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

The
need for employers to put in a raft of preventive measures, such as loyalty
bonuses and restrictive covenants, is becoming ever more urgent as the number
of employees jumping ship increases. Multinationals are most at risk of having
vital intellectual capital lured 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 prove to be disloyal. It’s easy for staff overseas to
download information without headquarters knowing," says Andrew Boling,
partner in labour and employment practice at law firm Baker & McKenzie in
Chicago, Illinois.

Like
most technology firms, Compaq has been exposed to a growing number of staff
quitting for global competitors. "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
Holloway concedes, "We do use intellectual property assignment agreements
and confidentiality restrictions which mitigate the impact of loss of key personnel.
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."

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 legal firm 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 those 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.

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 S‹o Paolo office had 20 employees producing annual gross sales of
around $5m. According to Value’s complaint, rival Bain established a S‹o Paolo
office in October 1997 and by early November almost all of Value’s S‹o Paolo
staff had migrated 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’s 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-compete clauses are illegal. Generally speaking, the
shorter the time period of restraint, the wider a restriction on 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 HR team at international
law firm 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) v Murphy and Valentine, 1989, IRLR 519 (Court of Session).

But
the tide is turning to an extent. For example, in the case of Scully UK 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 v Finch, 1995, FSR 751, the claimant, a plastic goods
manufacturer, was able to enforce a worldwide covenant taken to protect both
technical and commercial information against its former marketing controller
through the courts.

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 Appeal’s decision in Electro Optical Industries v White, 90 Cal. Rptr.
2nd 680, 199 Westlaw 108 6467 (Cal. App. 2nd Dist. 1999), was the first to
address and embrace this doctrine.

Mexican
employment lawyer Juan Carlos de la Vega, partner at a Santa Marina law firm in
Nuevo Leon, Mexico, says that while non-competition 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," he says.

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 S‹o Paolo, 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 varying from country to country. In Belgium and Germany, for
example, ex-employees are paid 50% 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
& McKenzie’s Boling.

Boling
urges employers with UK or US headquarters to consider specifying that
litigation should take place wherever the headquarters are 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’s 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 build 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 those
that 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," warns Fraser Younson, head of employment practice at McDermott,
Will & Emery in London.

How
to draw up a non-compete agreement

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

–
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.

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

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

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

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

–
Consider specifying restriction against employees 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.

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

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

Legal
links

–
Baker & McKenzie: www.bakernet.com

–
Pinsent Curtis Biddle: www.pinsents.com

–
Fox Williams: www.foxwilliams.com