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Scorched Earth--Or a way to send a STRONG message to your employees and competitors (1 Viewer)

chet

Footballguy
My friend owns a PE company and has a number of portfolio companies that he owns outright. I was talking to him today and he mentioned a situation at one of them where last week, a key employee tendered his resignation for a local competitor. The employee had a 5-year non-compete clause that specifically named his new company as a restricted from employing him.  

My friend immediately sued the employee and feels that the court will enforce the non-compete albeit for a shorter term. He also found the names of the salespeople and engineers at the competitor and made all of them offers at 15-20% above market. Opposing counsel called his attorney and asked for a moratorium on recruiting each other's staff and he told him to pound sand.  

I am pretty sure his remaining employees will think twice before violating their non-competes and his competitors will be similarly careful.

 
My friend owns a PE company and has a number of portfolio companies that he owns outright. I was talking to him today and he mentioned a situation at one of them where last week, a key employee tendered his resignation for a local competitor. The employee had a 5-year non-compete clause that specifically named his new company as a restricted from employing him.  

My friend immediately sued the employee and feels that the court will enforce the non-compete albeit for a shorter term. He also found the names of the salespeople and engineers at the competitor and made all of them offers at 15-20% above market. Opposing counsel called his attorney and asked for a moratorium on recruiting each other's staff and he told him to pound sand.  

I am pretty sure his remaining employees will think twice before violating their non-competes and his competitors will be similarly careful.
I wouldn't exactly call that scorched earth. Maybe "scalded beaver" at best.

 
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Non-competes are very hard to enforce, so your buddy may be disappointed. And, to restrict an employee, or former employee, from employment in their industry is kind of lame. And even if he gets an influx of some talent by recruiting from the competition, his reputation will most likely take a hit in the industry and it could very well turn out worse for him.

When an employee wants to go, let them go. It’s almost always not worth the struggle.

 
Non-competes are very hard to enforce, so your buddy may be disappointed. And, to restrict an employee, or former employee, from employment in their industry is kind of lame. And even if he gets an influx of some talent by recruiting from the competition, his reputation will most likely take a hit in the industry and it could very well turn out worse for him.

When an employee wants to go, let them go. It’s almost always not worth the struggle.
The enforceability of non-competes varies by state.  For example, they are not worth the paper they're printed on in California but in NY they tend to work.  This company is in a state where they work.  

The employee is gone and won't be back  The only question is whether he will be allowed to work in the industry or not and then for how many years. You think other employees will think twice before making a similar move? 

This company is a very small piece of his portfolio.  

 
The enforceability of non-competes varies by state.  For example, they are not worth the paper they're printed on in California but in NY they tend to work.  This company is in a state where they work.  

The employee is gone and won't be back  The only question is whether he will be allowed to work in the industry or not and then for how many years. You think other employees will think twice before making a similar move? 

This company is a very small piece of his portfolio.  
I guess I’ve always felt like people have a right to make a living in their industry. I can understand if a direct customer recruits someone - they are stepping over the line there. But a competitor is fine. The employee should be free to work where he/she thinks is best for him/her. If they made a better offer or offer a better job, more power to them.

I’ve owned a business for 18 years and I’ve never once stopped an employee from leaving. I always shake their hand, wish them luck, and truly depart with no hard feelings. It’s their life and career, let them do what’s right for them.

 
Non-competes are very hard to enforce, so your buddy may be disappointed. And, to restrict an employee, or former employee, from employment in their industry is kind of lame. And even if he gets an influx of some talent by recruiting from the competition, his reputation will most likely take a hit in the industry and it could very well turn out worse for him.

When an employee wants to go, let them go. It’s almost always not worth the struggle.
This

 
I guess I’ve always felt like people have a right to make a living in their industry. I can understand if a direct customer recruits someone - they are stepping over the line there. But a competitor is fine. The employee should be free to work where he/she thinks is best for him/her. If they made a better offer or offer a better job, more power to them.

I’ve owned a business for 18 years and I’ve never once stopped an employee from leaving. I always shake their hand, wish them luck, and truly depart with no hard feelings. It’s their life and career, let them do what’s right for them.
Every company and industry is different. I left Goldman Sachs when they tried to force me to sign a NC.  If they asked me to sign it when they hired me, maybe but don't ask after I've been there for 10 years. 

 
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Every company and industry is different. I left Goldman Sachs when they tried to force me to sign a NC.  If they asked me to sign it when they hired me, maybe but don't ask after I've been there for 10 years. 
I agree that every industry is different, and I’m coming from the perspective of the tech industry.

I just want my employees to work for me because they *want* to work for me. If they don’t, the I want them to find a place that makes them happy. I can’t imagine “forcing” someone to stay at my company if they want to leave because they can’t work elsewhere in the industry.

 
Think about it, an employee wants to leave for whatever reasons and your buddy is trying to prevent him from making a living because he's butt hurt, basically that's what it winds down to.

If he can't work in the profession he is qualified, certified, skilled in, basically you are forcing him to retool or be under employed because your pissed he didn't want to work for you anymore.

I think it's borderline unethical, and 100% think it's retaliation as long as he's not stealing trade secrets and passing them on to his new employer. Did the other company actively recruit him or did he seek them out. Your buddy actively recruited current employees from the other company after the fact.

It's just not a good luck and not fair to the employee that chose to leave.

And to be honest, no one wants to work for a boss or owner that behaves that way.

 
Dunno but it doesn't sound like it.
I don’t have any of this type of experience but I guess you have to create a tribe environment in this guy’s world. It does seem a bit crazy.

A couple thoughts would be what do people who work there now think? Is this good for the office or do people now feel trapped. 5 years non-compete is really long. 

What happens in the scenario where the guy who left gets sued and loses? He comes back to work at the original place. 

ETA: I missed the answer you gave to the second question (what happens to the ex-employee). Can’t see that being a good place to work with this kind of environment unless it’s some super lucrative job with potential for generational wealth payouts. 

 
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I don’t have any of this type of experience but I guess you have to create a tribe environment in this guy’s world. It does seem a bit crazy.

A couple thoughts would be what do people who work there now think? Is this good for the office or do people now feel trapped. 5 years non-compete is really long. 

What happens in the scenario where the guy who left gets sued and loses? He comes back to work at the original place. 
I never would have expected this from my friend.  He left a cushy desk job 8 years ago to form this company and through a little hard work and a little luck, he's built something with thousands of employees and EBITDA in the 8-figure range.  Quite incredible really.

 
Non-competes are the antithesis of free markets.  
not really.   As a business owner, i have proprietary information that I have gathered from years of hard work and deal making.   SO I hire some guy to do sales and all of a sudden he's given a chance to do a ton of business he never could have done on his own without my system, my information.   He's making really good money in one year.   Year 2 he decides to leave and start his own competing company with all the info I accumulated before he was ever hired.  There is no fairness to the innovator that starts and builds a company if every employee he hires with growth can just up and leave and steal his knowledge.   Thats actually anti competitive right there, people that create will have less incentive to do so

 
So now he’s got a bunch of people on his payroll at above market rates?  That sounds like good business and won’t piss off the current employees who are making less at all.
Yeah--he needs to be careful what he asks for.  

 
I never would have expected this from my friend.  He left a cushy desk job 8 years ago to form this company and through a little hard work and a little luck, he's built something with thousands of employees and EBITDA in the 8-figure range.  Quite incredible really.
Maybe there is more to this story or some history with these two. Definitely seems overly agro and counter productive. 

 
not really.   As a business owner, i have proprietary information that I have gathered from years of hard work and deal making.   SO I hire some guy to do sales and all of a sudden he's given a chance to do a ton of business he never could have done on his own without my system, my information.   He's making really good money in one year.   Year 2 he decides to leave and start his own competing company with all the info I accumulated before he was ever hired.  There is no fairness to the innovator that starts and builds a company if every employee he hires with growth can just up and leave and steal his knowledge.   Thats actually anti competitive right there, people that create will have less incentive to do so
Yes, but that scenario is more about trade secrets than it is about employment. Trade secrets may be tougher to prove and enforce.

 
-fish- said:
So now he’s got a bunch of people on his payroll at above market rates?  That sounds like good business and won’t piss off the current employees who are making less at all.


chet said:
Yeah--he needs to be careful what he asks for.  
How many competitor employees actually took him up on his offer??

 
I would never consider signing one of these. If word gets out, your buddys name could turn to mud and he may be hard pressed to find good employees going forward.

 
I think its a pretty interesting story.  In some industries, it is very common to have non-competes and litigation whenever someone leaves to go somewhere else. For example, in the financial advisory business, these companies expect litigation whenever they hire a consultant or team from a competitor.  They have lawyers on call ready to run to court for emergency orders the moment someone gives notice.  They have IT and other policies in place to act immediately as soon as they perceive a defection.  In other industries, non-competes are unheard of, or completely ignored if they exist.

For me, the thing I wonder is whether Chet's friend has a good lawyer or business person advising him.  It is very easy for an outside lawyer to get a client all fired up to sue the pants off someone who has left his company.  Emotions run high and are easily played by a skilled lawyer who needs the work.  When I was an in-house lawyer, meaning my income didn't change whether or not we pursued such lawsuits, my approach was almost always to advise caution, and only pursue litigation where it is truly necessary to protect an asset or important relationship.  Despite common perception, litigation is rarely a good tool to "send a message" or create an image of strength in the industry.  Generally, it is far better to invest in competing in the marketplace rather than in the courts.  If you want to retain key people, pay them well and give them opportunity for growth and enrichment in their careers.  A contractual handcuff is rarely effective at maintaining a quality workforce.

Its probably a great feeling to get all fired up over suing someone over a perceived slight, going after the company's employees, etc.  Its not unlike someone breaking up with you in a personal relationship, and reacting angrily and trying to hurt that person in return.  The courts aren't really very good at addressing those types of feelings.  That rush of power and revenge wanes pretty quickly when you start getting huge lawyer bills every month, you've dedicated dozens or hundreds of employee hours to document review and production, etc., you and your key people are taking time out of their day to give depositions and consult on litigation strategy rather than on their business, and you realize you might not win everything you thought you would in the lawsuit. You also start to realize maybe the lawsuit isn't that important to you anyway, and might actually hurt your reputation in the industry.

The really interesting thing for me would be to get an update in 6 months on this to see if he still thinks it was worthwhile.

 
I think its a pretty interesting story.  In some industries, it is very common to have non-competes and litigation whenever someone leaves to go somewhere else. For example, in the financial advisory business, these companies expect litigation whenever they hire a consultant or team from a competitor.  They have lawyers on call ready to run to court for emergency orders the moment someone gives notice.  They have IT and other policies in place to act immediately as soon as they perceive a defection.  In other industries, non-competes are unheard of, or completely ignored if they exist.

For me, the thing I wonder is whether Chet's friend has a good lawyer or business person advising him.  It is very easy for an outside lawyer to get a client all fired up to sue the pants off someone who has left his company.  Emotions run high and are easily played by a skilled lawyer who needs the work.  When I was an in-house lawyer, meaning my income didn't change whether or not we pursued such lawsuits, my approach was almost always to advise caution, and only pursue litigation where it is truly necessary to protect an asset or important relationship.  Despite common perception, litigation is rarely a good tool to "send a message" or create an image of strength in the industry.  Generally, it is far better to invest in competing in the marketplace rather than in the courts.  If you want to retain key people, pay them well and give them opportunity for growth and enrichment in their careers.  A contractual handcuff is rarely effective at maintaining a quality workforce.

Its probably a great feeling to get all fired up over suing someone over a perceived slight, going after the company's employees, etc.  Its not unlike someone breaking up with you in a personal relationship, and reacting angrily and trying to hurt that person in return.  The courts aren't really very good at addressing those types of feelings.  That rush of power and revenge wanes pretty quickly when you start getting huge lawyer bills every month, you've dedicated dozens or hundreds of employee hours to document review and production, etc., you and your key people are taking time out of their day to give depositions and consult on litigation strategy rather than on their business, and you realize you might not win everything you thought you would in the lawsuit. You also start to realize maybe the lawsuit isn't that important to you anyway, and might actually hurt your reputation in the industry.

The really interesting thing for me would be to get an update in 6 months on this to see if he still thinks it was worthwhile.
I will try to remember to follow up but feel free to remind me. 

A little background. My friend was a lawyer in Chicago practicing Corp law and hated it. One day around 2011, he quit, moved to CA and bought his first company. I highly doubt he has specific expertise in employment law but I’d expect he’s getting decent advice. 

 
I will try to remember to follow up but feel free to remind me. 

A little background. My friend was a lawyer in Chicago practicing Corp law and hated it. One day around 2011, he quit, moved to CA and bought his first company. I highly doubt he has specific expertise in employment law but I’d expect he’s getting decent advice. 
He should have posted on his fantasy football board for lawyerly advice

 
chet said:
The enforceability of non-competes varies by state.  For example, they are not worth the paper they're printed on in California but in NY they tend to work.  This company is in a state where they work.  

The employee is gone and won't be back  The only question is whether he will be allowed to work in the industry or not and then for how many years. You think other employees will think twice before making a similar move? 

This company is a very small piece of his portfolio.  
Not sure about New York Law, but in Texas, trying to hire the competitors’ employees, and particularly if he is successful in hiring them, would completely undermine his ability to enforce the non-compete against the departing employee. I would have had a field day with that (I used to litigate non-competes for a living).

Edit:  Some quick research and it appears that New York Law is similar to TX law on non-compete enforcement. Trying to hire the competitor’s employees may have been a good move from a competitive standpoint, but it hurts the viability of his legal position in the non-compete case if it’s being litigated under NY law (or frankly most states’ laws that enforce non-competes except for Delaware which pretty much will enforce any contractual restriction).

 
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Also, some states will refuse to enforce overly broad covenants (e.g. where the term is unreasonably long as it most likely is here), or if they do reform them (i.e., enforce the restriction but for a shorter period of time), they will limit recoverable remedies. For example, in Texas, if a court has to reform an overly broad restriction, you are precluded from recovering monetary damages. 

 
Also, some states will refuse to enforce overly broad covenants (e.g. where the term is unreasonably long as it most likely is here), or if they do reform them (i.e., enforce the restriction but for a shorter period of time), they will limit recoverable remedies. For example, in Texas, if a court has to reform an overly broad restriction, you are precluded from recovering monetary damages. 
Yeah, 5 years definitely seems excessive. Most I've read/heard of being enforced are 1-2 years.

 

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