Departing Employees Gone Wild! Part I

I have been tracking this case (Starwood vs. Hilton Hotels) for a while because it contains some great nuggets of wisdom for any company seeking a venture capital investment or growth capital. It concerns protecting your confidential and trade secret information in relation to departing employees. It was settled in December 2010 so I can now give you some insights and takeaways (Part I from the perspective of the ex-employer…Part II will be from the perspective of the new employer).

Background: Without laboring through the long details, two top level employees of Starwood who worked on developing the W brand of hotels went to work for Starwood’s competitor (Hilton Hotels) and apparently took with them 100,000 documents. Hilton was planning to create a similar boutique hotel brand to the Starwood W Hotels, and probably thought that getting these Starwood employees would really help them get a leg up. Well, long story short, Hilton cannot (by court order) develop a competitive boutique hotel chain for 2 years, and they must have (for 2 years) federal monitors supervise their strategic activities, and (according to the NY Times) pay Starwood $75 million (all of this before they even got started in competing with Starwood). All I can say is WOW. This is unprecedented and this all started from hiring 2 Starwood employees.

Ok, so what do you need to know about this before you even think about your company exit strategy?

1) ‘Identify’ and ‘Mark’ Your Confidential and Trade Secret Information. This case would not have gone as well for Starwood if they had not marked their confidential and proprietary information and restricted access to it. Think about it, once your documents leave your site, how does the person in possession of them know that it is your confidential or trade secret information? In a way–at least for argument’s sake–it may seem like documents lose their character once they leave your site if they are not properly marked (in terms of ownership and their confidential nature)!
2) Think About Your Business and Marketing Plans (not only Source Code). What is really unique about this case is Starwood had developed a ‘Brand in A Box’ (brand handbooks, marketing plans, and immersion plans), and properly marked and protected this material. Most software based businesses have lots of confidential and trade secret information besides source code, and this case demonstrates that marketing material can be very valuable.

3) Conduct Exit Interviews With Your Departing Employees. The goal here is to make your departing employee conscious about what the company owns, and inform them to return or destroy all company information (you don’t want them to think that they own or possess rights to their material just because they created it). 

4) Confidentiality Agreements. Use confidentiality agreements where appropriate, for this helps to prove you took steps to protect your important information. 

Now you be saying–and I have heard this argument hundreds of times from software executives–if the information was still taken by a competitor, what do all of these legal steps to protect IP really achieve? Well, if Starwood had not identified and marked its information, held exit interviews with its departing employees, and consistently used confidentiality agreements, they would probably not have come out so well in this case.

If you think about it, imagine if your significant competitor:

(a) cannot (for 2 years) compete with you in a very important growing market segment,
(b) must have (for 2 years) federal monitors on-site reviewing their strategic planning, and
(c) must pay you $75 million (even before they start to compete with you).
If you could put your competitor in this type of straight jacket by taking the above precautionary measures, then maybe you should consider them! Let me know if you got the message, because sometimes departing employees go wild!

These are a few thoughts from a venture capital adviser who works with OpenView’s portfolio of expansion stage companies.  
Here is the 135 page petition if you want to read the detailed allegations.

Do departing employees go wild in the tech industry too?
CA vs. Quest Software – departing employee is hired by Quest. 
SiRF Technologies – employee departs to allegedly start a competitor
Intel vs. AMD – departing employee is hired by AMD
Ex-Employee of Goldman Sachs – employee departs to allegedly start a competitor