is the good will it will buy you with your most valuable customers. The truth is that wasteful and unnecessary litigation is just as expensive, time consuming, and distracting for your customer as it is for you. Your adversary will be forced to eat its own attorney’s fees and litigation costs, just as you are, if the dispute ends up in litigation. Therefore, both parties will benefit from a well-drafted contract that resolves disagreements without the need to resort to litigation.

Finally, not every deal requires a full blown contract with all the bells and whistles, but even in those circumstances, there should be some written confirmation of the agreement. In many cases, a simple purchase order with pre-printed standard terms and conditions, sent by one party and accepted by the other, will suffice. Some simple deals will only require a confirming email or two back and forth to provide a record of the principal terms of the deal. With the convenience of electronic communications these days, there is no good excuse for not documenting every deal in writing!

Click here for Tip #1: Always Have a Strong Written Agreement to Govern Your Business
Click here for Tip #2: Avoid Doing Business with Members of your Family
Click here for Tip #3: Check Your Insurance Coverage Frequently to be Sure it Protects Your Business from Exposure and Risk

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

Ten Tips for Avoiding Litigation: Tip #3 – Check Your Insurance Coverage Frequently to be Sure it Protects Your Business from Exposure to Risk

umbrella 2Although having adequate insurance coverage is not necessarily a way to avoid litigation, I have included it on my list of litigation-avoidance tips because it is so important in protecting you and your business from financial disaster when litigation does occur. Despite the important role it plays in a business’s defenses to litigation, I can’t tell you how many times I have asked a business owner for details about his company’s insurance coverage, such as “Do you have coverage for X?,” only to be met with the response, “I don’t know.” Similarly, when I ask when was the last time you reviewed your coverage with your insurance agent, the response is frequently a blank stare. I get it; many of us would prefer a visit to the dentist to sitting with our insurance agent to discuss our coverage. But, unfortunately, your mother was right when she taught you that delaying doing something because it is unpleasant doesn’t make it go away; it only makes it worse.

First, you need to find a bright, industrious insurance agent, who has experience working with companies of your size and in your industry. You will know if your agent fits that description by the insightfulness of the questions she asks you when you meet to review your coverage. Your agent should want to know everything about your business, such as: what does it sell; how does it generate revenue; who are its customers; how many and what kind of employees and independent contractors does it use and for what purposes; does it own or lease vehicles for business use; what intellectual property does it own and does it license the use of any of that property; does it hold or invest money or other property for its customers; and numerous other similar questions about the company’s business. If your agent is not customizing your company’s coverage to your specific business needs, you should find someone else.

Second, you will know if your agent is the right agent for you if she insists on a meeting with you periodically to review your coverage and learn if there have been significant changes in your company since the last review. Your agent should also discuss with you at that meeting changes in the law that might create new risks or opportunities for your company, and that might require more or different coverage. Finally, your agent should discuss with you new types of insurance coverage (e.g., cyber security insurance) that are now available and might be appropriate for your company.

Third, you will also know if your insurance agent is right for you if she contacts you on a regular basis when there has been a change in the types of coverage available for companies like yours or a change in the law that potentially affects your company’s risk exposure. If those changes are significant, your agent should not wait until the next regular meeting to discuss them with you. You can reciprocate by letting your agent know when there has been a change in the company that might affect the amount or type of coverage you need.

If your agent does not fit the above description, then you should consider making a change. Ask competitors and your trusted business advisors whom they recommend. Or ask me. I know several insurance reps at different market levels who are on top of their game and will give you the service you deserve and get you the coverage you need.

Finally, it is an added bonus if your insurance agent is able to offer your company and its employees loss prevention training. A physician’s insurers, for example, frequently provide training on avoiding medical malpractice, wrongful discharge, sexual harassment, and hostile work environment claims. Many insurers offer this type of training free of charge to help their insured clients reduce their exposure to certain types of risks. Your agent should discuss these opportunities with you, but, if not, be sure to ask what is available.

Click here for Tip #1: Always Have a Strong Written Agreement to Govern Your Business
Click here for Tip #2: Avoid Doing Business with Members of your Family

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

 

 

 

 

Tip for Avoiding Costly Business Litigation: Always Have a Strong Written Agreement to Govern Your Business

Tips for avoiding litigation

As a career commercial litigation attorney, I have been asked by several people why I would write a column advising business people on how to avoid needing my services. That’s a good question for which I do not have a good answer, other than to say I believe, in our ever-more complex commercial world, there will be plenty of commercial litigation to keep me busy. At the same time, I hope my clients will benefit from using an ounce of prevention to avoid paying a pound for a cure involving litigation.

Litigation is expensive, time-consuming, a distraction from running a successful business, and unpredictable. It is NEVER a good thing for a business to be involved in litigation; it generally means you owe someone money or someone owes you money. Either way, you are not happy, but you will be even less happy if you end up in litigation, regardless whether you are the plaintiff or defendant.

I plan to post one litigation avoidance tip per week for the next several weeks. I hope you find these tips helpful, and if you have questions or want to discuss any of them with me, I am happy to oblige. So, here is my first tip for avoiding litigation:

Tip #1: Always Have a Strong Written Agreement to Govern Your Business.

No matter what type of business you have, be it a pizza parlor or a high tech company, and regardless how your business is organized, as a corporation, partnership, LLC, or whatever, you should start your business with a well-drafted operating agreement. This is the document that governs all the important decisions and activities in the life of your business, such as ownership structure, voting rights, management responsibilities, resolution of disputes between owners, death or disability of an owner, adding new members, transfers of ownership interests, and, ultimately, dissolution of the business. For example, the death of one of the owners of the company need not automatically lead to the death of the business. A well-drafted agreement will spell out exactly how the deceased owner’s interest in the company will be distributed and valued and how the company will be managed going forward. Without such an agreement, however, an owner’s death could lead to a power struggle among the remaining owners, expensive litigation, and, eventually, dissolution of the company.

Business operating agreements are generally ignored until there is a significant event in the life of the business. When such an event occurs, however, you will be happy you have one. For example, many businesses with multiple owners reach a stage in their development where the owners develop different visions for the future of the business and how the business should be managed. They might disagree about whether to expand the company into a new line of business, take on additional debt, hire a new employee, or any number of other critical business decisions. Without a strong agreement that specifies how such disputes are to be resolved, the company could find itself in a stalemate position, requiring resort to a court to break the deadlock. The cost of a court battle alone (payment of attorney’s fees and costs of suit, plus the expenses associated with the possible appointment of a receiver to run the business while the owners and the court sort things out) is reason enough to avoid litigation. The other detriments inherent in business litigation, such as the business opportunities the company is unable to pursue, and the time spent by the business’s owners and key employees on the litigation that should be devoted to the business, reinforce the conclusion that litigation is not a desirable outcome. Finally, the litigation might very well produce a result that neither of the owners wants.

In short, every business should avoid litigation if possible, and one of the best ways to do that is to have a well-drafted, comprehensive operating agreement. Be sure to entrust this most important task in the life of your business to an experienced and able business attorney who has drafted many agreements of this kind.

Stay tuned for more tips in the coming weeks!

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

 

City of Philadelphia Enacts Law Making it Unlawful for Employers to Ask Job Applicants for Their Salary Histories

Philadelphia has been prominently featured in the local and national news lately for enacting new laws that can be classified collectively as having as one of their primary purposes an attempt at “social engineering.”  Just last year, the City enacted an ordinance, popularly referred to as “Ban the Box,” which made it illegal for Philadelphia employers to inquire about a job applicant’s history of criminal convictions.  In so doing, Philadelphia joined a national trend of similar enactments by several other government entities, all motivated by a desire to improve employment prospects for ex-cons. Then, a little later last year, Philadelphia enacted a first-of-its kind soda tax, which, although probably aimed primarily at creating a new source of revenue, was rationalized, in large part, by the Philadelphia City Council that passed it as a measure to try to curb juvenile obesity among inner city children.

Now, Philadelphia has stuck its neck out again trying to control its private employers’ hiring practices and procedures and, thus, so the theory goes, their hiring results.  Motivated by a desire similar to the Ban the Box legislation, the City has now focused its attention on gender-based wage inequality, by enacting legislation making it unlawful for employers to consider a job applicant’s salary history in deciding what salary to offer that candidate.  In so doing, Philadelphia has put itself in the forefront of the attack on gender-based salary inequality.  Massachusetts passed a similar law last year, but, when the new Philadelphia Wage Equity Law becomes effective on May 23, 2017, Philadelphia will become the first US city to make it illegal for an employer to ask a job applicant to reveal his or her salary history.

As it had done with the Ban the Box ordinance, Philadelphia’s City Council made a number of findings on the record in support of the Wage Equity Law.  For example, City Council noted that women in the job market, especially minority women, on average, earn less — in some cases, significantly less — than men in comparable positions.  Specifically, City Council found that, basing salary decisions on an employee’s past earnings history “only serves to perpetuate gender wage inequalities.”  Finally, City Council concluded that the salary for a position should be based upon the responsibilities of the position, rather than an applicant’s prior salary.

What Does The New Law Prohibit?

The Wage Equity Law makes it an unlawful employment practice for an employer or an employment agency to (1) inquire about a prospective employee’s wage history, (2) require disclosure of wage history, (3) condition employment or consideration for an interview or employment on providing a wage history, (4) retaliate against a prospective employee for failing to provide a wage history in response to a request for one, or (5) rely, at any stage of the employment process, upon a wage history provided by a current or former employer in determining the employee’s wages or in negotiating or drafting the employee’s employment contract.  There are 2 exceptions to the law’s prohibitions.  First, the employer can rely on a prospective employee’s wage history if the applicant “knowingly and willingly” disclosed it.  And, second, the law does not apply to any action taken by an employer or employment agency pursuant to a federal, state or local law that specifically authorizes the disclosure or verification of wage history for employment purposes.  As just one example of the second exception, many government positions are authorized by statutes or regulations that include a requirement that the candidate’s employment and salary history be reviewed and verified.

What Is The Likely Impact Of This New Ordinance?

It is difficult to predict whether the Wage Equity Law will have its desired effect.  On the one hand, despite widespread criticism of the new law from the business community, a case certainly can be made that some portion of the apparent gender pay inequality is based on past wage discrimination by other employers, and that this ordinance will, in time, help stop the perpetuation of that inequality.

Eventually, as employers get used to the new law, perhaps they will also get used to the idea of offering salaries based upon the responsibilities of the job, rather than the candidate’s salary at a previous position.  After all, not that long ago, it was standard procedure for employers to inquire about female candidates’ marital status and family plans, but now most employers will readily acknowledge that such questions are discriminatory and should be precluded, as the law now provides.  Perhaps in a few years, as a result of the new ordinance, questions about salary history will be viewed in the same negative light as we now view questions about plans to have children.

In addition, most employers, including those who routinely ask their applicants for past salary information, will acknowledge that trying to hire employees at the lowest possible salary can lead to other employee relations problems for the employer.  Consider, for example, the possible tensions that could be, and, in fact, often are caused by two employees who have the same job responsibilities and comparable performance ratings, but are paid very different salaries due solely to their different salary histories before they came to their current employer.

On the other hand, some critics have suggested, although, to date, no concrete evidence has been presented to support their position, that the Wage Equity Law will actually hurt the movement to equalize salaries.  The theory is that, if employers cannot ask for a candidate’s salary history (or criminal background), they will simply guess or assume one.  For a female candidate, so the theory goes, the employer will assume she has a lower salary and will, in turn, offer her a lower salary.  If the employer’s assumed salary is lower than the candidate’s actual salary, the lack of a salary history, under this set of assumptions, will result in a lower offer than would have been the case if the employer had been able to ask the candidate for her salary history. The proponents of this viewpoint cite as support for their argument what they claim is anecdotal evidence that the Ban the Box law has actually hurt ex-convicts’ chances of landing a job, but there have been no scientific studies performed to date to prove or disprove the assumption.

In addition, employers who want to get around the law will, no doubt, be able to find ways to avoid or work around the law’s restrictions.  Just as employees often seem to know, despite their employers’ best efforts to maintain confidentiality, what their fellow workers are earning, employers will, no doubt, find ways to gather salary histories “off the record” if they really want them.  However, employers who engage in such behavior will run the risk of liability under the Wage Equity Law, which also prohibits reliance on salary history information in determining wages at any step in the employment process, regardless of the source of information.

More importantly, the consequences of getting caught violating the law could be severe.  In addition to having the power to order the hiring or reinstatement of an aggrieved employee, the Philadelphia Commission on Human Relations, which is the agency designated by the ordinance to enforce its provisions, also has the power to award the following relief to any person damaged by a violation of the Wage Equity Law:

  • Back pay
  • Compensatory damages.
  • Punitive damages up to $2,000 per violation.
  • Attorney’s fees and costs incurred by the Commission

The real enforcement hammer in the Wage Equity Law is reserved for repeat offenders, who can be imprisoned for up to 90 days for subsequent violations.        This provision will likely serve as a deterrent to willful violations of the law.

More difficult to assess will be the predictions of critics of the law that it will have a negative impact on the creation of new jobs in Philadelphia.  The Philadelphia Chamber of Commerce, among others, lobbied hard against the bill.  The Chamber criticized the bill as just the latest example of an overly-controlling City government telling companies how to run their businesses.  It warned that the law would hurt job growth and business expansion, claiming that the bill sends the message that “Philadelphia is not open for business.”  Indeed, Philadelphia has been accused in the past of having a reputation for having a high cost of doing business.

Finally, some business leaders, led by David Cohen, a senior vice president of Comcast, which is headquartered in Philadelphia, have challenged the legality of the law, saying that it impinges on employers’ First Amendment rights to ask prospective employees their salary history as one means of determining a fair salary for their new positions.  To date no court challenges to the law have been filed.  However, after City Council approved the new law but before the mayor signed it into law, Comcast’s legal team sent a lengthy memo to the City, which was made public.  The memo threatens a lawsuit against the City if the new law was not vetoed by the mayor, which we now know did not happen.  Instead, Mayor Jim Kenney signed the pending law, which now becomes effective 120 days from the January 23, 2017 signing date.  The ball is now in Comcast’s court whether to sue or not.

What Should Employers Do To Prepare For the Effective Date of the New Ordinance?

Philadelphia employers should begin now to revise their hiring processes and application forms to be ready for the May 23 effective date.  Obviously, written application forms will have to be edited to remove any questions about prior salaries.  More difficult will be training interviewers not to ask questions that they have routinely asked job candidates for countless years, especially for companies that give line managers, rather than human resources department personnel, responsibility for hiring decisions.  Such employers might be better advised to tell all interviewers that they should refrain from any discussion of salary, past, present or future, with job candidates, and that such discussions will be undertaken by human resources personnel trained in the nuances of the Wage Equity Law.

Employers who plan to ask their job applicants for “knowing and willful” waivers of their right not to reveal their salary histories, should be sure to put the request for waiver in a written document to be signed by the candidate.  That notice should explain to the candidate her right not to reveal her salary history and include language that the applicant has agreed, knowingly and willfully, to waive that right and provide the salary history.

What about non-Philadelphia employers who come to the city to recruit employees; does the Wage Equity Law apply to them?  How about an employer located outside the city, an executive of which comes into the city to meet with a job candidate?   And if a Philadelphia resident goes to New York for a job interview with a national employer that happens to have operations in Philadelphia, does the ordinance apply to that situation? As with any new law, the scope and applicability of the law will become clearer as time goes on, as the Philadelphia Commission on Human Relations decides how broadly it intends to try to enforce it, and as the courts rule on the legality of the Commission’s decisions and interpret the gray areas of the law.

 

Philip Kirchner is a shareholder in and former chair of Flaster/Greenberg P.C.’s Commercial Litigation Practice Group, a member of the Labor & Employment and Construction Litigation Practice Groups, and member of the Restaurant & Hospitality, Construction, Nonprofit & Charitable Organizations, Gaming and Alternative & Renewable Energy Industry Groups.

Hiring A Competitor’s Employee? Proceed With Caution!

For the first time since its enactment over four years ago, a federal court has interpreted a provision of the New Jersey Trade Secrets Act (the “Act”).  The decision, unfortunately, leaves New Jersey employers who are considering hiring a competitor’s employee on uncertain ground.

In Baxter Healthcare Corp. v. HQ Specialty Pharma Corp., Baxter, a pharmaceutical company, sued its competitor HQ for patent infringement, tortious interference with the non-competition provision of its former employee’s employment contract, and breach of the Act for misappropriation of its trade secrets.   The court refused to dismiss the claim under the Act, despite finding Baxter could not prove HQ knew the employee was subject to a non-compete agreement or had knowledge of the former employer’s trade secrets.

George Owoo worked as a scientist for Baxter before leaving to work for its competitor, HQ.  He was a specialist in esmolol premixed injectable bag drug delivery systems.  At the time it hired him, HQ was not a participant in that market.  However, HQ soon filed several patent applications, listing Owoo as the inventor, for new esmolol products that would compete with Baxter’s similar products.

Before hiring Owoo, HQ had interviewed him extensively to inquire about his experience at Baxter.  He repeatedly denied he had an employment contract with Baxter or any knowledge of Baxter’s trade secrets, insisting that his knowledge in the esmolol premixed injectable bag market was in the public domain.  Based upon his representations, HQ hired Owoo and put him to work on developing esmolol products.

To prove its interference with contract claim, Baxter needed to show that HQ had acted with “malice”, i.e., an intention to interfere with its former employee’s contractual obligations to Baxter.  Because there was no evidence HQ had any knowledge of the employment contract, and, to the contrary, had been repeatedly assured by Owoo he had no contract, the court ruled Baxter could not show HQ acted maliciously and, therefore, could not prove tortious interference.

By contrast, a claim under the Act requires neither an employment agreement nor knowledge of it by the new employer.  Baxter claimed HQ misappropriated Baxter’s trade secrets by using them without authorization to develop its own competing products.  The court stated HQ could be liable for breach of the Act if Baxter could show HQ had used Baxter’s trade secrets at a time when HQ either knew or should have known Owoo had acquired them through improper means.

The question before the court,therefore, was whether HQ knew or had reason to know that its new employee’s esmolol formulation for HQ was derived from his knowledge of Baxter’s trade secrets.  Significantly, the court found there was some evidence that suggested HQ knew of Owoo’s prior involvement in developing Baxter’s esmolol program.  Most troubling, the court found HQ’s interrogation about his work history at Baxter revealed a concern on HQ’s part that he might have been privy to Baxter’s trade secrets and might have been preparing to use them at HQ without Baxter’s authorization.  Thus, the very investigation by HQ that formed the basis for the court’s decision to dismiss the interference with contract claim became the key fact in the court’s conclusion not to dismiss Baxter’s Trade Secrets Act claim.

What can companies do in light of the Baxter decision to protect themselves from Act claims when they are considering hiring a competitor’s employee, who might have knowledge of its trade secrets?  The Baxter decision suggests that perhaps HQ was damned if it did and damned if it didn’t investigate.  Despite that HQ did investigate, and, in fact, at least in part, because it did investigate, the court refused to dismiss the Trade Secrets Act claim against it.  On the other hand, although not addressed by the court in Baxter, had HQ not investigated, the court almost certainly would have refused to dismiss the Trade Secrets Act claim, and perhaps the interference with contract claim, as well.  In other words, choosing not to investigate new employees’ backgrounds is not a wise strategy for avoiding future liability.

There are ways a new employer can enhance the benefit of its investigation in the hope of avoiding claims under the. Act.  First, HQ could have had its new employee sign a written statement following the investigation certifying that he (1) was not under any contractual obligations to Baxter, and (2) either had no knowledge of Baxter’s trade secrets, or, in any event, agrees not to use that knowledge in his new position.

Second, HQ accepted without attempting to verify Owoo’s claim that his information was in the public domain. Had it done so, it would have had a stronger argument to avoid liability under the Act.

Finally, employers can reduce exposure to liability by insulating their new employees from working in competition with their former employers.  That tactic might make the new employee less valuable to the new employer, so each employer will have to perform its own risk/reward analysis comparing the potential benefits of no restrictions on its new employee to the legal costs of an expensive lawsuit alleging violations of the Act.

There is no one-size-fits-all solution to the Hobson’s choice presented by the Baxter decision.  Companies considering hiring a competitor’s employee should proceed with caution, especially when the employee may know the competitor’s trade secrets.

Questions? Let Phil know.

 

Philip Kirchner is a shareholder in and former chair of Flaster/Greenberg P.C.’s Commercial Litigation Practice Group, a member of the Labor & Employment and Construction Litigation Practice Groups, and member of the Restaurant & Hospitality, Construction, Nonprofit & Charitable Organizations, Gaming and Alternative & Renewable Energy Industry Groups.

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