It’s a Raid!
Eight Situations When You Are Most Vulnerable
to Losing Employees to a Poaching Competitor and
Ten Tips to Avoid Losing Key Employees
by Milton Bordwin
Rubin and Rudman LLP
Boston, MA
This article is an excerpt from the author’s Preventive Law Newsletter, but the problems
are as timely today as when the original article was published.
First, a definition: The term employee poaching is used to describe practices that involve
companies hiring talented employees from their competitors.
Replacing an employee is costly and to increase employee retention, watch out for
those situations in your company or industry that can lead to poached jobs – to protect your
company, you’ve got to prevent poaching. Competitors and startups are always on the
lookout for good people – your people – and will try to hire them right out from under your
nose. They’ll poach them and you’ll quickly learn that newly vacant poached jobs are
sometimes difficult, but always costly to fill. So exercise extra care in these situations – all
taken from real cases that went to court.
1. A new competitor (who may poach your employees) emerges. If a company that had
not previously competed with you in a certain niche suddenly shows an interest in entering
that niche, or some new VC-funded company, maybe a startup, suddenly shows up, this may
be a warning signal. Years ago, this may have happened when Hyundai Electronics America
hired away five engineers from Advanced Micro Devices, which had developed the newest
flash memory processes for its computer chips and semiconductors. The same pattern
showed up when Unocal decided to enter offshore oil drilling in the Gulf of Mexico, hired
three Shell executives and senior managers and then hired eight Shell geoscientists,
constituting a major part of Shell’s team in that particular niche. So stay alert: Is a potential
competitor beginning to appear on your radar scope?
2. Joint venture, merger or strategic alliance plans fall through. Failed attempts at a
merger, forming a joint venture or a strategic alliance seems to be another setting where
one of the parties decides there’s another way to expand or get into the new business:
Poach and hire away the other party’s people (and maybe take up some of the
information you learned during the negotiations). During the information-sharing
“courtship” period, the potential partner may suddenly change its mind and decide it can
do the project by itself. So stay alert: Are you about to increase your vulnerability and
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“open your books” to a competitor you’re about to join in a business venture?
3. Customer loyalty is to your employee, not your company. Some businesses are
particularly prone to raiding because the customers’ loyalty lies more with their contact
person – like a salesperson or a broker – than with the employer company. Situations like
this demand constant vigilance and countermeasures by the employer. Merrill Lynch has
historically been particularly vigilant when employees depart. In one such situation, when
five Merrill Lynch stockbrokers defected to Smith Barney, the suit ended with S-B paying ML $500,000. Insurance brokerage is another example where the business usually follows the
individual, and constant vigilance is needed.
The question of “who owns the customers” can arise in some unusual circumstances.
The Indianapolis Star reported in November 1998 on an argument between two hospitals
about a weight-loss program and obesity clinic which three departing surgeons and two
other employees were moving from Winona Memorial Hospital (plaintiff) to St. Vincent
Hospital (defendant). One departing surgeon’s lawyer is quoted: “Our position is the patients
are the surgeons’ patients, not Winona’s.” So stay alert: Who owns your customers?
4. Unusual event is a clue to a coming defection. Part of your constant vigilance might
detect unusual events that you probably ought to check into. Lawyer Stevens was in charge
of legal business in China for Coudert Brothers, at the time a leading Wall Street international
law firm. Under the headline, “Coudert Seeks $1 Million Over Defection,” The Wall Street
Journal reported in 1997 that the law firm’s court papers indicate that ex-partner Stevens
“took time off, saying he wanted to study for the California bar exam and think about leaving
his practice to teach.” Coudert contends that he was, instead, arranging to move his practice
and some other Coudert lawyers to Freshfields, a major UK corporate law firm. An unusual
event is sometimes a tip-off that something’s about to happen. So stay alert: Is anything
“odd” happening among your executives or officers that could indicate that employeepoaching is about to happen?
5. Office remote from headquarters. A remote or branch office away from the company
headquarters sometimes creates a good poaching situation for competitors in the branchoffice city. An example: A, K & O, a leading law firm centered in the NY-NJ area specializing
in suing insurance companies for corporate policyholder clients, saw most of its 50-lawyer
Washington office jump to other firms in the summer of 1996. So stay alert: Are you keeping
a close eye on remote branch offices? Those remote employees are more easily poached.
6. Are “the natives restless?” In this same A, K & O situation, there were other factors at
work, as reported in the legal press. Some lawyers wanted to provide clients with a broader
range of services, outside the firm’s insurance-plaintiffs’ niche. The defections were also a
signal that the founders, older lawyers, should step back a bit and let the younger ones start
taking leadership roles. With these lessons learned, according to press reports, this firm
managed to turn a “lemon” situation into “lemonade,” with an apparently reinvigorated,
profitable and more diversified firm. So stay alert: Are conditions less than “happy” in your
company? And are you taking effective action to address those conditions?
7. The wounded company. Financial weakness in a company can also make it a target for
poaching. This was obviously the case when Sears planned to go after Montgomery Ward’s
executives in the midst of that company’s Chapter 11 reorganization bankruptcy proceedings.
Indeed, the presiding federal judge in the Montgomery Ward bankruptcy case issued a
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specific anti-poaching order against Sears Roebuck. The newspaper headline tells the story:
“Sears Roebuck Told Not to Go Shopping For Ward Managers.” Any reorganization plan for
the ailing M-W could have been torpedoed if Sears managers were allowed to carry out the
e-mailed orders from Sears top management: “Be predatory” in hiring Ward executives. So
be alert: Is your company financially weakened or does it look vulnerable to your
competitors? Are your employees getting nervous about the security of their jobs and are
ripe targets for poaching?
8. The unfulfilled, ambitious Executive VP. A not unusual situation that’s ripe for a
defection involves a disappointed second-in-command who has been patiently waiting in the
wings to succeed to the next higher rung in the executive ladder – sometimes even the CEO
position. This was the case which plaintiff International Paper Company (IPC) brought against
its former Executive VP, Mark A. Suwyn and his new employer, Louisiana-Pacific Corporation,
an IPC competitor.
In July 1994, International Paper was obviously quite concerned about the loss of
people and how this would adversely affect the company, so IP decided to act. As the court
noted, “Approximately 8,700 International Paper employees, including 700 of its most senior
executives were … required to execute … confidentiality agreements.” Then, following the loss
of several key executives to competing lumber and paper companies, the CEO also asked
certain select employees to sign non-competition agreements, among them, Mr. Suwyn.
The lesson of this case derives from Mark Suwyn’s resistance to such an agreement
and his finally agreeing in conversations with IPC’s CEO. In their talks, the CEO agreed to limit
the scope of the non-compete to several named companies. Suwyn then reduced these
oral agreements to writing, he attached them to the standard form non-compete agreement,
which he then signed and returned. As it turned out, IPC competitor Louisiana-Pacific was
not on this short list. And in September 1995, when Suwyn was passed over for the CEO
position at IPC, he left to become CEO of Louisiana-Pacific. (This became official in January
1996.) The fact that Louisiana-Pacific’s name was not on IPC’s non-compete list plus a
general weighing of the parties’ respective equities (e.g., did the benefit to IPC outweigh the
restriction on Suwyn’s freedom?) resulted in International Paper losing this case: No
injunction against Suwyn and no finding of any breach of fiduciary duty. Case dismissed. So
stay alert: Do you have a valuable executive who’s waiting in vain to be promoted?
What Can You Be Doing About It?

Recommendations

Working with human resource experts, develop a set of policies, including compensation
and incentives to foster employee loyalty and designed to retain your employees, all the
while recognizing that you may not succeed in preventing defections to poaching
competitors. Remaining competitive in the employee marketplace may require attention
to more than just salaries and bonuses. You may also have to take a close look at
working conditions. But you have to be realistic: In some situations, it may just not be
economically feasible to compete with dollars against another company to whom your
employee or team may be worth much more than you can pay them in your company’s
structure.
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
Be alert to the situations – some of them noted above – where defection to a poaching
competitor of one or more of your key people is most likely to occur. Sometimes, by
facing a situation early, you can address it head on and either prevent the loss of people,
or prepare your company to deal with the loss effectively.

Use contractual restrictions with key employees. Your lawyer can recommend the sorts
of contracts that “work” in your state; you may want to consider employment agreements
for a fixed term; non-compete covenants; non-disclosure covenants relating to
confidential information and company trade secrets; and covenants of non-solicitation of
your employees and customers or, if possible, prohibit any contact by former employees
with your customers and present employees.

One contractual restriction that may work (but also may backfire – check with your
lawyer) is requiring the employee who leaves before a minimum tenure (say, 36 months)
to repay the company any costs of training or relocation, or a signing bonus or similar
payment that has not been fully amortized. A California Court of Appeal ruled that
employers may require an employee to repay the costs of voluntary educational benefits
should the employee choose to leave within a reasonably defined time period, and
compete, after receiving the benefit. And this despite California’s well-known public
policy against non-compete agreements. See USS-POSCO Industries v. Case , No.
A140457 (California Court of Appeal, 1 st App. Dist., Div. One; A140457; Super.Ct. No.
MSC1102781 Jan. 26, 2016).

Another restriction should be a non-disparagement covenant; you don’t want your
poached ex-employee bad-mouthing your company after they go to work for a
competitor. This restriction does not come with a guaranty of effectiveness, but most
people do take seriously a contract which they’ve signed.

A clear agreement as to company ownership of inventions and the like may forestall the
employee who decides to leave to exploit his “good idea,” which he may attempt to
patent in his own name and exploit commercially on his own or with another, competitor
company. Ask your lawyer about a “work-for-hire agreement,” particularly if yours is a
business involving creative work, inventions with possible patent and copyright
implications.

Employees should understand, through appropriate company communications,
periodically reinforced, that while they are working for the company, there exists a
fiduciary relationship to the company and an obligation of fidelity. Explain clearly and in
writing the loyalty level you require of your employees.

With your new employees, inquire prior to hiring whether they are subject to a restrictive
agreement with their former employer; and communicate to them that your company
policy is not to learn of or use any other company’s trade secrets or confidential
information of which they may be aware.

Be wary of expanding your company by planning to poach employees from a competitor.
Those plans could come back to haunt you in a costly court room confrontation.
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
When beginning to open your books to a competitor in connection with a proposed
merger or acquisition, or a joint venture or a strategic alliance, consider slowing down and
“spoon-feeding” disclosures as you negotiate. You don’t want to learn that the two
parties are wholly incompatible at some point later on, after you’ve given away all your
trade secrets and confidential information. Needless to say, you don’t even start talking
without a well drafted confidentiality agreement, which should include a non-solicitation
and non-hiring promise from the other side.

Check the “social-media” side of your business and your employees’ involvement with,
e.g., Linked-In. Can your employee leave for another company and take all your on-line
contacts and materials to their new employer? As usual, the law lags behind fast-moving
developments in technology, although there may be some laws in your state that relate
to these issues. Identify your social-media concerns if an employee is poached or goes
into business on their own; and then express those concerns to your lawyer and get
advice on how to protect yourself.
Finally, my congratulations on having developed such an attractive work force that your
people are sought out by competitors trying to poach them – and congratulations on staying
alert to the risks such success brings with it!
Good Luck!
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