Wednesday, September 16, 2009

Pre-Termination Admissions Prove Fatal to Departing Employees (Highway Technologies v. Porter)

Attorneys can add (or eliminate) a significant amount of value by how they advise clients who are preparing to compete. For instance, counsel must discuss the need not to misappropriate or transfer an ex-employer's corporate information (particularly through digital means), and must emphasize why business documents have to be returned upon departure. Just as importantly, counsel must stress the perils of deleting any business information - whether that be stored at work, on a portable storeage device, or on a home computer hard-drive. Failure to advise a client as to these issues can have major consequences.

But other more subtle tactics can also backfire. Take the recent case of Highway Technologies v. Porter, a preliminary injunction proceeding to enforce a 2-year non-compete agreement against two departing employees in the highway safety services business. In that case, an Arizona court enforced the covenant, finding that both Rodd Jose and David Porter intended to compete directly for their ex-employer's clients upon termination.

Two admissions, which occurred before the lawsuit even started, proved damning to both Jose and Porter. First, the business plan the defendants drafted stated that one of the strengths of their ex-employer was the relationship the defendants built with the ex-employer's customers, and that the ex-employer was "very susceptible" if Jose and Porter left the company. The court found this to be an indicator that the plaintiff's customer relationships were directly threatened by the defendants' competing venture.

In an ideal world, counsel for departing employees would review and scrutinize any documents which may discoverable - business plans included - to determine if any admissions could backfire in the event of litigation. Business plans, usually done at the urging of a bank or private equity partners, often provide a fertile ground for revealing who an ex-employee intends to targetcertainly forseeable.

But the second document that hurt Jose and Porter at the preliminary injunction hearing was more curious. The court cited their notice of resignation, which specifically stated that if the non-compete was unenforceable, Jose and Porter would be "free to go into active competition with [HT] and they expect that many customers would indeed move their business." The court found that this too foreshadowed their intent, and deemed it important when determining whether a protectable interest was under threat.

Counsel can, and should, play an important advisory role in even the most mundane, ministerial tasks when a client is departing and contemplating active competition. Review of a resignation letter is a key part of this, and counsel ought to scrutinize how any statements in that letter will be interpreted by a court.


Court: United States District Court for the District of Arizona
Opinion Date: 6/26/09
Cite: Highway Technologies, Inc. v. Porter, 2009 U.S. Dist. LEXIS 57607 (D. Ariz. June 26, 2009)
Favors: Employer
Law: Arizona

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