04 Mar If Litigation is Inevitable, Consider Sending a Cease and Desist Letter

In our last few blogs, we have discussed how to draft strong business contracts, such as non-compete agreements and confidentiality agreements, and whether or not to pursue litigation if a former employee breaches a non-compete agreement.  What is the next step if your business decides to sue?  A cease and desist letter, along with a litigation hold letter, is the best next step in the process.  Today’s blog will focus on the cease and desist letter.

What is a Cease and Desist Letter?

A cease and desist letter or a “demand” letter is a letter that sets forth the improper activity of the former employee, with citation to appropriate legal authority; demands the former employee stop the improper activity; informs the former employee of the business’s intent to pursue legal remedies against the employee, if the employee fails to stop the improper activity; and, if appropriate, provides settlement options.  A cease and desist letter can often be an effective tool to stop the improper activity of the former employee and preserve your business’s rights.  A cease and desist letter could also help your company avoid costly litigation, if the former employee takes the letter seriously.  At a minimum, it could help set the stage for litigation.

How is a Cease and Desist Letter Drafted?

For a cease and desist letter to be effective, it must (1) be supported by facts; (2) contain clearly-articulated legal claims and demands; and (3) set the appropriate tone for the situation.  Ideally, your business should consult an attorney immediately about drafting such a letter, because an attorney will help your business assess the benefits and risks of sending such a letter, as well as your business’s potential legal claims.  An attorney can also help your business identify and gather the facts necessary to draft the letter, determine the tone of the letter and what your business’s demands to the employee should be, and assist in exploring different settlement options.

Assessing the Benefits and Risks

The benefits and risks associated with sending a cease and desist letter can vary according to the size and profitability of your company, as well as the magnitude of the improper activity, but the following pros and cons should be considered:

• Pro: the letter could resolve the dispute without costly litigation;
• Pro: the letter could provide evidentiary support for a finding of willfulness and enhanced damages, should the former employee ignore the letter;
• Pro: the letter serves to create a written record of improper activity, which may benefit your business in future disputes, even if you decide not to sue now;
• Con: the former employee could preemptively file a declaratory judgment action in response to the letter, and ask a court to find his or her activity proper;
• Con: if your business sends the letter and decides not to sue, the former employee can argue in any future litigation that your business waived its rights to certain claims;
• Con: if the letter has the wrong tone or is overreaching, it could provide for negative publicity.

Once the pros and cons are considered, the next step is gathering the relevant facts to draft the letter.

Gathering the Relevant Facts

1. Assessing Your Business’s Rights

Gathering the relevant facts is an important part of preparing an effective cease and desist letter.  The letter must be careful not to disclose any weaknesses in your business’s case, but rather present a demand that is restrained in substance and tone.  The first step is identifying your business’s rights to the protected data or enforcement of the non-compete agreement, including:

• identifying your business’s confidential information and/or non-compete agreements with current and former employees;
• the goods and/or services which use the proprietary information or are affected by the business’s non-compete agreements;
• your business’s marketing activities and channels, and how your business’s proprietary information or non-compete agreements are used in those processes;
• your business’s trade mark application or other efforts your company has made to establish ownership of your business’s proprietary information under law;
• the geographic regions in which your business competes or uses its proprietary information; and
• your business’s price points in the industry.

This information is key in determining the scope and strength of our business’s rights and the likelihood of success at trial, should the former employee fail to adhere to the letter.  Specifically, your business will want to make sure its rights to the proprietary information or its rights to enforce the non-compete restrictions are superior to those of the rogue employee in the relevant geographic area.  And if a trademark is concerned, your business will need to evaluate whether it has the necessary evidence to establish its rights to the trademark, including the dates of first use (both actual and constructive); any territorial limits on your business’s rights to the trademark; whether there has been nonuse of the mark; whether your business has practiced uncontrolled or “naked” licensing; and whether there have been any improper assignments of the mark.

2. Reviewing Relevant Agreements

Many commercial litigation cases arise from the breach of a confidentiality or non-compete agreement.  Your business and your attorney should review any written agreements between it and the former employee to determine whether the parties are required to resolve their disputes in a particular manner. These contractual requirements could impact the form, substance and timing of a cease and desist letter.

Specifically, your business and your attorney should review the relevant agreements for:

• clauses requiring a certain form and timing for breach notification;
• arbitration clauses;
• choice of law provisions;
• forum selection clauses;
• consent to personal jurisdiction.

Contracts with third parties should also be reviewed, to ensure that the business has not consented to any activity which may serve to waive its enforcement of similar activity against the former employee.  If your business has failed to exercise proper control over of enforcement of its proprietary information or non-compete agreements, this may make your business’s claims against the former employee vulnerable to waiver defenses or claims of abandonment.

3. Investigating the Former Employee’s Improper Activities

Investigating the activities of the former rogue employee is a critical part of preparing an effective cease and desist letter.  While it could be useful to begin the investigation through online searches and other readily-accessible public information, sometimes it may make sense to engage an experienced investigator to look into the improper activities.  Either way, the investigation should include research into:

• the nature and scope of the alleged improper activities and improper use of proprietary information;
• how long the alleged improper activity/improper use has taken place;
• the former employee’s future plans for continuing the improper activity or use of proprietary information;
• the nature and location of the employee’s assets, if any, for purposes of determining potential recovery;
• any potential privilege and work product issues, in order to avoid waiver in litigation; and
• any potential ethical issues with using a private investigator or other techniques that involve direct contact with the former employee.

Identifying and Assessing Potential Claims and Demands

Using this information, your business can then work with a competent attorney to identify and assess all viable claims and potential defenses, as well as demands that can be appropriately made to the former employee, including:

• a demand for the former employee to stop the improper activity by a specified date;
• a request that the former employee provide written confirmation that the conduct has been stopped or modified;
• a demand for an accounting of sales and profits which derived from the former employee’s improper use of your business’s proprietary information or his or her breach of the non-compete;
• a demand for a recall and destruction of all proprietary data in the former’s employee’s possession;
• a demand for the destruction of advertising and promotional materials bearing an infringing trademark;
• a demand that the former employee voluntary abandon any efforts to claim ownership over infringing trademarks.

Determining the Tone of the Letter and Potential Settlement Options

The factual data your business gathered can also be used to determine the proper tone of the letter and potential settlement options.  The proper tone will depend on many factors, including:

• the seriousness of the improper activities;
• whether the former employee is acting with willful intent;
• the strength of your business’s claims;
• the strength of the former employee’s defenses and counterclaims;
• the damages your business has sustained;
• the relief sought by your business; and
• the size and resources of your business.

While an aggressive tone may be appropriate in some circumstances where the former employee’s actions are willful and causing significant harm to your business, it may be more appropriate to take a restrained approach in situations where the employee is not acting with willful intent and merely needs some education on the appropriateness of his or her actions/activities.  In the latter situation, a phone call from an attorney or a gentle letter signed by a company executive may be worthwhile, before spending the time and money on hiring an attorney to draft a cease and desist letter.  In any situation, consider providing reasonable deadlines for compliance, avoid accusatory language, and consider offering one or more settlement options to effectively resolve the dispute short of litigation.

Also consider whether it makes sense to avoid sending the letter altogether, and instead file a complaint, where there is risk the employee could file a declaratory judgment action in the forum of his or her choosing to have his or her activities declared lawful.

If you and your business need help working through some of these steps, Edwards Law can help.  We are experienced in drafting cease and desist letters, and can offer you a free consultation to determine whether it’s in your business’s best interest to pursue litigation.