Following the decision by Softchoice Corp. (TSX: SO) to add En Pointe Technologies Inc. (NASDAQ: ENPT) to two lawsuits against former employees hired by the competing VAR, En Pointe is firing back with legal action of its own.
Softchoice, a Toronto-based VAR that does extensive business across the U.S., announced last week it was seeking to add En Pointe Technologies Inc. to lawsuits it has filed against former employees hired by the Gardena, Calif.-based VAR in Virginia (read the filing) and Minnesota (read the filing).
In each of the states Softchoice has filed suit against two former employees, alleging they breached non-solicit and/or non-compete clauses, as well as clauses related to confidential information, by soliciting former customers as well as removing confidential company information before their departures. In some cases, Softchoice alleges former staffers encouraged customers to follow them to En Pointe while still on the Softchoice payroll.
Softchoice is also pursuing similar cases against other former employees hired by En Pointe in Nebraska, Missouri and North Carolina, although currently En Pointe has only been added to the suits in Minnesota and Virginia. In total, Softchoice is pursuing action against nine former employees hired by En Pointe.
In a July 3rd news release, En Pointe fired back, indicating it had filed its own suit against Softchoice, asking the court to declare Softchoice has engaged in improper business practices by using anti-competitive clauses in its employment contracts and policies which unlawfully restrict an individual’s ability to work.
“We believe that Softchoice’s overreach manifests itself through an attempt to impose illegal and void terms on employees that restrict the rights of workers through anti-competitive business practices,” said Bob Din, CEO of En Pointe, in the release.
In a release of its own, Softchoice indicated it has yet to receive a lawsuit from En Pointe but is confident in its case.
“Softchoice prides itself on its hard-earned reputation for ethical behavior and corporate responsibility,” read the statement. “We believe that competition in the information technology industry benefits customers – but that competition must be fair and legal.”
En Pointe did not respond to a request for comment on the cases from CDN. In an interview prior to En Pointe’s countersuit, Softchoice said it takes the alleged actions of its former employees seriously.
“As part of our business we make a promise to our customers that we’ll protect their interests and their information, and we make a promise to our other employees they’ll be able to make a decent living here,” said Kirsten Thompson, general counsel, Softchoice.“We take those promises quite seriously.”
En Pointe was added to two of the suits, says Thompson, because during the discovery process it “became fairly apparent this was part of a larger organization strategy” by En Pointe to target Softchoice business and employees.
“Over the past several years En Pointe has relied on a ‘business model’ of raiding competitors in general, and plaintiff Softchoice in particular, of experienced sales representatives,” states the Softchoice filing. “This model has permitted En Pointe to reap the benefits of an experience, knowledgeable sales force without making the investment in time and resources required to develop such a sales force.”
Thompson says Softchoice is seeking monetary damages and an injunction, and in each of the cases the former staffers are currently subject to interim restraining orders or injunctions while the legal cases proceed.
Non-compete versus non-solicit
It’s important to draw a distinction, says Thompson, between non-compete clauses and non-solicit clauses. As a rule, she says Softchoice doesn’t require employees to sign non-competes, however in these cases a mix of non-competes and non-solicits are involved, as some of the employees came to the company through acquisition and had non-competes in their inherited employment agreements. Terms of both in these cases range from six months to two years.
“We think competition is good for the customers. It’s good for us, it keeps us sharp,” said Thompson. “What we’re concerned about is individuals, and ultimately the companies, that appropriate our investment in our people. It’s both ethically and legally inappropriate.”
It’s not Softchoice’s intention with these suits, says Thompson, to instill a chill in the industry that will restrict the free movement of talent. She adds, though, that the VAR has a duty to the interests of its current employees, and their ability to make a living with Softchoice.
“They are absolutely free to take their skills and talents elsewhere,” said Thompson. “But the work produced of that investment belongs to Softchoice, and what we object to is them leaving with that, or worse, using it against us.”
The distinction between non-compete and non-solicit is also drawn by Carl Cunningham, a lawyer and partner with Toronto’s Bennett Jones specializing in employment law. He adds Canada is seeing an increasing trend of employee litigation around claims made against departing employees and/or new employers over breach of confidential information covenants.
As a restriction of trade and one’s ability to make a living, Cunningham says non-competition clauses, particularly if broadly written, are unlikely to be upheld by the courts.
“One of the reasons…is the potential chill; these clauses can be a restraint of trade,” said Cunningham. “While the courts want to help a company protect their business and confidential information, often that can be done by a confidentiality clause and a non-solicit.”
What will likely be enforceable, says Cunningham, are non-solicit clauses, as long as they are deemed reasonable in both geographic and temporal scope, i.e. the region and length of time where a former employee is barred from soliciting former customers. Generally, he says, six to 12 months would be considered reasonable.
The other important consideration, says Cunningham, is clauses relating to the protection of confidential information. These clauses are likely to be upheld.
“If you walk out the door as a departing employee and you take a list of contacts and confidential information, there’s significant risk that you’re going to be in breach of not just your contractual provisions but also your common-law duties,” said Cunningham. “That’s a no-no.”
He adds it’s not uncommon to name the new employer in these employee departure cases. There can be a legitimate claim to believe they induced the breach, but from a market perspective he says it can also be important to send a message to competitors that you intend to protect your business.
Walking the line
If an employee is considering moving to a competitor, before they make the jump Cunningham recommends they take a step back and review their employee agreement or confidentiality agreement to see what their obligations are. Getting independent legal advice on its enforceability is also advisable. And taking an employer’s confidential information with you, he adds, isn’t permissible.
For employers, Cunningham recommends they don’t rely on common law but have legal agreements in place. They should be clear and reasonable, and not over-reaching in geographic or temporal scope. They should also be properly implemented, which means having them signed before the employee begins work. If a new agreement is implemented during employment some consideration will need to be given to the employee in exchange, such as a monetary payment or a promotion.