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Employee Poaching

477986347Poaching employees from a rival company has risks. So does agreeing with your rivals not to poach employees from each other. Potential poachers beware…

There some serious risks involved with poaching employees from another company.

The general rule is that competitors may solicit each other’s employees as long as they don’t use unlawful means or engage in acts of unfair competition. See Bus & P C §16600. Poaching using unlawful means could lead to a claim of interference with an at-will employment relationship. Reeves v Hanlon (2004) 33 C4th 1140. To establish this cause of action, the employer must prove that the defendant engaged in an independently wrongful act—i.e., an act forbidden by some constitutional, statutory, regulatory, or other legal standard—that induced the former employee to leave his or her employment.

The Reeves case hits close to home for attorneys. The defendants in that case were two former attorneys of a law firm who resigned from the firm without notice and then formed a new law firm. In the months before leaving the firm and shortly after their resignations, they

  • compiled confidential client address and contact information for 2200 of the firm’s clients;
  • intentionally erased numerous client documents and form files from the firm’s computer system;
  • telephoned at least 40 of their former firm’s clients and persuaded them to move over to their new firm;
  • failed to provide status reports or information on deadlines for more than 500 clients; and
  • brought nine key at-will employees from their former law firm to their new firm.

The supreme court agreed with the court of appeal that these actions were “calculated to cripple the [plaintiff] firm’s ability to provide legal services.” 33 C4th at 1147.

Although Reeves created a new shield to protect employers from unlawful efforts to raid their employees, the decision doesn’t overturn prior law holding that it is not a tort to simply hire the at-will employees of a competitor by offering them better terms and benefits. As long as the inducement to leave isn’t accompanied by unlawful acts, a competitor can’t be held liable for intentional interference with at-will employment relationships.

When it comes to employees on contract—as opposed to at will—the employer may have separate claims against a poaching competitor for tortious interference with contract and prospective economic advantage, as well as statutory unfair competition under Bus & P C §17200. See CRST Van Expedited, Inc. v Werner Enters., Inc. (9th Cir 2007) 479 F3d 1099, 1105.

And there’s always the possibility that the employee being poached is subject to a nondisclosure agreement and other legal restrictions on the use of trade secret information acquired during employment. If that’s the case, not only is the employee who actually misappropriated trade secrets potentially liable, but so too may be any new employer or other person who benefits from the misappropriated trade secrets.

Here’s another contract issue that comes up in the poaching context: contract provisions that prohibit employees, on termination of their employment, from soliciting other employees to join a new business (so-called nonrecruiting or anti-raiding provisions) may be valid and enforceable even without any trade secret misappropriation or unfair competition as long as they’re reasonable in scope.

For example, in Loral Corp. v Moyes (1985) 174 CA3d 268, the court upheld a provision in an employee’s termination agreement that the employee would not “disrupt, damage, impair or interfere with his former employer by ‘raiding’ its work-staff” for the 1-year period following termination, concluding that the agreement wasn’t void on its face under Bus & P C §16600. The court narrowly construed the agreement as prohibiting only affirmative solicitation of employees by the former employee; it didn’t preclude the former employee and new employer from accepting and considering job inquiries from such employees. The California Supreme Court hasn’t weighed in on this issue yet, so employers might still be able to enforce “anti-raiding” clauses with their employees that prohibit “affirmative” solicitation for a reasonable duration, but keep on the lookout for further legal developments.

A flip side of poaching employees is an agreement not to poach them. This is what some Silicon Valley companies are alleged to have done and this alleged tactic resulted in a different type of legal hot water: antitrust law problems. Much to the companies’ chagrin, a judge has just ruled that this case can proceed to trial as a class action, making the stakes even higher.

For much more on the legally murky world of anti-solicitation agreements, turn to CEB’s Advising California Employers and Employees, chapter 11. On employee defection and trade secrets protection, check out CEB’s Drafting Employment Documents for California Employers, chapter 7.

Related CEB blog posts:

© The Regents of the University of California, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

3 Responses

  1. Thank you For Sharing!

  2. It would be very dangerous for employers to assume that Loral is still good law after Edwards v Arthur Andersen. One needs to read the Loral case carefully to see why. The Loral court’s rationale for finding that the non-raiding agreement survived B&PC §16600 was that it was limited, only for a year and not a complete bar to competition. This is very similar to the “reasonable restraint” theory that the Edwards Court struck down for good. If the same Loral case was tried today, in the post-Edwards environment, I don’t think anyone would put good money on the employer to win that case.

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