Recently in Civil Conspiracy Category

October 19, 2010

Reducing the Risk of Litigation When Hiring Employees with Non-Compete Agreements

Hiring an employee who is subject to a non-competition agreement can be a risky venture.  In many instances, the new employer can find itself on the receiving end of an expedited lawsuit along with the new hire.  But there are a few simple measures new employers can take to reduce the chances of being named as a co-defendant in a lawsuit. 

First, make certain your new hire has “clean hands” before commencing employment.  This means that all documents, computers, PDAs, flash drives, and any other property arguably belonging to the former employer has been returned intact.  The employee needs to be aware that erasing hard drives and databases before returning equipment (even if inadvertent) can often result in a negative ruling from the court or even a spoliation finding.  Once completed, the employee should confirm in writing that all property in his possession has been returned to his former employer. 

Next, make sure the potential new hire does not engage in competition while still at his old job.  In Delaware, it is generally permissible to make preparations to compete while still employed, which would include discussions with other companies about possible employment opportunities.  But employees often cross the line when these discussions develop into actual competition, and if there’s evidence the new employer encouraged these acts, it may open the door for a civil conspiracy claim. 

Finally, before the employee commences work, there should be a written agreement confirming that the employee has returned all property to his former employer, that he will not to disclose any protected confidential information or trade secrets, and address any limitations that will be placed on his job functions and/or ability to solicit past / current customers.  This last point will likely require some analysis of the employee’s agreement not to compete and a decision about which provisions are and are not enforceable.

While new employers cannot totally eliminate the risk of being named a co-defendant in a noncompetition lawsuit, the above steps should help lower the risk associated with hiring a new employee.  These steps also will prove invaluable should the employer have to defend against a noncompete case.

July 16, 2010

Civil Conspiracy May Open the Door For Jurisdiction Over Non-Resident Defendants

Much of the non-compete litigation occurs in Delaware because the parties (usually the former employee and his/her former employer) have consented to the jurisdiction of Delaware courts in the underlying contract. But in many of these cases, obtaining personal jurisdiction over third parties such as the former employee’s new employer may pose difficulties. If there’s evidence of a conspiracy between the defendants, however, one consideration is using the Conspiracy Theory to establish personal jurisdiction over the non-resident defendant.

When determining if it has personal jurisdiction over a non-resident defendant, a Delaware court conducts a two-part analysis. First, it considers whether the defendant’s conduct satisfies the state’s long-arm statute. Second, it considers whether the exercise of personal jurisdiction would violate the Fourteenth Amendment’s due process clause. The Conspiracy Theory is used to satisfy the long-arm statute when one defendant has engaged in conduct within the State that satisfies the long-arm statute, but the other defendant has not. In other words, the Conspiracy Theory is used to impute one defendant’s conduct to the other, thereby obtaining jurisdiction over both.

The standard for establishing personal jurisdiction using this theory not easy. A plaintiff must demonstrate that: (1) a conspiracy existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

This method of establishing jurisdiction was recently asserted in the case of LeCroy Corp. v. Hallberg, 2009 Del. Ch. LEXIS 178. In that case, Hallberg left his employment with LeCroy to work for a competitor, in violation of the non-competition provisions of his employment contract with LeCroy. The competitor was incorporated in Delaware, so the courts had jurisdiction over it, but the Hallberg had never lived or worked in Delaware. In order to obtain jurisdiction over Hallberg, the employer tried to establish a conspiracy between Hallberg and his new employer, in order to impute the employer’s tortious conduct in Delaware to Hallberg.

In this case, the tortious conduct on which LeCroy’s claim of conspiracy was based was the competitor’s decision to dissolve a predecessor business established in Colorado, and reincorporate the business in Delaware in order to hide the competitor’s connection with several of LeCroy’s former employees, all of whom were subject to non-competition agreements. However, the Court found that LeCroy failed to prove conspiracy because it could not demonstrate element (4), above. The Court held that Hallberg was hired after the competitor reincorporated in Delaware, thus there was no reason to assume that Hallberg knew of the reincorporation in Delaware. Based on its holding, the Court ordered that Hallberg be dismissed as a defendant for lack of personal jurisdiction.

As the Halberg case suggests, obtaining jurisdiction over a non-resident defendant using the Conspiracy Theory has its challenges. It is narrowly construed and will require more exacting factual allegations to withstand a motion to dismiss. Still, the theory can be a viable alternative for establishing personal jurisdiction where the facts suggest a conspiracy between the defendants, and where one or more defendants lacks contacts with Delaware.

June 11, 2010

Employees Exiting with Trade Secrets May Open the Door for Civil Conspiracy Claim

A mass exodus of employees from a company often results in the employees joining a competitor or starting up a competing business. Often the employees do not leave empty handed, and involve a concerted effort to use the company's confidential or proprietary information to obtain an unfair competitive advantage. Such acts may give rise to a common law claim of civil conspiracy.

To be successful on a civil conspiracy claim, a plaintiff must usuallys show that two or more persons engaged in an unlawful act done in furtherance of the conspiracy and some form of actual damages. The court will require that there be some underlying wrongful act, such as a tort or a statutory violation. In Delaware, a breach of contract is not an underlying wrong that can give rise to a civil conspiracy claim.

One of the advantages of a civil conspiracy claim is it provides recourse against parties who may not have participated in the initial wrongful act, but nonetheless participated in the conspiracy. This is significant since each conspirator is jointly and severally liable for the acts of co-conspirators committed in furtherance of the conspiracy.

Civil conspiracy claims have led to the award of injunctive relief in the Court of Chancery. Most recently, in Zrii, LLC v. Wellness Acquisition Group, Inc., the Court of Chancery awarded a preliminary injunction against various individuals after finding a their former employer had a reasonable likelihood of success in proving the existence of an unlawful act in furtherance of the alleged conspiracy.

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