Poachers encroach on tech-talent turf

Google-Microsoft spat underscores legal risks that make employee poaching a tricky business. Maybe that's why it's not on the rise.

Ed Frauenheim Former Staff Writer, News
Ed Frauenheim covers employment trends, specializing in outsourcing, training and pay issues.
Ed Frauenheim
8 min read
The ongoing legal spat over Google's hiring of a Microsoft executive is a reminder that "poaching" of top employees is alive and well.

But it's risky business in an era of employment agreements with noncompete clauses and other restrictions, experts said.

Tim Farrelly, president of San Francisco-based recruiting firm Coit Staffing, said that compared with the late 1990s, the practice has decreased, with companies becoming more selective. "They're not just taking anybody anymore," he said. "You really have to come to the table with a solid skill-set."

The issue of recruiting employees from under a competitor's nose--and the legal ramifications of doing so--resurfaced last week with the tussle involving software giant Microsoft, its former executive Kai-Fu Lee, and search king Google.

The strings
of attachment

Employment agreements can have a variety of post-termination restrictions. In an essay earlier this year in HR Magazine, attorney Jonathan Segal cited five types:

• Restrictive covenants: These prohibit the employee from competing with the employer for a specified period in a particular geographic area.

•  Nonsolicitation of customers: These bar the employee, for a set period, from soliciting business from the prior employer's customers or potential customers.

• Nonsolicitation of employees: These prohibit an employee, for a set period, from soliciting certain individuals to leave their current employer and work with the employee.

•  Confidentiality: These bar an employee, after termination, from using or disclosing confidential information created or acquired in the course of employment.

•  Inventions: These specify that writings, products or other inventions created in the course of employment are the property of the prior employer; they also bar the employee's use of such inventions, for personal benefit or for the benefit of any other employer.

Source: HR magazine.

Google announced it had hired Lee to lead a new research and development center in China and serve as president of its Chinese operations. The same day, Microsoft sued both Google and Lee, who was a vice president at Microsoft and played a key role in its operations in China.

The suit, filed in a Washington state court, claims Lee is breaking a noncompete agreement in taking his new job, and it accuses Google of encouraging Lee to violate promises made to Microsoft.

"Lee entered into a valid and binding agreement with Microsoft in which he promised that he would not, for a period of one year following termination of his employment with Microsoft, compete with Microsoft in certain, defined ways..." the suit states.

Google and Lee fought back this week. "This lawsuit is a charade," They said in court documents filed prior to a Wednesday hearing in Seattle. "Indeed, Microsoft executives admitted to Lee that their real intent is to scare other Microsoft employees into remaining at the company."

In another filing made before Wednesday's hearing, Lee claims that in a July 15 meeting, Microsoft Chairman Bill Gates told him, "Kai-Fu, (CEO) Steve (Ballmer) is definitely going to sue you and Google over this. He has been looking for something just like this, someone at a VP level to go to Google. We need to do this to stop Google."

Last Thursday, Google asked a California court to declare Microsoft's noncompete provision invalid.

Google appears to be taking advantage of a California rule that frowns on noncompete contract clauses, and a war over courtroom jurisdiction could loom. Google representatives did not return requests for comment.

Long, sordid history
This talent tiff among tech-world powerhouses has many precedents. This is not, for example, the first time Microsoft has turned to legal channels to pursue former employees it felt were unfairly competing.

Several years ago, the company sued when former executive Tod Nielsen and a number of ex-Microsoft employees went to work for Crossgain, a start-up focused on allowing business applications to run over the Web.

Crossgain eventually disassociated itself from a number of Microsoft workers that were still bound to noncompete agreements. Among the other ex-Microsofties who were forced to step down, at least temporarily, were Nielsen and Adam Bosworth, a founder of Crossgain who eventually joined Google.

And Microsoft has been on the other side of things. In 1997, Borland International sued the software giant, claiming it had hired 34 Borland employees over three years in an attempt to put Borland out of business.

Earlier that year, database software company Informix tried to obtain a restraining order against Oracle after 11 of its software engineers left for

Oracle. And also in the late 1990s, SAP cried foul that 27 of its key executives walked out for rival Siebel Systems.

There are signs, including a revived start-up scene, that competition for employees in the tech world is heating up. But it's difficult to find hard numbers on the practice of actively tempting workers at rival companies.

If anything, the amount of talent snatching in the software field has declined from a decade ago, said Jack Cage, senior client partner at executive search firm Korn/Ferry International.

Cage, who specializes in the software and tech services arenas, said one factor is the consolidation of the software industry during the past 10 years or so from some 500 public companies to fewer than 100. He also said companies aren't as likely to raid one another when there are so many people looking for work--such as the thousands laid off after the Oracle-PeopleSoft merger.

through the ages

The dispute over Google's hiring of Microsoft exec Kai-Fu Lee follows a long history of tech companies taking talent away from one another other.

Amazon.com, Drugstore.com
In 1999, Wal-Mart sued the online retailers, alleging they had hired Wal-Mart execs in order to get at trade secrets. The dispute was settled later that year.

In 2001, former Microsoft employees hired by the business application developer stepped down after Microsoft sued, saying the execs were still bound by noncompete agreements.

Borland International
In 1997, the company filed suit against Microsoft, saying the software giant had tried to cripple the business by recruiting 34 Borland employees.

In 1997, the database software company asked a court to impose a restraining order on Oracle after 11 of its software engineers left for the company.

In the late 1990s, the business software developer complained after 27 of its key executives left to work for rival Siebel Systems.

"If resumes are flowing, there's a perception of talent out there," he said.

Farrelly suggests the greatest amount of recruiting among tech rivals these days is in the field of network security, an area that's become hot, given the rise of phishing and other computer threats. "There's a lot of (employee) swapping going on in that industry," he said.

Farrelly says noncompete agreements lasting a year or more are commonplace for upper-level tech employees in sales, but that doesn't keep them from moving to a similar company.

"All my sales guys have noncompete clauses, and they all jump ship," Farrelly said. "(And) when they jump ship, nine times out of 10 they're going to competitors."

By contrast, Korn/Ferry's Cage thinks employees have gotten more careful about abiding by agreements at a time when executive shenanigans can quickly make headlines. "Everyone is just much more open because they realize eventually there's going to be a document trail or some disclosure," he said.

Check the fine print
Even so, employers would be wise to ask their potential hires about previous employment agreements, attorney Jonathan Segal suggested in an essay earlier this year.

"While employers probably have no affirmative duty to ask about restrictive agreements, they do have a duty to take corrective action if they learn that an employee is subject to a binding restrictive agreement," Segal wrote in the essay, published by the Society for Human Resource Management. "Employers that become aware of, but ignore, post-termination restrictions can be held liable..."

Segal said employment contracts can include prohibitions against competing with the former employer for a specific period in a specific geographic area; soliciting business from the prior

employer's customers or potential customers for a set period; and using or disclosing confidential information created or acquired in the course of employment.

There may be wiggle room in some of these agreements, Segal suggested. For example, the hiring employer may want to closely examine a clause barring the solicitation of customers: "Does the restriction cover only current customers or does it also apply to former and potential customers?" he wrote.

Postemployment contract restrictions are becoming more widespread at California technology companies, said Martin Foley, attorney with the firm Sonnenschein, Nath & Rosenthal. Given the importance of intellectual property to a company's success, businesses are now asking both executives and "worker bees on the line" to sign agreements aimed at safeguarding a company's secrets, Foley said.

But when it comes to noncompete clauses in particular, California tends to side with footloose employees. Except in narrow circumstances, the state's code renders such agreements meaningless.

Not only that, but state courts have at times struck down employment contracts signed outside the state, Foley said. "California has voided noncompete contracts from non-California employers when the employee works in California or lives here," he said.

Foley also said the state has ruled against a legal theory invoked in Microsoft's suit: that former employees will inevitably disclose a company's trade secrets when moving to a competitor.

The Lee case seems to present some tricky questions about jurisdiction. Though Google is headquartered in Mountain View, Calif., Lee is supposed to lead the company's operations in China.

In their court filing last Thursday, Google and Lee said Lee resides in California.

Microsoft took issue with Google's filing. "Forced to confront its clear violation of Washington law, Google is attempting to manufacture California residency for Dr. Lee in a poorly disguised effort to persuade a California court to treat him as a California resident in order to evade Washington law and renege on the agreement Dr. Lee made to Microsoft," Microsoft said in a statement Wednesday.

Foley expects some high-powered legal fireworks in the case. "There's going to be a hell of a battle," he said.