Hit the Road, Jack: Protecting Your Company When a High-Level Manager Leaves
June 2008

Hit The Road, Jack: 
Protecting Your Company When a High-Level Manager Leaves.

Breaking Up Is Hard To Do
After years of blood, sweat and tears, your gaming equipment company is flourishing. Your business has successfully transitioned from supplying specialty parts to gaming manufacturers to providing cutting edge products and services that greatly enhance the casino experience and drive casino revenues and the bottom line. You’ve built a solid base of loyal customers, and you’re gaining an ever-increasing share of the lucrative gaming markets through word of mouth and targeted, costly marketing efforts. Your portfolio of innovative and highly successful gaming equipment products is about to be expanded by new products in the pipeline. Your key people work hard; they are committed, and they are some of the best in the field. Things are looking good.

Suddenly, Murphy’s Law rears its ugly head. One of your top managers wants more compensation – much more. More than your Chief Financial Officer and your company can stomach. After some intense, and maybe even emotional, negotiations, you draw your line in the sand, hoping (but not very hopeful) that loyalty will win out over the immediate draw of more money elsewhere. Nevertheless, you soon get the breakup note or letter or speech. Not surprisingly, he already has a position lined up with a new well-financed start-up.
This same scenario can happen to any gaming company (and has happened to many) whose general manager or marketing/product development director is lured away by the promise of larger rewards.

It raises some important questions: how do you deal with the employee in the time remaining before he leaves for good? How do you protect the company’s good will and assets? How do you prevent the soon-to-be-ex employee from walking out the door with your existing customers and other key employees?

Don’t prolong the farewell.

Suppose the employee is willing to give you up to several weeks of notice, if you are so inclined. Should you take him up on his offer? It’s tempting to jump at a soon-to-be-former manager’s offer to stay until the last possible minute and clean things up for the replacement, maybe even train that person. There are a couple of important reasons, however, to consider other options. First, there’s the inevitable “short-timer’s syndrome.” Generally, by the time an employer receives notice, the once-workaholic, go-down-with-the-ship superstar employee has already mentally and emotionally moved on. Keeping him around for a few more weeks to push paper probably is more of a drain on company resources – not to mention the morale of other employees – than it’s worth.

Second, because loyalties have shifted (and make no mistake that they have), the manager is now effectively a hostile intruder in the heart of friendly territory. Until he is one hundred percent gone, he still has access to the vital organs of the company’s operations: computers, software code, customer lists, supplier lists, financial information, marketing and business development plans and other trade secrets. Although this individual is probably not likely to do anything inappropriate on his way out the door, why bet the house on it? Better to be safe and avoid the situation than potentially sorry later.

Bottom line, unless the soon-to-be-ex employee is a critical part of a profitable ongoing project and is truly indispensable, thank him kindly for the offer to stay, then gently and professionally tell him to hit the road.

Sleeping With The Enemy

It’s bad enough when a gaming company loses one of its key people, but what if he turns up across the street, at the offices of a direct competitor? Worse yet, what if he’s holding the exact same position he held with your company? Obviously, if that is the case, chances are pretty good that he was specifically recruited and hired because of the expertise that he gained, or the results that he achieved, while employed with you. That’s a lot of training and mentoring that your company invested that is now going to benefit a competitor.

How do you prevent this sort of “betrayal”?

Companies that have weighed the risk of this exact thing happening, and made a deliberate choice to avoid it, protect their investment by requiring key personnel, even before they are hired, to sign non-compete agreements. These types of agreements restrict ex-employees from competing against a former employer for a period of time after they leave. The agreements are enforceable in court, subject to the requirement that they be reasonable in scope (i.e., distance) and duration.

If your company had the foresight to require a non-compete agreement, then all that needs to be done in this scenario is to send a nice, polite reminder to the former manager about his obligations under the non-compete. Usually, this will be all that it takes for him, and his new employer, to rethink their actions and potential exposure to liability. Your former executive might even enjoy a sabbatical from the industry. Of course, needless to say, it also helps if the non-compete has a provision allowing you to recover reasonable attorneys’ fees and costs if a lawsuit has to be filed to enforce the agreement and you prevail in the suit.

Before Walking Through Gate, Please Empty Pockets

Another key protection for businesses when high-level executives or managers leave can be found in agreements that proscribe the unauthorized disclosure or use of the company’s confidential and proprietary information and trade secrets. Nondisclosure agreements are valid in Nevada and can cover a wide variety of information that might not seem at first blush to qualify as “trade secrets” in the traditional sense of the word, like complex chemical formulas and software code. For example, customer/pricing information, business methods and marketing strategies and plans can all be protected.

Even in the most mundane of businesses, there can be valuable company information that would give competitors an unfair edge if it fell into their hands – for example, customer and supplier lists and price sheets. This information can easily be protected with nondisclosure agreements. Such agreements should, though, be put in place well before any need for them arises. After all, recapturing information that has been leaked is basically like trying to shove smoke back into a glass jar.

Equally important are agreements specifying that all intellectual property (e.g., software programs, manuals, prototypes, etc…) that is developed by employees during their tenure with the company belongs to the company. These agreements ensure that key personnel won’t be able to take products/services that they participated in developing to their next employer – who is likely to be a competitor. Too often, it is simply assumed that employees will leave their work product behind when they move on. Assumptions, however, don’t hold water, and they certainly don’t hold up in court.

Even if your company has non-disclosure and proprietary intellectual property agreements in place, though, don’t develop a false sense of security and let your guard down in the final hours before a key employee walks out the door for good. Do your due diligence during the exit interview – make him return all company property in his possession, including any company equipment (e.g., laptops, PDA’s, cell phones), documents (e.g., company financial information, internal company memos), and electronic files. Not enforcing your own policies and requirements can come back to bite you later in the form of arguments that you “waived” or gave up those protections.

When It Rains, It Pours

The common truism that the easiest business to develop is existing business often leads former employees to solicit clients that they previously worked with. If a former employee has a good rapport with your clients and can promise them the same level of service at the same cost or lower, it’s very possible you’ll be losing not just a key employee but business as well. Since he has inside information about what your company is delivering to those clients, he is in a far superior position to lure them away than another competitor.

Companies can protect themselves against this frustrating – and financially damaging – situation by including a provision in their employment agreements that prohibits employees from soliciting clients when they separate. Former employees should be permitted to inform clients of their departure and new contact information, but a non-solicit agreement will give them pause before they go any further in trying to take clients with them and away from you.

It’s not just clients who are at risk of being lured away. Other employees are often targeted by high-level managers who have switched employers. The reason can be as simple as loyalty or as insidious as a desire to harm the former employer. Whatever the reason, if a former manager has inside knowledge about the compensation of other employees (as well as how loyal they are to the company), and he uses that information, then he has an unfair advantage in trying to recruit them away. To protect against this happening, any non-solicit agreement should also include a prohibition against soliciting other employees to leave.

As with a non-compete, if a non-solicitation agreement is in place, sending a polite reminder of his obligations under the agreement to a former key employee will go far towards ensuring that when he walks out the door, clients, suppliers and other employees won’t be going with him.

When All Else Fails

Despite all the advance planning in the world, things can, and often do, go awry. There’s just no way to completely eliminate the risk that an ex-employee will do something that is in his, or his new employer’s, best interest but harmful to you and your company. There are options available to a business, though, if it finds itself in the worst case scenario of losing a key employee who has confidential and trade secret information, and who has taken clients and employees with him, to a direct competitor.

First, if there are signed non-compete, nondisclosure and non-solicit agreements, or an agreement not to misappropriate the company’s intellectual property, then the company is in good shape and can enforce those agreements in court.

Second, even without the benefit of such agreements, a business may still have claims against a former employee, under the previously discussed scenarios, for breaching fiduciary duties owed to the company and for breach of other duties that are imposed by law. For example, the law imposes a duty on a former employee – and his new employer - not to intentionally and wrongfully interfere with your company’s existing contractual relationships with customers and employees and not to misappropriate or misuse your trade secrets.

It’s not an ideal situation, but it’s definitely not too late to protect your business and your investment. It may be time to go meet with the company lawyers.

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