Chelan David

In today’s competitive environment, noncompete and confidentiality agreements can be critical to maintaining an edge over your rivals.

And failing to have them could put your company out of business should your employees leave and take your secrets with them, says Susan Rowe, a partner with The Stolar Partnership.

“One of the primary assets that most businesses have — which they’ve often spent significant funds to develop — is their confidential information,” says Rowe. “This includes, for example, formulas, proprietary research, customer databases, pricing strategies and other trade secrets.”

Smart Business spoke with Rowe about noncompete and confidentiality agreements, what type of information to include in employee contracts and, if things go awry, what type of evidence is needed to pursue legal action.

Why is it important for employers to address noncompete and confidentiality agreements?

Missouri statutes protect confidential information that is a trade secret. It’s important to have a confidentiality agreement because you can use it to talk to the employee about the importance of protecting confidential information. You can also identify trade secrets and confidential information. If you fully describe what is confidential, the employee can’t later say, ‘I didn’t understand that this was or wasn’t confidential.’  Furthermore, you can include certain protections in addition to the protections that statutes might provide for the employer.

It’s also important to have a noncompete agreement. Absent a noncompete, former employees can leave to join a competitor, with nothing to prevent them from doing so. Even without confidential information, there are circumstances in which an employer doesn’t want someone it has trained — and spent significant resources doing so — to go out and compete against it.

What information should be included in a noncompete agreement?

It’s important for employers to realize that the enforcement of a noncompete agreement is a legal matter. Noncompetes can be expensive to enforce in the courts. Noncompetes undergo a lot of scrutiny in the courts because the law says such agreements are anti-competitive and can only be used to protect certain interests of the employer — such as the customer base or trade secrets.

If you’re protecting client relationships, describe the scope of the relationships and identify which are considered confidential and subject to the noncompete.

Also, be careful about the scope of the agreement in terms of its length and geographic restrictions. The courts typically do not allow for a very broad geographic scope or permit a noncompete to go on for a long period of time.

Finally, include remedies for yourself, such as attorney fees and other provisions, which will protect your business if you have to enforce the agreement.

If an employee signs a noncompete agreement but takes a job with a competitor, what steps can an employer take?

To prevent disputes, give the employee who is leaving or who has been terminated copies of the agreement upon his or her departure.

Employers who employ someone with an existing noncompete with a former employer — and are aware of the noncompete but continue to employ that person nonetheless — run the risk of being sued by the former employer on a tortious interference with contract claim. If you become aware of a former employee, bound by your noncompete agreement, working for a competitor, have your attorney send the new employer a copy of the agreement, thereby putting the new employer on notice that you believe there is a noncompete agreement in effect. Often, this will dissuade the new employer from continuing to employ the person. You can also send a letter to the former employee, reminding him or her of the noncompete agreement and stating that you intend to enforce the provisions. Sometimes that’s enough. Other times, employees will proceed in the face of a noncompete and you will have to go to court to enforce the agreement.

What evidence does a business need to pursue legal action against a former employee whom it suspects has leaked confidential information?

As with any lawsuit, before it is filed, make sure that you have good-faith basis for the lawsuit and see that much of your evidence already in place. If one of your former customers says, ‘Oh, your former employee is calling on me,’ ask that person to send a note or letter identifying the person who has called on the business.

If you think the former employee is talking about your confidential information, ask your customer to write down the substance of the conversation. This allows you to have a statement ahead of time that you can use to support what you will be alleging in the lawsuit.

In addition to noncompetes, what other methods can a business use to protect its intellectual property?

Employers should be mindful of what’s out on the Web. Commentators have talked about employers who have found their former employees disclosing confidential information or engaging in developing relationships with former customers on such sites as Facebook and LinkedIn. When employers find this type of information, they should demand that the former employee stop this conduct or remove confidential materials, or face legal action for failing to do so.

Employees change jobs because they’re dissatisfied — they feel like they don’t have opportunities or that they’ve been treated badly. To prevent people from leaving with confidential information, it’s important to build loyalty with your employees, listen to them when they’re upset and treat them fairly.

Susan Rowe is a partner with The Stolar Partnership. Reach her at (314) 641-5119 or snr@stolarlaw.com.

When a dispute occurs between businesses, it is not uncommon for one of the parties to turn to the court system for resolution in the form of a lawsuit. However, there is an alternative method to resolving legal issues that can save you both time and money.

Alternative dispute resolution, or ADR, is a process in which legal disputes are resolved by trained mediators or arbitrators rather than a judge. Under certain circumstances, ADR can be used to settle disputes more quickly and less expensively than if they were decided in litigation. ADR also provides the parties with greater privacy because proceedings are not taking place in a public forum.

“Privacy is one of the principal advantages of arbitration or mediation over litigation,” says Stephen J. Siegel, a partner with Novack and Macey LLP.

Smart Business spoke with Siegel about how ADR can benefit your business and when it is an appropriate choice for dispute resolution.

What are the most commonly used forms of ADR?

The two principal forms of ADR in the United States are arbitration and mediation. Arbitration is similar in some respects to litigation.  Both are adversarial processes in which the parties offer evidence and arguments to try to obtain a favorable binding ruling from a neutral decision-maker.

But, arbitration is different from litigation in several key respects. Unlike in the court system, the parties typically participate in selecting one or more of the arbitrators. Also, there are only a handful of grounds on which you can try to overturn an arbitration award and these are very hard to establish. In addition, U.S. arbitrations are generally resolved in less than a year, whereas it often takes several years to get a decision ‘on the merits’ in business litigation. Finally, on average, there is less discovery and less motion practice in arbitration than in litigation.

Mediation is quite different from arbitration and from litigation. First, though mediations are sometimes contentious and have adversarial elements, a successful mediation requires the parties to collaborate with a neutral mediator and one another to negotiate an agreed resolution to the dispute.  Second, there are fewer rules in mediation and generally, the mediator and parties are free to design the process to suit their needs. Third, if settlement efforts fail, a mediation does not commonly lead to any sort of binding ruling.

Under what instances is it most appropriate to use ADR?

Arbitration and mediation are tools. They are helpful if used wisely, and can be frustrating and costly if not. Arbitration is a good tool for resolving repeat disputes of a known size and complexity. For example, if your company periodically has pricing or performance disputes with its customers that are significant but not ‘bet the company’ events, arbitration might be a good way to resolve those disputes. It can provide you with a confidential process, a say in who the arbitrator is and the opportunity to limit discovery and motion practice to help contain costs.

On the other hand, in large, complex or unique disputes, arbitration may not be the best choice because it offers little or no right to appeal.  If you don’t agree with the award, you’ll generally have to live with it, whereas in litigation, an appellate court can take a fresh look at the legal issues. Also, with bigger disputes involving multiple claims and issues, the parties often want more discovery and the opportunity to file motions to resolve issues before trial.  Litigation is well suited for such cases, though arbitrators often permit discovery, and sometimes allow motion practice.

Mediation is worthwhile for nearly any dispute that both parties want to resolve but which they are having trouble settling on their own. Setting aside a time and place to meet about settlement, and working with a neutral party frequently helps parties to bridge differences that seemed insurmountable.

Even when a settlement is not reached during mediation, the process can still be beneficial.  For example, it might bring the parties closer to a settlement and facilitate reaching a settlement in the future. Even if no settlement is ever reached, mediations often provide the parties with insights into their adversary’s positions, goals and strategies, and that can be invaluable as the dispute proceeds. Most mediations are valuable whether or not the mediation leads directly to a negotiated resolution.

On the flip side, a common frustration occurs when two parties want to settle but the mediator is not skilled at working the parties toward common ground. So take the time to investigate and select your mediator carefully.

How do ADR costs compare to cases processed in the court system?

Generally, arbitration should reduce your direct costs in attorney’s fees and other dispute-related expenses as compared to a litigated outcome. This is because there is less motion practice and discovery and the process typically leads more quickly than litigation to a hearing on the merits of the dispute. But, these savings are not always realized. Sometimes arbitrations get very involved and complicated. The choice of how to manage arbitration is as important as the choice of whether to arbitrate. Once you’ve agreed to arbitrate, you have an important task in laying out the ground rules to keep it less costly, burdensome and time-consuming than litigation. You have to manage the process to achieve those goals.

In general, mediation is less expensive than litigation or arbitration, but it’s hard to compare the costs. Mediation is often a supplemental way to resolve a dispute that’s in litigation or arbitration, so unless the mediation leads directly to a settlement, it may increase your direct costs. If the parties go to mediation simply because they were asked or required to do so, not out of a genuine desire to resolve the matter, then it can be an added cost with little or no benefit. But, as with arbitration, if you select your neutral party carefully and manage the mediation process, you’ll increase the chances of saving costs and obtaining an acceptable outcome.

Stephen J. Siegel is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or ssiegel@novackmacey.com.

More than 47 billion nonspam e-mails are sent every day, and many of those pass through an employer’s e-mail system or an employer-provided mobile device.

“As of mid-2010, approximately 40 percent of corporate employees used employer-provided mobile devices to send and receive electronic messages,” says Andrew D. Campbell, a commercial litigation partner at Novack and Macey LLP.

Managing e-mails can be time consuming and costly for employers, says Campbell.  The time and expense of regulating e-mails can be exacerbated when employees send or receive personal e-mails on employer-provided devices. Personal e-mails sent through employer-owned devices raise unique issues such as who owns these e-mails, and what, if any, expectations of privacy do employees have with respect to nonbusiness e-mails sent via corporate devices?

Smart Business spoke with Campbell about the rights of employers to access e-mail sent on company-owned devices and how an e-mail policy can help protect employers.

What are some of the issues regarding employees sending personal e-mails through their employers’ devices?

Some organizations allow their employees to use employer-owned mobile devices or e-mail systems to send or receive occasional personal messages.

These organizations tend to believe that requiring an employee to use two devices — an employer-provided device for business and an employee-provided device for personal use — will result in employees opting to carry just their own device after hours and on weekends. For these employers, the benefit of greater access to their employees seven days a week outweighs the costs associated with employees sending and receiving personal messages. However, many employers prohibit employees from using employer-owned devices for personal or nonbusiness use. So why do employees continue to send personal e-mail despite these policies? Likely because they feel they can get away with it.

A recent study found that while 95 percent of organizations have policies in place for mobile devices, only 10 percent say that enforcing restrictions on their use is ‘very easy.’ In light of the fact that more than 47 billion e-mails are sent each day, employees may send personal e-mails believing that there is minimal chance that their personal messages will be detected.

Why would an employer want to review an employee’s e-mail?

For the most part, employees use e-mail accounts as permitted by their employers. Yet, there are some who use their accounts to break the law, disparage an employer or transfer trade secrets or confidential information outside an organization. Incoming e-mails can also be a source of electronic viruses, and employers may monitor these e-mails for security purposes. Reserving the right to review an employee’s company-provided e-mail can be extremely important to maintaining the security and integrity of an organization.

When is it permissible for an employer to review personal e-mails?

As with most legal questions, the answer is, ‘It depends.’ Among other things, it depends on whether the employer is a government entity or a private business. Government entities, even when acting in their capacities as employers, are bound by the Fourth Amendment, which prohibits the government from making unreasonable searches of people’s property or effects. Private employers, while not bound by the Fourth Amendment, must still be concerned with potential claims for invasion of privacy.

While the analysis under the Fourth Amendment and privacy claims can differ, one element they share is that employees must have a reasonable expectation of privacy. If there is no reasonable expectation of privacy, an employer’s review of an employee’s e-mails is far less likely to be regarded as violating the law.

How do courts assess whether an employee has a reasonable expectation of privacy?

There are a number of factors that courts will consider. Four of the most common questions addressed are, does the organization maintain a policy banning personal or other objectionable use? Does the organization monitor the use of the employee’s computer or e-mail? Do third parties have a right of access to the computer or e-mails? And did the organization notify the employee of, or was the employee aware of, the use and monitoring policy? The more factors that are present, the more likely it is that a court will find that an employee had no reasonable expectation of privacy in his or her e-mails.

Other factors that courts have considered — although these factors are generally not outcome determinative — include whether the employee has a password; whether anyone other than the employee knew the password; and whether the employee has a private office or a more visible workspace. The harder it is to access an employee’s e-mails, the more likely it is that a court will find there is an expectation of privacy.

What provisions should an organization’s e-mail policy include?

Regardless of whether an employer allows personal e-mail, to minimize the risk of liability from an employee-initiated claim for privacy violation, a policy should, among other things, be in writing; be signed by each employee to whom it applies; state that employees do not have any expectation of privacy in e-mails; notify employees that e-mails may be monitored by the employer; state that all communications sent or received through an employer’s software or hardware are property of the employer; and prohibit the use of employer software or hardware for illegal or harassing purposes.

An alert, reminding employees of the policy when they sign onto their accounts, can also help shield employers from liability for claims of invasion of privacy.

Andrew D. Campbell is a commercial litigation partner at Novack and Macey LLP. Reach him at acampbell@novackmacey.com or (312) 419-6900.

Historically, the power of eminent domain has been exercised to facilitate the construction of large public projects such as highways and railroads, schools and housing developments, to name a few.

Eminent domain has been used to clear blighted areas in cities to make way for redevelopment. More recently, the power has also been used to enable municipalities to clear the way for economic redevelopment projects, such as new shopping centers. Indeed, the decision in Kelo v. City of New London, a case that went before the United States Supreme Court in 2004, set a precedent for property to be transferred to a private owner for the purpose of economic redevelopment.

The court found that if an economic project creates new jobs, increases city revenue and revitalizes a depressed or blighted urban area, that project qualifies as a public use.

“Eminent domain is the power of the state to appropriate an individual citizen’s property for the benefit of the citizenry,” says Jay Levitch, a partner with The Stolar Partnership. “Eminent domain is embedded in the federal constitution and the state constitution.”

Smart Business spoke with Levitch about eminent domain, how compensation in a property-taking is determined and how to go about finding a suitable attorney to assist you in an eminent domain case.

How does the process of eminent domain work?

If it’s a state agency — such as the Missouri Department of Transportation — the condemning authority has the power to claim land for a public purpose or public use. This power derives from the constitution.

If it’s a municipality seeking the land, the agency can pass legislation to claim it for a public purpose or public use. In either case, the entity identifies the property and the purpose for which it is to be taken. It then notifies the property owner or owners of the need for the property and makes an offer of compensation.

If the condemning authority and the property owners cannot agree on the compensation for the taking, there is a procedure prescribed by statute that enables the condemning authority to initiate a lawsuit in order to pursue taking the property.

How is compensation determined?

The process was revamped by the Missouri General Assembly in 2007. There is a statute that defines just compensation and says that it is to be determined by a jury utilizing a variety of generally accepted appraisal practices.

This includes, but is not limited to, the sales comparison approach, which looks at sales of similar types of property; the cost replacement approach, which is an evaluation technique based on what it would cost to replace the property with a similar property of similar construction; and the income approach, which looks at the property in terms of the income it generates and translates that into the property value.

These techniques, plus other generally accepted appraisal techniques, may be presented to the jury as a means by which the jury becomes informed as to the fair market value of the property. After evaluating the evidence, the jury then makes a determination and awards the property owner compensation for the taking of his or her property.

How have public views about eminent domain shifted recently?

We have a seen a change in the attitudes of the public over the last several years. It culminated with the Kelo decision by the United States Supreme Court. Ten years ago, people were not opposed to the use of eminent domain to try to foster redevelopment, the rebuilding of cities and the development of roads.

But over time, some people have come to believe that eminent domain has been used to transfer private property from one owner to another who plans to develop the property for their own profit. As a result, in the St. Louis area, you don’t see nearly as much use of eminent domain in connection with redevelopment as you once did.

Can a business be compensated if the government’s eminent domain acquisition adversely affects its operations?

The law in Missouri holds that a business owner is not compensated for the impact an eminent domain taking has upon its business. The view has been that the condemning authority is taking the land; it is not taking the business.

However, there are exceptions. There have been instances of substantial rewards for the partial taking of a business that completely closes off the access to a public street and leaves customers with a convoluted type of access to the business.

There have also been awards for the taking of property that impacts the ability of a business to expand.

What criteria should be considered when selecting an attorney in an eminent domain matter?

As with any legal matter, the person who is seeking an attorney should look for a lawyer with experience in the field. If a person is faced with a letter from a condemning authority saying, ‘We are going to be taking your property,’ it’s important for the property owner to look for a lawyer who has represented property owners and who is familiar with the eminent domain process.

Jay Levitch is a partner with The Stolar Partnership. Reach him at jll@stolarlaw.com or (314) 641-5178.

If your organization still doesn’t have a social media policy, it is time to create one.

“Every organization should have a social media policy that enables it to optimize the opportunities that interactive social media sites present while minimizing the attendant risks,” says Kristen Werries Collier, a partner with Novack and Macey LLP.

Smart Business spoke with Collier about those risks and how to develop a workable policy to minimize your exposure.

What are some of the risks associated with social media?

While social media’s open format and accessibility to the public makes it a vital platform for organizations to disseminate information, that attribute engenders certain risks, including: the disclosure of confidential or proprietary information; the broadcast of negative comments about your organization, co-workers, customers or clients; and the risk of employees’ personal views being improperly imputed to the organization’s detriment. Your social media policy should essentially be a primer of how to avoid these and other risks.

How can an organization begin to draft a social media policy?

You don’t need to start from scratch. Visit socialmediagovernance.com/policies.php or www.kokasexton.com/word/100-examples-of-corporate-social-media-policies — free databases of social media policies. Assimilate what you like from these policies and then continue to modify the directives to address your specific concerns. If your organization already has a code of conduct related to media, you can modify those directives to cover the use of social media.

One size doesn’t fit all. You need to tailor your policy to reflect your organization’s culture. Determine how strict your policy needs to be based on your needs and tolerance for risk. I don’t think it makes sense to bar your employees from accessing social media sites at work. Your organization depends on your employees’ professional judgment, and their use of social media sites should be governed by that judgment, guided by your social media policy.

Even if you block access to social media altogether, that does not obviate the need for a policy that informs employees of the repercussions of posting negative comments during nonwork hours that could damage the organization’s reputation or reveal confidential or propriety information.

Who should be involved in creating the policy?

Keep in mind that you are asking your employees to self-monitor their behavior in accordance with prescribed guidelines, which means that any policy’s effectiveness turns on whether your employees understand it and buy into it. Given that, you want to create an understandable policy that protects your organization from the pitfalls of social media sites without overreaching.

To get employee buy-in, recruit a cross-section of employees to help you create the policy. They can then be integral to communicating it, facilitating implementation, monitoring its effectiveness and tweaking it.

What are some general guidelines for creating an effective social media policy?

1. Keep it short.

2. Define social media so it is clear what the policy is addressing.

3. Start on a positive note and highlight how your organization uses social media sites to its advantage so it is clear the policy is intended to empower and educate.

4. Declare that the purpose of the policy is to protect the organization.

5. State that the policy is not intended to infringe on employees’ personal interaction online but to ensure their posts do not reflect poorly on the organization, its employees or clients, and do not reveal confidential or proprietary information.

6. Encourage employees to use common sense.

7. Be specific. Provide an organization-specific list of the types of information that cannot be disclosed and note that if it seems confidential, it probably is.

8. Remind employees that if they identify the organization as their employer in online profiles, comments posted there could be imputed to the organization.

9. Direct employees to refrain from posting comments that could be interpreted as harassing, slurs, disparaging, demeaning or inflammatory.

10. Explain why certain conduct is prohibited.

11. Remind employees that their online presence is subject to applicable laws and terms of service.

12. Inform employees that you will monitor their social media presence, and then do it.

13. Tell employees the use of social media at work is a privilege, one that can be rescinded if abused.

14. Spell out the repercussions for violating the policy.

15. Have employees sign the policy.

16. Have a plan to minimize damage if the policy is violated.

How should an organization implement the plan?

Communicating the policy is as important as writing it. With that in mind, designate someone to convey a clear message about why the policy is necessary and that employees are expected to follow it. It would be a shame to invest significant time and effort into drafting the policy and then have it sit unread in your employees’ inboxes.

Also have a point person to answer questions because employees can’t abide by the policy if they don’t fully understand it.

How often should the policy be reviewed?

It should be reviewed at least annually, allowing you to work out the kinks by refining what works and eliminating what doesn’t. After you have a policy that has proven to be workable and effective over time, you can revisit it when the need arises, or at least every couple of years.

Kristen Werries Collier is a partner with Novack and Macey LLP. Reach her at kwc@novackmacey.com.

Disasters, both manmade and natural, can strike at any time, at any place. And if you’re not prepared, your business might be forced to close — which, even if only temporarily, could lead to devastating consequences.

Ravi Sundara, partner and firm manager at The Stolar Partnership, says that a comprehensive disaster recovery and business continuity plan is key to ensuring a business’ survival in the wake of a catastrophe.

“With proper planning and preparation, a business can place itself in a better position to ensure that it will continue, even in the face of disaster, which is important to a business’s customers, employees, management, owners, business partners and markets,” says Sundara.

Smart Business spoke with Sundara about how to be proactive, the legal issues that may arise if you are unprepared and the importance of having off-site backup.

How can preparing for the worst-case scenario help a business re-emerge from a catastrophe?

Proactive planning and preparation are extremely important in helping to ensure business continuity when disasters or other major business interruptions occur. Everyone is familiar with fire, tornado and other disaster drills. The reason we go through those drills is so that we know in advance how to respond, rather than trying to figure it out on the fly in the middle of a disaster.  A disaster recovery and business continuity plan serves the same purpose for the business.

What steps can business owners take to prepare for disaster?

It is important to have insurance coverage for loss of property, liability and business interruption. Also, you should have contracts and alternatives in place to deal with disasters that might happen elsewhere that can affect your supply chain. Take, for example, the recent tornado in Joplin, or the earthquake and tsunami in Japan. Your business may be dependent on other businesses to supply it.

Make sure you have alternative vendor arrangements, or have at least identified where you would turn if a current supplier is unable to deliver shipments. For disasters that directly affect the business, options should be in place for temporary office or plant locations, as well as alternative communication methods. If the phone systems go down or there is no cell phone coverage, how will you communicate? This is important not only for internal communications but external, as well.

What types of legal issues commonly surface for businesses that have been affected by a disaster?

There are a number of legal issues, including contractual issues, regulatory compliance and negligence claims. Contractual issues involve fulfilling obligations to customers in the aftermath of a disaster. If a business is unable to fulfill its goods or services obligations, does it have contracts that require it to come through regardless of the circumstances? If so, it could be in breach of its contract.

If there is a force majeure clause — commonly thought of as an Act of God clause, but broader — the business may be let out of the contract or given an extended period to perform. Even if there is a force majeure clause, however, the business might still be responsible for performing if it could have reasonably planned for foreseeable, yet uncontrollable, circumstances, such as a power outage.

Negligence is a failure to act as a reasonably prudent person would under similar circumstances. Failure to plan for reasonably foreseeable disasters could allow customers, employees or others to bring legal claims asserting negligence based upon the failure to undertake reasonable planning for disasters.

In addition, directors of a corporation have a fiduciary duty of care owed to the corporation, and the failure to undertake reasonable business continuity planning to address foreseeable disasters could be a breach of that duty for which the director may be held liable.

How important is it to back up computer data frequently and keep a backup tape off site?

It depends upon the nature of the business and the type of data that is being stored. In other words, how much data could the business stand to lose and still be able to function? It could be a day for some businesses, and it could be an hour or even just minutes for others.

Off-site backup is very important because if a disaster strikes and disrupts your main systems, and if the backup is located in the same location, the backup could very well be destroyed, as well. This is why many businesses that have good disaster recovery and business continuity plans often use data centers located in other regions of the country for their off-site backup needs.

How do disaster recovery plans and business continuity plans differ?

Disaster recovery — involving data, information and documents — is really one piece of a broader business continuity plan. A business continuity plan includes those essential functions that a business needs to perform in order to continue operating. It covers identifying items such as employees’ roles and responsibilities, systems and data recovery, temporary locations, alternative communications, alternative modes of transportation and funds management. Some companies, such as financial institutions, may be legally required to have both a disaster recovery and a business continuity plan.

How often should a disaster preparedness plan be reviewed?

At least once a year. Contracts change, needs change and technology changes. The last thing you want is to have a disaster occur and when you pull out your data recovery/business continuity plan, you find that most of the items are no longer relevant, making the plan useless when you need it the most. Finally, it should be tested periodically, even if that simply means walking through it with your top management and staff.

Ravi Sundara is partner and firm manager for The Stolar Partnership. Reach him at  (314) 641-5143 or rsundara@stolarlaw.com.

Historically, employers have learned about potential hires through applications, questionnaires, interviews, references and background checks.

That is changing, however, as more companies are beginning to use social media outlets to vet candidates. But while such sites can provide a lot of information about a candidate, it is important to understand the legal ramifications of researching a candidate online, says Jennifer Raymond, a partner with The Stolar Partnership.

“Employers are reporting that they’re making all sorts of employment-related decisions based on social media,” says Raymond. “But most employers don’t have targeted, written policies addressing what they’re doing with, and how they’re collecting, social media information.”

Smart Business spoke with Raymond about what is permissible when using social networking sites and credit checks to screen applicants, how to keep up to date with hiring practices and how to minimize legal risks.

What are the pros and cons of using social networking sites during the hiring process?

The pro is that you get information that you wouldn’t otherwise get from an interview or a resume. The con is that you get information you wouldn’t otherwise get from an interview or a resume.

You can find inaccuracies in a resume and information regarding a candidate’s judgment by screening social networking sites. But you also might learn information that is protected and wouldn’t normally be accessible to you as an employer, such as a person’s religious beliefs or someone’s health conditions.

You might also find information about someone who drinks alcohol or smokes cigarettes. However, some states, such as Illinois, have laws protecting legal recreational activities, and you can’t make a hiring decision based on that type of information.

What steps should employers take to minimize the legal risks associated with using social networking sites to screen potential employees?

Employers should have written policies governing the screening process that include, among other things, exactly which sites will be searched and who will be doing the searching. It’s critical to develop policies that include examples of what is, and what is not, permissible hiring criteria, acceptable conduct and appropriate information to consider in making hiring determinations. All personnel who will be participating in interviews or participating in hiring decisions should be trained on these policies.

These guidelines must be applied to every candidate. Employers may want to avoid sites such as Facebook because of the risk of finding protected information that a candidate might say was used impermissibly in making a hiring determination. Employers may wish to limit their search to professional sites such as LinkedIn, where they can verify resume information, as opposed to finding out personal, and possibly protected, information about candidates. And whoever is conducting the screening should never misrepresent his or her identity to gain unauthorized access to a candidate’s social networking information, such as by ‘friending’ the candidate or creating a fictitious profile.

Can an employer also reference a candidate’s credit report when making hiring decisions?

This area is in flux due to the downturn in the economy. It has become more of an issue because, for example, the credit score of someone who was laid off could have changed because of unemployment.

The Equal Employment Opportunity Commission (EEOC) and a number of states have been cracking down on an employer’s use of credit reports to make hiring decisions. And while looking at a credit report itself is not discriminatory, it can have a disparate impact on specific categories of people that are protected, such as African-American or female candidates, who may have lower credit scores based on social circumstances.

Not only has the EEOC been increasing its enforcement, but four states have enacted laws to prohibit employers from using credit reports in making hiring decisions, except in certain situations. And Missouri is considering legislation that would curtail the use of credit screenings in hiring decisions. There is even federal legislation that’s been introduced that would amend the Fair Credit Reporting Act and prohibit the use of credit reports, except in certain situations. A good rule of thumb is that if the position requires the candidate to handle money or other financially sensitive information, or if it’s a managerial or executive level position that involves signatory power, then it may be permissible to look at credit report information and use it to make determinations. However, for rank-and-file employees, making decisions on the basis of credit information can be very risky. And it’s going to become even more risky as other states, and potentially the federal government, pass this type of legislation.

If a candidate claims discrimination during the hiring process, how can a company protect itself against a lawsuit?

You’re not going to be able to stop someone from suing you, but you can demonstrate to the courts that you have written policies, that you’ve trained supervisors and decision-makers to follow them and that you have a documented screening process for candidates. This preparation will go a long way toward defeating claims that may be brought by a disgruntled candidate who feels that he or she was treated unfairly.

How can employers make sure they stay up to date with legal hiring practices?

There are human resources publications and websites that post updated information, such as the EEOC and the Department of Labor. But the best way to stay up to date and protect your company is to conduct a regular audit of your written employment policies — including hiring policies — and use the services of a qualified employment lawyer who can make sure you are in compliance.

Jennifer Raymond is a partner with The Stolar Partnership. Reach her at (314) 231-2800 or jjr@stolarlaw.com.

Ideas and closely held information, designs and processes are often a business’s most valuable assets, and the law provides companies with tools to protect those assets.

Patent, trademark and copyright laws are the most widely known ways to protect new ideas, but, while lesser known, the laws protecting trade secrets provide the better tool for companies to protect their confidential intellectual property.

“Protecting one’s valuable trade secrets is not only a good business practice, it is also often necessary to maintain the protections afforded by trade secret law,” says Donald Tarkington, the managing partner of Novack and Macey.

Smart Business spoke with Tarkington about how to protect trade secrets and how to make sure departing employees don’t walk out with valuable information.

What information is covered by trade secret protection?

Trade secrets can include technical or nontechnical data, compilations of information, marketing or financial data, manufacturing processes and lists of actual or potential customers. It covers virtually any information that is sufficiently secret that it derives economic value from the fact that it is not generally known and that the business makes a reasonable effort to keep confidential. Even information derived from public sources may be a trade secret if accumulating that information requires significant effort.

Courts look to six factors in evaluating whether information is a trade secret: the extent to which the information is known outside the employer’s business; the extent to which it is known by employees and others involved in the business; the extent of measures taken by the employer to guard the secrecy of the information; the value of the information to the employer and to its competitors; the amount of effort or money expended in developing the information; and the ease or difficulty with which the information could be properly acquired or duplicated.

Do trade secrets need to be registered?

Trade secrets are not registered like a trademark or copyright. Nor are they applied for as with a patent. Unlike ideas that are patented, trademarked or copyrighted — which are protected even though they are publicly known — trade secrets are protected because they are secret and because their secrecy makes the information valuable. As long as the information is secret, used in the business and valuable, it will be protected if the business takes reasonable steps to keep it confidential.

Why is it important for companies to protect their business practices, products, services or intellectual property?

Trade secrets are, by definition, confidential and valuable. They are assets and should be protected. Businesses should be no more tolerant of someone taking their trade secrets than they would be of someone walking out the door with a valuable piece of equipment.

Protecting trade secrets is also important to preserving a business’s legal rights. Under the Uniform Trade Secret Act, information is not a trade secret, regardless of how valuable it might be, if the business does not make reasonable efforts to protect its confidentiality. Businesses’s efforts to protect confidentiality don’t have to be perfect. What is reasonable will depend on the size and sophistication of the parties, as well as the relevant industry. But a business must take affirmative measures to protect the secrecy of its information.

How can businesses protect their trade secrets?

There are several measures a business can take, including marking information as confidential, keeping information in a secure place, restricting access to those who need to use it, password-protecting electronically stored information, developing policies that require employees to keep the information secret and requiring anyone with access to sign a confidentiality agreement. For particularly sensitive information, businesses should work with their data processing professionals to restrict offsite access to electronically stored information and limit the ability to download or copy information.

How can businesses ensure departing employees won’t take trade secrets with them?

As long as information qualifies as a trade secret, the law precludes employees from using that information after they leave. The best protection, however, is to require employees to sign confidentiality agreements in which they acknowledge that the information they were given is confidential and that they will not disclose it if they leave.

Confidentiality agreements can even protect information that does not meet the strict definition of a trade secret. When one employee with access to secret information leaves, disable his or her password and e-mail access and take back company issued laptops. It is also a good idea to review the usage logs on the employee’s laptop and the company’s computer network to see if there is any unusual copying or downloading activity.

If a nondisclosure agreement is violated, what steps should a company take?

If a business learns that someone is disclosing trade secrets to third parties, it should consider taking action against that individual and against the former employee’s new employer.  Possible actions include a suit for damages resulting from improper use of information and/or an injunction action against the former employee and new employer prohibiting the use or disclosure of the information.

Knowingly allowing trade secrets to be disclosed to third parties risks damaging a business’s claim that the information is a trade secret. Deciding whether to take action against a former employee or a new employer should be considered on a case-by-case basis, but one thing that should be taken into account is that allowing the trade secret to be disclosed could destroy the value of the information and destroy the business’s ability to seek protection of the information in the future.

Donald Tarkington is the managing partner of Novack and Macey. Reach him at (312) 419-6900 or dtarkington@novackmacey.com.

Business ownership succession planning means different things to different business owners.

Succession generally involves the transfer of ownership to family members, to employees or to third parties. But, it also involves identifying and balancing the emotional and financial needs of the owner, the owner’s family and key executives with the needs of the business itself. It means developing a plan that satisfies everyone’s needs to the greatest degree possible.

When conducting business ownership succession planning, there are two key aspects the business owner must address, says Tom Venker, chair of the Business and Tax Department at The Stolar Partnership LLP.

“First, the plan must allow the business owner to exit the business at retirement, death or disability according to his or her plans,” he says. “Second, it must provide a means for the business to continue and prosper after the owner’s departure.”

Smart Business spoke with Venker about how to establish goals for a succession plan, the importance of addressing the issue now and not when you have an immediate need, and why you cannot just create a plan and put it on a shelf.

What elements should a succession plan include?

Depending on the needs and goals of the individuals involved and the complexity of the business, business ownership succession planning can be as simple as developing a plan to give voting and nonvoting ownership interests to family members. At the other end of the spectrum, it can be very complex, involving the business’s attorneys, accountants, appraisers, bankers, insurance agents, business brokers and psychologists, and resulting in various legal documents such as shareholders agreements, employment agreements and deferred compensation agreements.

Planning also involves identifying potential roadblocks, such as an inability to find capable management talent among the new owners, pay for new outside management, provide adequate cash to the departing owner, or split the business among family members.

What types of goals should business owners set when creating a succession plan?

Business ownership planning begins with the business owner setting goals. Personal goals may include retiring versus working for life, financial security in retirement, support of a spouse after the owner’s death, provisions for family members not in the business, a buildup of assets outside the business, preservation of the family business for family members who are in the business, purchasing the interests of other owners, establishing charitable goals and facilitating a family member taking over the business.

There are also business goals, including enhancing management capabilities, building financial capacity to implement the succession plan and establishing the business’s future growth goals.

What is the most common mistake that business owners make when it comes to succession planning?

The most common mistake that business owners make regarding succession planning is ignoring it altogether. Too often, business owners think they will control their businesses forever, and, because it can be a difficult topic to address, they defer the planning.

When tackling the planning process, it helps to have all of the advisers at the table, such as accountants, life insurance agents, investment advisers and attorneys. These advisers have the interests of the business owner at heart and can help the business owner understand the benefits of putting a plan in place.

The key is to get a plan started and then modify it over time.

Baby boomer business owners should take particular note and start business succession planning now if they do not yet have a plan in place. As boomers begin to reach retirement age, sales of businesses will likely pick up, which could, in turn, drive down business valuations. Baby boomers whose plan includes selling the business will want to monitor the business sale market to detect any potential downturns.

What estate tax considerations should be taken into account with multigenerational businesses?

If the business is going to be transferred down through the family, business owners need to focus on how to provide liquidity for estate taxes. If the business is going to be retained in the family, owners can use some estate tax deferral rules that are available under the Internal Revenue Code. Other times, if the business has enough cash, stock may be redeemed. Sometimes business owners must rely on life insurance to help provide liquidity. Another option is to sell some of the interests to employees or a third party to provide liquidity.

How often should a succession plan be reviewed or updated?

A plan should be reviewed every three years and updated as circumstances change — when there are changes within the business owner’s family, changes of employees in the company, or changes in the growth of the company.

With any major change, the plan should be reviewed and perhaps updated.

Recently, there have been some succession plans that were contingent upon new owners buying out the departing owner. They assumed that bank financing would be readily available. In today’s banking environment, however, loans are more difficult to secure, so some plans have had to be tweaked to provide flexibility on the financing side.

Tom Venker is chair of the Business and Tax Department at The Stolar Partnership LLP. Reach him at tev@stolarlaw.com or (314) 641-5151.

Tuesday, 26 May 2009 20:00

Protection from fraud

All businesses, regardless of size or sector, are vulnerable to fraud. And while the types of schemes used to misappropriate funds vary, they tend to share a common thread: They can be extremely costly to a business.

“Fraud can encompass any business, anytime, anywhere and in a vast number of ways,” says Nathan Edmonds, senior partner at Secrest Wardle. “It is estimated that fraud accounts for more than $100 billion per year of incurred losses in the insurance industry alone.”

Smart Business spoke with Edmonds about how to identify fraudulent claims and reduce your risk of them, and about the importance of working closely with your legal team.

What types of fraudulent claims are businesses most frequently exposed to?

Fraud has been defined as a deception deliberately practiced in order to secure unfair or unlawful gain. Some of the most common types of fraud businesses are exposed to include employees claiming benefits that they are not entitled to — whether it be workers’ compensation or additional compensation for time not worked — and personal injury claims by allegedly injured people on the business’s property or by someone working for the company.

Fraud usually increases as the economy declines and typically declines during prosperity.

How can a company identify its risk for fraudulent claims?

Businesses face many challenges when it comes to identifying, resolving, mitigating and preventing fraud. There is a tremendous amount of information that must be gathered and analyzed from internal and external sources.

Additionally, businesses must continually adapt detection techniques and processes to new and evolving fraud patterns. A business should identify its risk by using historical data regarding prior claims losses.

Training of personnel is key in identifying red flags or indicators of fraudulent activity. If you doubt the validity of a claim or any circumstances surrounding it, gather all information immediately and document it. Remember that proving fraud is difficult, and it is a problem that businesses constantly grapple with.

What steps can a company take to reduce its risk?

The best manner in which to combat fraud and reduce risk is to thoroughly investigate the claims where fraud is suspected and promptly and fairly pay meritorious claims and vigorously defend claims without merit.

If a clear and strong message is delivered to all individuals that fraud will not be tolerated, this can be the strongest reduction of risk. No matter how small, take the approach that all fraud will be dealt with seriously.

Additional suggestions for reduction of risk include adding surveillance cameras that record all events where suspected fraudulent events occur, such as hotspots, repeated claim sites and high-traffic areas; establish seminars to inform employees about fraud and how to deal with suspected fraudulent activities; screen employees before they are hired and use exit interviews; display fraud awareness and prevention posters or literature; and display the National Insurance Crime Bureau phone number, (800) TEL-NICB.

Also, ensure your initial response to any alleged fraudulent activity places you in a position of strength. Look for indicators of increased risk at every stage of a claim, such as aggressive behavior, suspicious circumstances such as a delayed claim or delayed medical treatment, and inconsistencies in reported events.

What can a company do if it believes it is the victim of a fraudulent claim?

If a business believes it has been the victim of a fraudulent crime, the most critical aspect is documentation. As time progresses, memories of events are lost, things are moved and items are replaced. Thus, it is imperative to collect as much information as close to the actual fraudulent event as possible.

Once you gather all the information, contact an attorney, and then law enforcement is critical. Law enforcement may not make the claim a high priority, and it will typically become a civil matter in which legal representation is required to attempt to recover or prevent a claim from being made.

Prepare a list of questions that will help you establish the details of the fraud. Ask for answers in writing so they can be used as evidence. Obtain the name, address and phone number of every witness. Request photographs and sketches to document the fraud and obtain medical records if it is an injury claim. As the old saying goes, ‘The devil is in the details.’

Why is it important for a company to develop an action plan with its legal team?

In dealing with fraud, the attorney is a critical part of the team. The attorney who has handled fraud either for a victim or in helping recover assets from fraud can alleviate many pitfalls and spot issues to avoid legal difficulties.

Counsel can also open avenues to law enforcement for potential prosecutions of individuals who committed fraud. The legal team is part of the entire position of any business’s approach that fraud will not be tolerated.

If a business tolerates fraud, it will only serve to be a target of more frequent activities, which will grow in scale. Typically, fraudsters will test out a business by small activities and, if undiscovered, will then grow bolder with no repercussions.

nathan edmonds is a senior partner at Secrest Wardle. Reach him at (586) 465-7180 or nedmonds@secrestwardle.com.