This is not news to some of Apple’s competitors, in particular the standard-bearer of electric carmakers, Tesla. In an interview with Handelsblatt, Tesla CEO Elon Musk describes Apple as the “Tesla Graveyard,” a reference to the number of engineers that have defected to Apple from his company, enticed by enhanced compensation. Bloomberg reports that Apple has offered Tesla employees “$250,000 signing bonuses and 60 percent salary increases.” And it must be noted that this employee pilfering — and the attendant transfer of trade secrets and other valuable information — has in this case been a two-way street. Musk publicly remarked that according to some statistics, “Tesla has recruited five times as many people from Apple as Apple has recruited from Tesla.”
Employee poaching between US-based blue chip rivals like Apple and Tesla grabs the headlines, but it’s a scenario that’s being played out at all levels of industry and in virtually all countries. (There are reports that Apple has poached Samsung experts in South Korea to design batteries for its planned electric cars.) For smaller firms, the double whammy of a loss of talent and a leak of intellectual property can be disastrous.
In the face of this trend, employers of all sizes increasingly want to prevent defection through a tightly worded employment contract. The extent to which an employer can stack the odds in its favor can be influenced by a number of factors, not the least of which is the employer’s country (or countries) of operation, as related laws can vary considerably by location.
But despite significant differences in laws and situations, any multinational seeking to prevent employee defection should focus on three employment-contract areas: confidentiality clauses, non-compete clauses and non-solicitation clauses. I’ll address those areas broadly here.
Confidentiality Clauses
Businesses often assume that their confidential information is protected by local laws. However, statutory protection beyond the termination of employment generally only covers information that qualifies as a trade secret. And most countries don’t have a statutory definition of a trade secret. So unless a business’ confidential information is akin to Coca-Cola’s secret formula, then it will have no guarantees that local law will protect its data once an employee leaves. Instead of relying on local laws, then, employers should seek to protect their information in part by creating contractual duties of confidentiality.
A confidentiality clause should comprehensively define what types of information are subject to a duty of confidentiality. Don’t make the mistake of simply referring to “confidential information” without further definition, as this may ultimately lead to a court determining the degree to which certain information is confidential. Similarly, your contract language should describe why it is important to the business that the information is confidential. Contract language should also describe the potential consequences of a breach.
In many countries, the courts will seek evidence that an employer’s actual working practices reflect the spirit of a confidentiality clause. In other words, if a given type of information is managed in the workplace without regard to confidentiality, and if its confidential status has never been impressed upon the workforce by the employer, then a court probably won’t enforce the provisions of a confidentiality clause.
It should be noted that monitoring compliance in this area is almost impossible, since breaches typically occur after an employee has left the business to work for another employer. Given this reality, it is critical for employers to attempt to prevent employees from having contact with competitors in the first place, though a non-compete clause.
Non-Compete Clauses
A non-compete clause is a post-termination restriction that prevents an employee from competing with his or her former employer’s business. Because such clauses limit an employee’s ability to make a living, most countries recognize non-competes as lawful only if certain conditions are met. (And some countries don’t recognize non-competes at all.)
Generally speaking, non-compete clauses are recognized if they protect a legitimate business interest and go no further than is necessary to protect that business interest. Customer and supplier connections, a stable workforce and confidential information have all been accepted by the courts as business interests worthy of protection through non-competes. The protection of confidential information is generally considered the most persuasive of these.
Whether or not the non-compete goes no further than is necessary depends on the circumstances of the case. However, some common parameters should be borne in mind when drafting a non-compete clause. The courts will assess whether the restriction is reasonable in terms of duration, territorial range and the activities being restricted. In addition, the personal profile of the employee subject to the restriction will be considered. A court is far more likely to uphold a non-compete agreement against a senior executive than one against a junior employee, in part because the latter is unlikely to have any influence over the business interest that requires protecting (either during their employment or after).
In some countries, employers are required to compensate employees subject to a non-compete agreement following termination. Most European countries, for example, require that such an employee is paid throughout the period of the restriction, with amounts ranging from 30% of the employee’s average monthly pay in France to 100% of pay in the Czech Republic. While this kind of compensation requirement may seem unduly harsh to some employers, the practice has its merits. In many countries, compensation payments go a long way to supporting the reasonableness of the non-compete restriction.
Non-Solicitation Clauses
A non-solicitation clause prevents a terminated employee from approaching the clients, suppliers and employees of their former employer. (A non-dealing clause is similar but slightly more restrictive.) Like the other clauses described here, a non-solicitation clause is not a surefire means of restricting a former employee from these activities, as it can be struck down by courts as unreasonable.
The key to a successful non-solicitation clause is personalization. Generally speaking, the restriction should be limited to the customers or suppliers with whom the employee has had recent contact; a period of 12 months prior to termination is typical. In addition, employee poaching will likely be considered reasonable or not depending on the particular relationships the employee formed with colleagues during the period of employment. And with regard to employee poaching, a non-solicitation clause is more likely to be upheld if the individual subject to the covenant is a senior employee that is targeting other senior or specialist employees, rather than a junior employee.
Depending on the country, a non-solicitation clause may require that the former employee be compensated. Many countries that require compensation for non-competes, however, do not apply the same rules to non-solicitation clauses.
As should be clear, restrictive covenants are more or less effective depending on host-country laws, how well they are written in light of those laws, and other factors such as the relevant employee’s position within the company. In general, laws governing restrictive covenants are themselves becoming more restrictive, tending to favor the employee over the employer. However, those same laws are also evolving to keep pace with technologies that expose trade secrets and confidential information, which is good news for employers.
By Stuart Buglass, VP Consulting