Employee confidentiality a bigger issue in a tougher economy

When three salesmen from a rival firm offered to come on board at Standard Medical Supply Inc., founder Tony Ferrante thought it would be a way to expand the company. Two years after they arrived, they quit and started a competing business.

Now, Ferrante and his erstwhile sales crew are in court in Delaware County, arguing about whether the crew built their new business by making unfair use of Standard's pricing strategy for its product line of bedpans, catheters, and oxygen tanks.

When the economy is moving up or down, sensitivity can be heightened to such things as breaches of confidentiality and employee duty of loyalty, trade secrets, and noncompete contracts.

And these days, said Christopher Stief, chairman of law firm Fisher & Phillips L.L.P.'s employee defection and trade secrets practice group, business is picking up.

"We're seeing more of those inquiries," said Stief, who is not involved in the Standard Medical case. "It does give me the sense that the economy is improving in that companies may be hiring and they may be willing to invest in some higher-risk hires."

When economic conditions worsen, Stief said, high-profile employees are less willing to jump to rival companies. And companies, though they'd appreciate a superstar salesperson, are not so eager to fund efforts to circumvent noncompete agreements or stave off legal challenges.

When the economy is on the upswing, employees are more willing to leave their safe perches, and their new employers are more willing to go out on a legal limb.

Either way, Stief and other lawyers said, companies need to weigh the potential damage the departing employee could cause against the cost of litigation, given that courts are reluctant to keep people from earning a living by imposing strict limits on their ability to work in their fields.

Such cases have long been standard fodder in employment law, but there are different wrinkles in recent cases, which have become increasingly complex in today's Internet-accessible, I-Phone/laptop/telecommuting/cloud-computing world.

"More and more company information is stored on computers," said Standard Medical's attorney, David Landau, a partner at Duane Morris L.L.P., the Philadelphia law firm. "It's not locked in a file cabinet locked in someone's office anymore."

In Philadelphia federal court, there's a different, perhaps more appealing product, Thomas' English muffins, at the heart of a similar case.

Bimbo (pronounced "Beem-bo") Bakeries USA, the Horsham-based firm that now owns Thomas' English muffins, successfully prevented former executive Chris Botticella from moving to rival Hostess Brands Inc.

Bimbo said Botticella was one of seven people worldwide who knows the recipe and manufacturing process that gives the English muffins their "nooks and crannies."

"A number of files accessed from Botticella's laptop during his final days at Bimbo were highly sensitive," Senior Judge Morton I. Greenberg of the U.S. Court of Appeals for the Third Circuit wrote in his decision in July sending the case back to the lower court.

The latest? Fearing trade-secret leaks, the company wants the court to order Botticella to inform Bimbo if he takes any bakery job, and Botticella's lawyers object.

Bimbo's a huge company, but even in tough times, Landau said, midsize companies will do what they can to protect their trade secrets.

"If you are a midsize company and someone's going to walk out with your book of business, or your special sauce, or your business method, and you've taken steps to bind them [through noncompete contracts], you are going to make efforts to stop that," he said, "because it's your bottom line."

Just last month, for example, another case was settled in federal court after a company pulled out the big guns in pursuit of two former employees who allegedly started a cleaning business while working for their former employer, siphoning clients.

In that case, the plaintiffs, Venturi Technologies Inc., of King of Prussia, filed a federal lawsuit under the civil racketeering act, similar to the law criminal prosecutors use to go after mobsters.

The use of the racketeering statute may give a little extra leverage in settlement conferences, Stief's law partner Michael Grecco said, even if it does not tend to hold up in court. Grecco was not involved in the Venturi case, but often blogs on the topic.

In the Standard Medical case, the three defendants joined the company in September 2008 on the recommendation of a longtime employee, the fourth defendant.

Landau said Standard avoided confidentiality problems when the three were hired by "scrubbing" the trio's home computers to rid them of information from their past employer.

Earning more than $100,000 each, they managed accounts worth millions of dollars for the 75-employee company, the complaint said. Earlier this year, it said, the defendants began to tell clients they were planning to start a competing business.

Not only did they have access to Standard's customer list, they had confidential information such as customer preferences and strategies on pricing and profit margins.

"I felt betrayed," Ferrante said.

Landau said the amount of business at issue is "in excess of $7 million per year."

The defendants' attorney, John Landesman, a partner in Cohen, Seligas, Pallas, Greenhall & Furman L.L.C., said his clients did nothing wrong.

In fact, he said, the law allows employees to take steps to start a competing business while they are still on the job.

"Employees can file articles of incorporation," Landesman said. "They can get a tax identification number. It's when they start soliciting customers or making sales or taking corporate opportunities that they cross the line."

His clients, he said, never crossed that line.

On Oct. 21, Common Pleas Judge James F. Proud enjoined the defendants from doing any business with Standard's customers until Feb. 1, writing, "There is substantial risk that defendants will use their knowledge of Standard pricing information if they are permitted to compete for Standard's customers."

He also ordered that a forensic computing expert be hired to remove all company information from home computers used by defendants and their families.