Dr. Dobb's Sourcebook September/October 1997
Many companies believe that it is legal to hire programmers from a competitor. Usually, it is. However, the act can give rise to a variety of legal claims, including claims for corporate raiding, misappropriation of trade secrets, and interference with the employment contract. The chances of a claim for copyright or patent infringement may also increase. Even criminal laws can be violated.
The harm to the competitor's business -- and the feelings of betrayal and distrust that often follow -- provide strong impetus for the assertion of whatever legal claims are suspected.
To be legal, the motive for the hiring must be a fair one. Starting a new company or competing more effectively are acceptable motives. Trying to put your competitor out of business or trying to steal his trade secrets, on the other hand, are not.
Courts look to the circumstances to determine the presence of an improper motive. A few months ago, for example, Borland sued Microsoft because Microsoft had hired 34 of Borland's top programmers within less than three years. Borland alleged that this was done to harm Borland, not simply to benefit Microsoft.
Hiring a large number of programmers from another company can provide substantial support for a claim of "corporate raiding." Hiring a smaller number can also be problematic if they are the key programmers of the company. A claim of "corporate raiding" will be strengthened if the competitor was the sole target of the employment search. Hiring the programmer before he quits his prior job will also increase exposure to this claim, but will not alone support it.
Unfairness in the method of hiring can also give rise to a claim for corporate raiding. The competitor should not be disparaged during the interviewing process. Inside information (such as salary and job satisfaction levels) should not be used. It is particularly risky to use one programmer from a competitor to recruit another, especially while the recruiting programmer is still employed by the competitor.
By far, misappropriation of trade secrets is the most common legal claim that results from hiring a competitor's programmer. Although hard to prove, it is easy to assert and costly to defend.
Resolution of a trade secret claim involves a balance between protecting the technology the competitor has developed and the programmer's right to gainful employment in the field in which his talents are most valuable. The balance is usually struck by imposing the following set of requirements for a legal claim.
A legal short cut around this third requirement may be developing. It is called the "inevitable disclosure" doctrine. When use of the trade secrets by the former programmer in his new job seems to be "inevitable," an injunction against the programmer proceeding forward with his new job may be issued, even if there is no proof that any violation has yet occurred.
The "inevitable disclosure" doctrine has a solid foundation in the trade secret statutes of most states in this country. Still, courts have been hesitant to apply it. At the very least, the court will want to see proof that the programmer had knowledge of the protectable trade secrets, that the technology on which he is working in his new job is so similar that it would be extremely difficult for him not to use or rely upon the trade secrets, and that the programmer and his new employer cannot be depended upon not to use the information.
The remedies for misappropriation of trade secrets are substantial. In addition to an award of damages, the court can enjoin sales of software that is based on the trade secrets. Punitive damages and the competitor's attorneys fees will also sometimes be assessed.
The scope of information that can be protected by trade secret law is also broad. In addition to software, trade secret laws can protect customer lists, pricing information, and marketing strategies.
Language can be added to the employment application and employment agreement to reduce exposure to this claim. The language should state that the applicant and employee did not promise to maintain anything confidential during his prior employment or, if he did, that the information has nothing to do with his new employment. If these representations cannot truthfully be made, the most prudent course might be to look elsewhere to fill the position.
Louis Freeh, the Director of the Federal Bureau of Investigation, recently expressed concern over the growing threat posed by industrial espionage. Other government officials have expressed similar concern. The result has been the enactment of criminal statutes protecting proprietary technology and more vigorous enforcement of them.
One of the more important new laws is the Economic Espionage Act of 1996, signed into law by President Clinton on October 11, 1996. For the first time, the misappropriation of a trade secret in interstate commerce has been made a federal crime. Penalties include imprisonment for up to ten years, a fine of up to $5 million for organizations ($500,000 for individuals), and forfeiture to the government of all technology developed around the misappropriated trade secrets.
State officials are also giving more serious attention to this business problem. Recently, for example, a criminal indictment for conspiracy and theft was filed against a software engineer who quit Cadence Design Systems to work for Avanti! Corp. in Silicon Valley. The indictment followed a raid of the programmer's home during which Cadence's source code was found. Also under investigation was a 5-MB e-mail message which the programmer sent from his office to his personal e-mail box.
Prosecutions and convictions for stealing software are likely to be limited to the most egregious and obvious cases. Prosecutors are often hesitant to get involved in private civil disputes where the facts are unclear. They also have limited funding and have wide discretion in selecting the cases they pursue.
During the hiring process, care should also be exercised to ensure that the competitor's programmer does not breach any contractual commitment he may have with the competitor. Otherwise, the new employer might be charged with inducing this breach.
During the hiring process, the prospective programmer should be required to provide copies of employment agreements signed during the past several years. These agreements should be examined to verify that the new duties of the prospective programmer will not constitute a contractual breach.
Some employment contracts, for example, prohibit the programmer from working for a competitor for a limited number of years. Although some states (such as California) will not enforce these clauses, others will -- particularly if they are limited in time and area of technology.
Although not common, an employment contract may also require the programmer to work for the competitor for a designated number of years. If the programmer quits before this period has expired, and if this resignation was induced by his new employer, his new employer might also be liable.
Employment contracts also often prohibit the programmer from trying to recruit other programmers for a new job or from communicating with customers or suppliers of the former employer. These clauses may also be enforced, and inducing a programmer to breach them can also expose the new employer to liability.
Most commonly, employment contracts state that the software on which the programmer is working is a trade secret. The employment agreement usually prohibits the programmer from using or disclosing any of the details about this software to any outsider, particularly a competitor. Hiring a programmer who has signed such an agreement with his former employer -- particularly when the former employer is a competitor -- is often buying into a lawsuit.
The new employer cannot be held liable for inducing breach of the employment contract unless the new employer was aware of the terms of the employment contract at the time he induced its breach. For this reason, some lawyers recommend against asking for copies of prior employment contracts during the interviewing process. I usually disagree: Better to pass over a risky prospect than to walk blindly into a potential lawsuit. The new employer's claim that he was unaware that a contract was being breached may not be believed.
Hiring a programmer who worked for a competitor, of course, is not an element of copyright or patent infringement. But it can increase the chance of such an infringement occurring.
Copyright infringement cannot be committed without copying. A competitor's source code should never be used or even permitted on the premises. (For guidance on using higher level elements, see my column "Copying Software Concepts Can Be Legal," Dr. Dobb's Sourcebook, March/ April, 1995).
Avoiding patent infringement can be a bit more tricky. The programmer may not know that his former employer applied for a patent on the concepts on which he was working. Until a U.S. patent is issued, moreover, patent applications are maintained in strict secrecy. One approach for minimizing problems in this area is to conduct a search for all patents owned by the former employer. (For guidance on how to conduct this search and on how to analyze the results, see "Determining Software Patent Infringement," Dr. Dobb's Sourcebook, January/February, 1996.)
Finding the right talent for software development is frequently a difficult process. Although programmers working for a competitor may appear to be good prospects, care must be exercised to ensure against a costly lawsuit or, worse, criminal charges.
All job applicants should be required to provide copies of prior employment agreements. They should also be required to state in writing that they are not prohibited from using or disclosing any technology relating to the new job for which they are applying. If this representation cannot be made, or if a prior employment agreement contains problematic terms, consideration should be given to looking elsewhere to fill the position.
DDJ