When employees leave, what stays?

WHEN an individual leaves a company, what is he allowed to take to his new employer?

A recent case filed in Los Angeles Superior Court may clarify just how much expertise an ex-employee can bring with him when he begins to compete with his ex-employer.

The plaintiff in the case, Waltco Truck Equipment, is suing Interlift Inc and four of its employees — three of whom formerly worked for Waltco — for unfair competition, misappropriation of trade secrets, breach of fiduciary duty, breach of contract, unjust enrichment, conspiracy, fraud, conversion, and constructive trust.

Waltco obtained a preliminary injunction in December and is now awaiting the assignment of a trial date. Waltco president Rod Robinson believes a trial could start by the end of this year.

Robinson executed a declaration September 24, which was filed by attorney Baret C Fink in support of an application for a temporary restraining order and preliminary injunction.

In the declaration, Robinson accuses former employee Randy Reid and the other defendants of stealing Waltco trade secrets and other confidential business information. Reid left his job as Waltco's western regional sales manager in April 2003 to join Interlift.

“We are anxious to respond publicly to the allegations that have circulated,” says Hakan Peterson, executive vice-president, Interlift. “However, since these matters are still the subject of active litigation and upon the advice of our legal counsel, we must respectfully decline to make any comments at this time. We are, however, completely confident that when these matters finally reach resolution, Interlift's position will be clearly vindicated.”

The case has attracted the attention of other companies in the truck equipment industry.

“I think it is a problem,” TODCO president Dan Rengert says. “With the size of the industry, you see people moving from company to company, maybe competitor to competitor, or maybe customer to supplier. There's a lot of movement, and there's a lot of information that finds its way around. I think companies are at risk all the time. But companies are reluctant to pursue it because they don't have enough hard evidence.”

Rengert says he has “suspected” that TODCO has had ex-employees deliver confidential information to their new companies but decided not pursue legal action.

“We were never able to determine (exactly what happened), and elected not to pursue it for a couple of different reasons,” he says.

Taking action

Robinson says he decided to take action for two reasons: (1) he believes Interlift has been “targeting” Waltco's sales employees over a period of years; (2) he believes the trail of evidence left behind by Reid paints a very clear picture of wrongdoing, including violation of the confidentiality and non-disclosure agreement and corporate communications policy he signed.

Robinson says going to work for a competitor is understandable.

“That's where you have contacts and relationships,” he says. “I don't have a problem with that. The issue is the proprietary and trade-secret information and how you protect it.

“I think most companies expect that when somebody leaves their employment and goes to a competitor, there are things they're going to carry with them in their head. But I've never seen anything in my years at Waltco or even heard of anything this blatant. If I had an employee coming to me that offered to bring these kinds of materials, I would not offer him a job.”

Says Royal Truck Body-River City president Mike Frizzell, “Our industry has been one where we have pretty much weeded out the bad guys. They just don't go someplace else. This just astounded me. And knowing all the parties involved, it really astounded me.”

Raising suspicions

Robinson says Reid's last day at Waltco was April 30, 2003, and that the departure was “amicable.”

However, Robinson says that by August, he noticed “suspicious sales activity” in which “customers in Reid's territory who had previously indicated an intention to place orders with Waltco had not placed orders.”

He decided to analyze the company-issued laptop and cell phone that Reid had turned in when he left Waltco.

In the declaration, Robinson says that an examination of the laptop showed correspondence with Interlift months before Reid left Waltco — including an e-mail that contained his West Coast business plan. The message listed deals pending for all rail gates being worked by Waltco in Region 4. According to Robinson, it also contained a list of key customers, four years of sales history, and Reid's promise to deliver sales to Interlift. As early as February 25, 2003, Reid was positioning himself for a move to Interlift, Robinson says.

Computer records

The declaration says that Waltco's computer system allows persons with access to trace when a file was “modified” (changed, printed, or downloaded) by a user. An examination of the records convinced Robinson that between January 1, 2003, and April 30, 2003, Reid had transferred what Robinson termed “Waltco's most valuable trade secrets and confidential business information” to Interlift. The files modified included national account pricing and locations for fleets, key trailer and body OEMs; key end-user target customers; rental/leasing trailer targets; distributor discount list; numerous lists of deals pending; and an engineering activity report (containing records of customer notification of technical problems with Waltco liftgates).

Using the phone

Robinson says that an examination of Reid's cell phone records identified 126 calls to Interlift personnel (totaling 570 minutes) between December 13, 2002, and June 12, 2003. The declaration says that before Reid left Waltco, he programmed his Waltco-assigned telephone number to forward business calls meant for Waltco to his new telephone number.

Robinson says Reid violated the confidentiality and non-disclosure agreement and corporate communications policy he signed.

“His defense is that he did not know it was proprietary confidential information,” Robinson says. “But we have agreements he signed and corporate policies he signed where it was very clear that he acknowledged any computer file is company property and not to be used outside Waltco without the expressed written permission of management.”

Robinson also says Reid has not returned two three-ring binders detailing previous years' shipments of liftgates by customer and model — materials that “have very detailed information with respect to Waltco's sales.”

Net result

Based on a review of sales Waltco expected to obtain since Reid left, Robinson has concluded that Waltco has lost at least $250,000 in sales as a result of what he calls “the defendants' misappropriation of trade secrets and confidential business information.”

Of greater concern to Waltco is that “once the information was released, it can never be recaptured and, by normal consequence, has been spread to others.”

The declaration says that the only ways Waltco can be returned to its previous status are to:

  • Exclude MBB Liftsystems AG, the German corporation that owns Interlift, from selling its product in the United States. “MBB's distribution outside the United States would not be affected,” the declaration says.

  • “Enjoin Interlift from doing business anywhere in the world. This will remove the benefit of the misappropriation from MBB's subsidiary.”

  • “Enjoin Hakan Peterson, Pat Michenaud, Mark Johnston and Randy Reid and possibly others from being engaged in the trucking industry, including, but not limited to, liftgates, truck sales, after market truck equipment and truck leasing, so that these defendants are not in a position to affect Waltco's sales of its products.”

Says Robinson, “We're a 50-year-old company. They were incorporated in 1996. Were they trying to short-circuit the process and get 50 years of experience and information in a much faster process? I can't say. They would have to explain that. They'll get their chance.”

Keeping company secrets: Tips on confidentiality

The Waltco-Interlift case has yet to be tried, and Interlift personnel involved are merely accused — not convicted. But the issues the case raises have caused some truck equipment companies to rethink their policies and procedures for keeping keep sensitive data secure.

“If somebody wants to do something, it's pretty hard to stop them from doing it,” says Rod Robinson, Waltco president.

Yet companies can place obstacles in the way that make it more difficult to take company data outside the company. For example:

  • Non-disclosure agreements. The strength of those which Waltco employees sign is expected to be tested should the case go to trial. “They're very solid agreements,” Robinson says. “There's nothing wrong with the agreements. Either you honor the agreement or you don't.”

  • Inspect laptops immediately after acquiring them from departing employees. Waltco's policy has been to return the computer to the IT Department, burn a CD of the hard drive, then wipe the laptop clean and issue it to another employee.

    “We don't typically analyze it to see what's in it — especially in a voluntary termination,” Robinson says. “It's worked for us in the past. It was probably a little naiveté on our part.”

  • Provide cell phone service to employees that need them to perform company business. Do not reimburse employees for using their personal cell phones for company business. If the employee owns the cell phone, he takes the number with him. Companies who had developed a relationship with that employee could mistakenly believe they were dealing with the employee's previous company.

  • Perform periodic checks of cell phone records.

  • Discontinue cell phone service immediately. This prevents calls from being forwarded to the ex-employee's new number.

  • Educate employees about the consequences of taking trade secret information from the company.

  • Set up a system that allows the company to monitor employees' e-mails.

“It's unfortunate we have to do that,” Mike Frizzell, president of Royal Truck Body-River City, says, “but I think every time there's any type of event that impacts our business negatively, all of us should examine procedures. It'd be foolish not to have those in place, because a computer is a business tool.

“I was talking to somebody else in the industry a few weeks ago about palm pilots and I said, ‘My suggestion is that you buy palm pilots and give them to your sales people.’ He said, ‘Why?’ I said, ‘Because then it's yours.’ There shouldn't be any secrets in a company computer or company palm pilot. Sales people become very territorial with their information, but that information is gained while they're in your employment.”

It's not enough to simply implement policies. They also must be maintained.

“I believe we have the policies in place to protect ourselves,” Rengert says. “But I think you need to consistently and constantly review them and do everything you can to protect your proprietary information.”

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