Thursday, December 15, 2016

Year-End Extravaganza (Part 2): Top 10 Mistakes Employers Make in Competition Lawsuits

Last Thursday, I wrote the first of my four-part year-end review column. The focus was on mistakes employees make when they leave to join a competitor. This week, I look at the flip-side: mistakes, fumbles, and foibles that employers make when pursuing competition claims.

  1. Litigating based on emotion rather than outcome. Competition claims against ex-employees tend to have a great deal of emotion simmering beneath the surface. Those stem from feelings of loyalty and betrayal. Although the first inclination may be to sue, exact revenge, and send a message, employers that pursue litigation for this purpose inevitably set themselves up for failure. Mistakes often reveal themselves through angry deposition testimony and even outright dissembling about key facts. Employers who let emotion guide their decision-making fail to recognize case weaknesses and end up making poor tactical decisions throughout the case.
  2. Focusing too late on damages. Judge Richard Posner - in one of his seemingly never-ending criticisms of lawyers - believes attorneys in patent cases focus too much on liability and not enough on damages. This time, I agree with him. The same conundrum is true of counsel representing companies in non-compete and trade secret litigation. The fascination with obtaining liability facts devolves from the insatiable appetite lawyers have to load up on the low-hanging fruit and avoid tackling tough issues. Damage theories can be quite tough, and the specter of proving damages is outside many lawyers' comfort zone. Oddly enough, damages rules are flexible enough to give plaintiffs' counsel ample room to be creative, particularly in trade secrets cases. But my experience has been that most of the time, plaintiffs get a start way too late in the game.  
  3. Declining to have a litigation point-person. Representing employees has its many challenges, but it usually is easy to get information from them. A lawyer has one client and one person to keep under control. Representing an organization, though, is tough. Many different people in the company could have access to important documents and knowledge of key facts. Outside counsel can feel as though they are herding cats trying to marshal those diffuse resources. That's why it's key for attorneys to have one point-person within the company, who is preferably not a lawyer, to serve as the point-person for litigation. That individual must have authority, have a vested interest in the outcome, retain organizational credibility, and be responsive. In many cases, however, it is apparent counsel is running the show and simply has no one to coordinate the fact-gathering and strategic effort within the company.
  4. Overlooking lower-level employees. One problem that stems from a company's failure to appoint a non-lawyer point-person is that mid- and entry-tier employees may possess vital information that somehow goes undetected until it's too late. This person could have vital knowledge concerning trade-secret security measures, customer contacts, or dealings with the ex-employee. But my experience has been that companies who litigate competition cases poorly rely too much on executive-level employees and ignore those who have a better pulse as to what actually happens in the trenches.
  5. Ignoring third-party impact. Since competition suits should be about loss of business, it stands to reason that third-parties - those who supply that lost business - will play a vital role. Employers who sue ex-employees may not realize where the loyalties of these third-parties lie. When credibility issues are paramount, courts will often make decisions based on which of the non-interested witnesses (i.e., third-parties) are more credible. If they are not aligned with or even hostile to an employer, then this can redound throughout the entire case. Relatedly, companies may not realize the impact that mere litigation will have. Even if customers were inclined to remain with the employer, the litigation itself may be so upsetting or costly that it causes them to leave altogether.
  6. Failing to follow basic exit procedures. A company's mistake in litigation may stem from prophylactic steps it could have taken before the lawsuit to avert a costly suit. Those include: (a) sending effective, call-to-action reminder letters to the departing employee; (b) conducting a simple exit interview; (c) disabling a departing employee's access to sensitive database material; and (d) examining Outlook items or dedicated work computers for information the employee may have taken. Even if a suit eventually arises, a company's sloppy handling of departure procedures can feed into a damaging narrative at trial - that the company was unconcerned about keeping information confidential.
  7. Short-cutting discovery answers. Employees usually do a pretty good job of taking discovery seriously. Employers? Not so. They tend to revel in boilerplate objections and offer answers that simply may get the job done. Those short-cuts inevitably come back to hurt later in the case. To be blunt, companies want to use litigation to their advantage but do not want to bear the burdens that come with litigation. I saw this earlier this year, when a plaintiff gave a half-hearted, misleading answer to a damages interrogatory. It clearly thought it could get by with doing the bare minimum, and in doing so undermined its credibility. This ultimately hurt the company badly in settlement talks, resulting in a resolution far less favorable than it could have been.
  8. Not telling a story. Trials - like elections - are really no more than telling a story. Abraham Lincoln used to remind young lawyers to be be storytellers. A lawyer should be striving to presents a more compelling story than her adversary. Without a common unifying theme, a plot really, then a trial just devolves into a disorganized and clumsy presentation of facts with no cohesion. Employment competition cases usually have a lot of facts. But employers frequently make the mistake of trying to dump too many disparate facts into a trial, even if they have no connection to the dispute.
  9. Oversimplifying the claimed trade secrets. A lot of frivolous competition cases have at their heart a broad, generalized description of stolen trade secrets. Many times, this is easy to spot. Here are the tell-tale signs: (a) active resistance to disclosing the information allegedly stolen; (b) broad, unintelligible descriptions of the trade secrets at issue; (c) hedging and qualifying as to what the information at issue actually is; and (d) outright speculation as to how anything was stolen. Lawsuits that have any of these features are doomed to fail, usually during discovery when courts intervene and demand the plaintiff do more.
  10. Discounting contract defects. Little-known fact about non-compete disputes. Um, sometimes the contract's not enforceable. You may have heard this. The case reporters are full of such cases. Non-compete suits that go bad for companies often have a defective contract - whether on consideration, reasonableness of the terms, or some other drafting problem. Many employers, however, double-down on their contracts, sure that they must be fine and that a judge will understand this. Not so. A bad contract can ruin a lawsuit, even if the employee doesn't entirely have clean hands.
Next week on the year-end review, the top 10 developments in non-compete and trade secrets law during 2016.

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