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Hot property: defending IP when employees walk away
Imagine if a key employee, who had worked for an organisation for 15 years, announced his retirement, only to recommence work a year later with the organisation's closest competitor. Or if, within the space of four months, three members of a research and development team resigned in order to join the same start-up. These scenarios might well raise red flags that there has been unlawful activity or intellectual property (IP) infringement, but how should a company go about investigating and reacting to these scenarios?
If an employee's departure raises concerns, the key is to act quickly and co-ordinate the investigation across the company. It is usually, but not always, the in-house legal team that carries out this co-ordinating role, pulling in different parts of the company, including senior executives, HR, IT and public relations (PR).
One of the first actions to take is to consult the departing employee's employment contract. This can be led by HR, in conjunction with the in-house legal team. Ideally, there should be clear obligations on the departing employee relating to:
Protection of confidential information.
- Assignment of all IP created by the employee to the company, on creation.
- Delivery up of all confidential information, IP and IT equipment.
- Non-solicitation of customers and employees.
- Non-compete provisions.
It is worth bearing in mind that, while the latest version of the employment contract being used by HR may contain all of the desired IP and confidentiality protection, some of the longest-serving key employees may be on old employment contracts that contain less stringent legal protections. It is therefore worth periodically performing an audit of the employment contracts for key employees to identify those high-risk contracts.
Simultaneously, HR should also look to see if any specific terms were agreed with the departing employee relating to his exit.
Internal communications and disclosure
As soon as litigation against the departing employee becomes even a possibility, the company is under an obligation under the Civil Procedure Rules to preserve all documents relevant to the dispute, including those that prejudice its own case. The in-house legal team should therefore send round a "litigation hold" email as soon as possible, informing colleagues of the impending litigation and requiring key documents to be preserved.
The duty to preserve documents extends to electronic documents that would otherwise be deleted in accordance with the company's document retention policy or in the ordinary course of business. The in-house legal team should therefore liaise with the IT team to ensure that all electronic data relevant to the dispute, including deleted data and metadata and backup servers, are preserved.
This duty to preserve documents is a continuing duty, which means that the company needs to be careful about internal communications as these may also be disclosable. During this investigation period, the HR and IT teams may be communicating with each other; for example, with regard to what IP they believe the departing employee might have taken, and whether they consider it to be confidential. These emails could harm the company's legal case if they have to be disclosed. The in-house legal team should therefore control what documents and notes are created at this time and instruct the investigatory team on how to ensure that any documents they create benefit from legal privilege.
As well as thinking about the documents that the company may have to disclose, it pays to think early on about what documents might be useful from the other side too. It is common to seek disclosure of the departing employee's personal laptop, USB sticks and text messages sent on personal and business mobile phones, in order to build up a fuller picture of what wrongdoing might have taken place. A company can also make a number of court applications in order to protect or gain early sight of key documentary evidence. These include an order for pre-action disclosure, a search and seizure order, a freezing order, or a Norwich Pharmacal order.
Forensic analysis is important to try to establish an evidence trail linking the departing employee to an unlawful act of IP infringement.
A key mistake that companies often make is to ask the internal IT team to carry out an initial investigation on the departing employee's laptop or other devices. This can lead to key evidence not being preserved, for example, "date last modified" data for files. Not only does this compromise the evidence trail, it also means that the company risks failing to preserve key evidence. Anyone within the company who carries out an initial forensic IT investigation should be willing to give a witness statement about the steps they carried out, therefore, it is best to avoid instructing junior IT assistants who may not want to be witnesses in a later court claim.
It can be worth getting a professional forensic examiner on site, at an early stage, to preserve evidence (by taking image copies of the devices) and to prepare an expert report that can be used in any subsequent court proceedings. Internal IT teams still play a vital role in terms of liaising with the external expert (see box "Preserving IT evidence").
Legal action and remedies
Once the forensic examination has uncovered evidence as to which IP might have been taken, it falls to the in-house legal team and external counsel to decide what causes of action might exist against the employee and which remedies to pursue.
Usually a company will rely on breach of confidence, however, it pays to think widely about what IP infringements the departing employee might have committed. For example, a departing employee who copies emails from key clients onto his personal USB stick not only commits a breach of confidence, but also a copyright infringement each time that employee copies and pastes the content onto a USB and then downloads them onto his laptop, or uploads them on his new employer's servers. It is therefore worth consulting an IP specialist to make sure that legal claims are cast as far and wide as possible.
It is a well-established legal principle that departing employees can take know how they have acquired during the course of their employment to their new employer, however, they cannot use trade secrets. There is no fixed legal definition for what amounts to a trade secret but it is likely only to include information with a very high degree of specificity and confidentiality such as secret processes of manufacture like chemical formulae, designs or special methods of construction (see feature article "Trade secret protection: guarding against a global threat", www.practicallaw.com/5-637-7032). Many companies are caught out by the fact that they do not consider in advance what trade secrets are key to the business and do not protect them accordingly, for example, by limiting their disclosure to a limited number of individuals within the company.
As well as considering potential causes of action, it is also important to consider what remedies are important to the company. Typically, a company will seek damages for lost profits, lost customers and increased recruitment fees, or alternatively an account of profits from the other side. For this reason, it is often worth including the new employer of the former employee as a co-defendant in any legal claim because the new employer may be vicariously liable.
The most valuable remedy can be an injunction: this can be sought at an early stage in proceedings to keep the former employee and the new employer from using the IP and confidential information, or to mandate the delivery up of the IP and confidential information. If granted, an injunction can have significant commercial implications for the former employee as well as the new employer. Injunctions therefore tend to be a strong inducement to settle the case early on.
Taking court action can be very helpful in conveying a public message of strength, that is, that the company will protect its IP assets at all costs. However, litigation is not always the favoured option: some companies may prefer to avoid the publicity of employees leaving and instead to channel their efforts into bringing forward their latest product launch date and, for example, being the first to bring their product to the market.
Internal and external PR
It is highly likely that customers will hear about any significant employee or team moves and the company will need to consider how to convey a message to those customers, and the market more widely, about how those departures are being handled.
As well as external PR, the company should also manage the morale of the remaining workforce which may be deflated following the exit of a significant employee or team. As far as possible, any issues should be contained to avoid further resignations and escalation of the situation into a larger-scale team move.
Reproduced from Practical Law with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7542 6664.