Think Before You Poach: Luring Away a Competitor’s Talent Comes with Risks

A court battle between Twentieth Century Fox and Netflix highlights the risk of luring away a competitor’s talented executives to gain an edge. The lawsuit alleges Netflix wrongfully encouraged Fox’s VP of promotions Marcos Waltenberg and VP of creative affairs Tara Flynn to break their contracts and come to work for the streaming giant. They both now work in programming development for Netflix. In a countersuit, Netflix contends Fox’s fixed contracts constitute “involuntary servitude.” In a first-round victory, the judge in the case has denied Fox’s motion to dismiss Netflix’s counterclaim.

While this case is before the courts in California, and the outcome is far from decided, there are important takeaways for Michigan companies. The greatest competitive edge any company has is its people. For that reason, it might seem tempting to identify and hire away a competitor’s top talent in order to gain a leg up. As the legal battle between Netflix and Fox demonstrates, this can be a problematic strategy.

The risks can be summed up in just one word: litigation. Most companies are not going to let key executives just walk out the door. There’s too much at stake. So, they will fight. They may not get those employees back, but taking an aggressive stance will also send a message that the company will not tolerate anyone else coming after their remaining talent. Other competitors might think twice before making a move that will likely lead to a costly and time-consuming court battle.

A company that has lost key employees will likely try litigating on a couple of fronts. As with Fox’s suit against Netflix, the business would seek to enforce the departing executive’s non-compete agreement. The enforceability of non-competes varies between jurisdictions, so the likelihood of one standing up to scrutiny isn’t entirely certain.

Michigan’s courts will enforce a “reasonable” non-compete. They must balance the rights of both the employer and the employee. For example, a non-compete cannot unreasonably limit an executive’s ability to earn a living in their chosen profession. An agreement should not prohibit an employee from working outside the company’s geographic market or in another industry sector. Although Courts in Michigan have not established a bright line rule, they have generally held that non-competes can be enforceable for a period of one year.

If an employee’s non-compete is “reasonable,” then, it’s likely a Michigan court would take a dim view of poaching. This could result in damages being assessed against both the executive and, possibly, the new employer. A company would have to consider whether or not these possible costs would outweigh the competitive value to be gained from the new hire.

Another factor to consider when hiring away a competitor’s talent is the issue of intellectual property. If the executive had knowledge of his former company’s trade secrets, for example, these are off-limits to a new employer. They cannot be used in any way without risking litigation. And, unlike non-compete agreements, the courts, including those in Michigan, do not tolerate trade secret theft and will likely be very punitive in terms of damages should they find any evidence of infringement. Those damages can also be tripled if the infringement is found to be willful.

It is important, then, that companies ensure the new executive they have hired away from a competitor does not make use of any of a former employer’s trade secrets in his new position. The risk here is significant, and the IP rights of the previous company must be respected.

It might seem like the easiest way to gain an edge over a competitor is to take away their best people. A company considering this move, however, should go in with open eyes and full knowledge of the potential risks. It might be that the value of the new employees and what they bring to the table will be worth it – but this is a decision that cannot be made lightly.

Posted in In The News.