Protecting your vital assets

What action can a global corporation take to keep its
employees from setting up in competition or defecting to rival companies? Liz
Hall examines the difficulties of enforcing legally binding contracts across
country borders.

Globalisation and the erosion of the employee loyalty that
went hand in hand with traditional jobs-for-life have increasingly exposed
multinationals to the potentially devastating consequences of key employees
setting up in competition or being poached by a rival overseas.

The need for employers to put in a raft of
preventive measures such as loyalty bonuses and restrictive covenants is
becoming more urgent as the numbers of employees jumping ship increase.
Multinationals are most at risk of losing vital intellectual capital away from
their headquarters: it is often a case of while the cat is away, the mice will
play.

“Multinationals are particularly vulnerable
as they rely on branch office leaders who are the very ones who may be
disloyal. It’s easy for staff overseas to download information at the weekend
without headquarters knowing,” says Andrew Boling, partner in labour and
employment practice at Baker & McKensie in Chicago, Illinois.

Like most technology firms, Compaq has been
exposed to growing numbers of staff jumping ship globally:

“We have experienced an increase in the loss of
engineering, sales and marketing talent to other companies, including
start-ups, on a global basis,” says Wanda Holloway, associate general counsel-
human resources at Compaq in Houston, Texas.

Compaq does not generally enter into
non-competition agreements with staff.

“But we do use intellectual property assignment agreements
and confidentiality restrictions which mitigate the impact of loss of key
personnel,” says Holloway.

“We take protection of our intellectual
property very seriously and have been increasingly aggressive in putting a halt
to predatory hiring tactics and in addressing situations where there would be
inevitable disclosure of our intellectual property,” says Holloway.

Most employers turn to the law for protection
against loss of intellectual capital but it is an area which is much more
nebulous than that of protection of trade secrets, although there is an overlap.

Dr John McMullen, head of employment law at
Pinsent Curtis in London says:

 “One thing is
pinching someone’s secrets, another is pinching customers which is less
controlled. It is common to have clauses to restrict key employees from dealing
with clients for certain time periods and for employers to make claims for poaching
employees.“

Enforceability of contracts varies from
country to country, depending on local jurisdiction and relationships between
different countries. Thus employers can easily find themselves in no-man’s
land, with one of their overseas operations at risk.

“Companies can lose their entire capacity in
countries where it is difficult to get authority to set up in business and
where sorting out things like utilities can be cumbersome,” says Boling of
Baker & McKensie.

Take the case of Value Partners v Bain. International consultancy Value Partners,
with headquarters in Italy, opened its Brazilian subsidiary in 1994. By the end
of 1997, its Sao Paolo office had 20 employees producing annual gross sales of around
$5 million. According to Value’s complaint, rival Bain established a Sao Paolo
office in October 1997 and by early November, almost all of Value’s Sao Paolo
staff had jumped ship to Bain.

Value filed criminal charges in Brazil and
New York against many of the staff, alleging breach of trust and loyalty and
theft of confidential information. The US courts ruled that the case would be
more conveniently and efficiently dealt with in Brazil under the forum non conveniens doctrine.
Unfortunately for Value, Brazilian law offers none of the US’ significant
compensatory and punitive damages for employee disloyalty.

The more reasonable a
restrictive covenant is, the more likely it is that courts worldwide will
enforce it. But in some areas such as Latin America and the US state of
California, non –competition clauses are illegal.

Generally speaking, the shorter the time
period of restraint, the wider a geographical area may be tolerated. A covenant
is also more likely to be enforced if it applies only to certain key staff.

“For our key engineers and executives we
enter into a non-competition agreement giving them the option of leaving the
company but not of working for a competitor. To be enforceable, these
agreements have to be reasonable in terms of location and time and they cannot
apply to all staff,” says John Han, associate general counsel for intellectual
property at Ericsson in Dallas, Texas.

Henry Clinton-Davis, partner and head of the
employment and human resources team at Brobeck Hale and Dorr says: “Plenty of
cases have been struck out because they are too wide-reaching but if the
clientele is genuinely global and the employer is circumspect in other areas
such as time period, enforceability is more likely. It’s a balancing act.”

The advent of the ‘global village’ means courts are more
likely to accept the need for worldwide covenants, particularly to protect
state-of-the-art technology or other trade secrets. It is still unusual for
global restrictions in employment contracts to be upheld as can be seen in the
case of Hinton & Higgs (UK) Ltd v
Murphy and Valentine (1989) IRLR 519 (Court of Session).

But the tide is turning to an extent – in the
case of Scully UK Ltd v Lee (1998)
IRLR 259, the UK’s Court of Appeal
specifically referred to the fact that business is becoming more international
and the relevant covenant was to protect dissemination of confidential
information – not constrained by national boundaries.

In the case of Poly Lina Ltd v Finch (1995) FSR 751, the claimant – a plastic
goods manufacturer – was able at trial to enforce against its former marketing
controller a worldwide covenant taken to protect both technical and commercial
information.

In areas where non-compete clauses are
prohibited, employers turn to the trade secret disclosure doctrine to guard
against employee disloyalty. The California Court of Appeals decision in Electro Optical Industries v White, 90
Cal. Rptr. 2^nd 680, 199 Westlaw 108 6467 (Cal. App. 2^nd
Dist. 1999) was the first to address and embrace this doctrine.

Mexican employment lawyer Juan Carlos de la
Vega, partner at Santa Marina law firm in Nuevo Leon, Mexico, says that while
non- compete clauses have no legal teeth, employers still stipulate them in
contracts.

“Such clauses, saying key employees must not
set up in competition for one to two years, exert psychological pressure and
can be effective.”

Mexican law does recognise confidentiality of
information so this is one option employers can use to protect their
intellectual capital:

“Employers might be able to say the employee has had
access to confidential information and that by setting up in competition, he is
using this information, “says de La Vega.

Phil Dwyer, executive director
of HR at BCP Telecommunications in Sao Paolo in Brazil says that as non-compete
clauses are unenforceable, the company relies on an intellectual property
clause and a voluntary pay package given to key employees in instalments over
one year, dependent on ethical behaviour.

In many continental jurisdictions, there is
an obligation to compensate employees for a specified time period for not
working for competitors  – the time
period and amount varies from country to country. In Belgium and Germany, for
example, ex-employees are paid 50 per cent of their gross pay and benefits.

“It’s an expensive business and I have seen
US employers get their staff to sign non-competes in Europe not realising they
have to pay out,” says Baker & McKensie’s Boling.

Boling urges employers with UK or US
headquarters to consider specifying that litigation should take place wherever
the headquarters is located. Obviously this means that local courts in Belgium
or wherever cannot act but if the employer is fighting another multinational,
it can mean going against the competitor directly and taking advantage of the
UK or US’ broad unfair competition laws. This might have made all the
difference for Value Partners.

“Thus employers lose the small battle in
Italy, Belgium or Germany but win the war in London or the US, the home turf,”
says Boling.

Employers
using stock option plans which only vest over several years as an incentive for
employees to sign non-compete agreements should include a clause about
employees not being able to exercise gains if they indulge in disloyal
activity. In the case of International Business Machines v Bajorek 191
F.3d 1033 (9th Cir.1999), the court held that an IBM employee forfeited around
$900,000 in stock options on joining a rival, violating his stock option
agreement non-competition restrictions.

To be effective, employers should combine preventive legal
measures with ones to foster a company culture of employee loyalty,
strengthening bonds between the corporate parent and employees overseas.

“People
usually jump ship because they don’t feel rewarded or in control of their own
destiny. I increasingly see a lot of unempowered employees who feel like HQ’s
lackey,” says Fraser Younson, head of employment practice at McDermott, Will
& Emery in London.

How to draw up a
non-compete agreement

1.      Be
highly specific and reasonable: all-embracing employment contracts are very
hard to enforce

2.      Do
not lump all clauses together: breaking the contract down into different
sections makes it more likely that the courts will enforce at least some of it

3.      Consider
which geographical locations to include: the smaller the area, the easier it is
to enforce

4.      Consider
duration of restriction: the shorter the time limit, the more likely it is to
be enforced

5.      Specify
which information is confidential, such as pricing policy or customer lists

6.      State
that the employer should not only not disclose information but also not use it
for his own purposes

7.      Consider
specifying restriction against employee carrying out certain activities such as
selling specified products to specified customers or a specified market rather
than just saying they should not work for a rival

8.      Include
a non-poaching of employees clause, including only employees who have worked
for the company at the same time as the ex-employee

9.      Include
a non-solicitation of customers clause which applies to clients dealt with in
specific time frame.

Enforceability
of non-compete covenants around the world

Legal
links

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Baker
& McKensie: www.bakernet.com
Pinsent Curtis Biddle: www.pinsents.com
McDermott Will & Emery: www.mwe.com
Fox Williams: www.foxwilliams.com
Eversheds: www.eversheds.com
Hammond Suddards Edge: www.hammondsuddardsedge.com

This
article first appeared in the July/August 2001 edition of Global HR
magazine, the new monthly publication HR professionals working within
multi-national companies who have responsibility for global HR policy. To
subscribe to Global HR, visit www.reedbusiness.com/products/global_hr.asp