"Human Capital" is a term that has seen quite a bit of use. Personally, I would far prefer it if the term would depart forever from the already hopelessly twisted lexicon of buyouts (and any other field in which I will eventually play some part). I tend to like people in the Human Resources of Sub Rosa's various daughter companies, that is to say the junior people in Human Resources of Sub Rosa's various daughter companies. The senior people have a far more inflated sense of their importance within the organization and the world at large. Often it is only their vice-like grip on critical compliance information (and the veil of secrecy in which their offices are cloaked, this facilitated by any number of state and federal privacy statutes), as opposed to some semblance of merit, that enables the perpetuation of their brutal rule.
Because Human Resources is the first line of defense for the company against its employees, the tendency (and I don't suggest for a minute that this is absolute) is for Human Resources professionals to have few qualms with respect to mercurial and duplicitous behavior. One day they are the most helpful people on earth to the new employee. Then, an allegation, and they are leading the charge for your ouster and digging up your file for dirt.
If you compound these elements with the fact that qualitative factors, like competitive advantage, the "moat" of a barrier to entry, and non-compete protection for key personnel, the importance of Human Resources elevates even more, and their close ties with the general counsel (or outside counsel) are, necessarily, numerous. These sorts of things can have a very direct impact on valuation. Tell that to a seller and see how quickly they start asking to review every employment file the company has ever touched.
As one might imagine, firms with primary interests in fields where "Human Capital" play an important role (consulting, finance, banking) take such matters quite seriously. And here begins the disconnect. Most courts hate enforcing non-competes. A professional has to be able to ply his or her trade, no? It is quite difficult, therefore, to lock in top talent, or to prevent them from flying to competitors with state secrets. Or whatever. Ah, but watch now, here come the hedge funds.
Work for a hedge fund, perhaps as a quant, depart and try to work in the field again. Instead of attempting to directly enforce a non-compete agreement, the hedge fund might bring an intellectual property case based on trade secrets. Now the non-compete provisions, which on their own are not likely to work well, merely become further evidence of the former employee's bad faith.
If you are a clever hedge fund, you will then seal your complaint, after all, it contains sensitive trade secrets. What sort of secrets? Let's take an example, perhaps from a temporary restraining order granted to Telluride Asset Management against their former employee, Eric Falkenstein. I take no position on the validity or lack thereof of Telluride's claims, but the tactics are quite interesting. To wit:
[Falkenstein] further admitted that he intends to apply the same set of factors (accruals, profitability, volatility and capital issuance) and the same algorithm (mean-variance optimization) to his proposed strategies as he did to the "sub-strategies at Telluride."
Does anyone else out there think they might, right this minute, be using Telluride's trade secrets on a day to day basis? Well, I'm sure it sounds novel and exotic to a judge.
And how might you, as a hedge fund in this position, respond to the suggestion that these factors and mean-variance optimization might be rather obviously in the "public domain" and therefore beyond enforcement as a "trade secret"? First, in your complaint, indicate that your trade secret is "a specific application of mean-variance optimization that will be defined after discovery." That will delay the argument until a fishing expedition can be conducted and a connection made. Then, insist that your former employee disclose the entire model to prove it doesn't infringe.
...when Telluride asked Falkenstein to prove that the "significant similarities," the factors and the algorithm that he purportedly implemented in his proposed trading strategy were indeed part of the public domain by providing actual copies of the significant similarities, factors and algorithm, Falkenstein refused to do so.
Well, duh.
Now that former employee looks pretty shifty, yes? Not only that, but most employment contracts have pretty broad definitions of the kinds of things you may have touched or learned while working for them that they now own.
Employee agrees that all inventions, discoveries, computer software programs, trade concepts, designs, patents, ideas and copyrightable and/or patentable materials made, conceived or developed by Employee during the term of this Agreement shall be owned in full by the Firm." (Emphasis in original).
And, even if specific elements (mean-variance optimization) are very public, you can argue that specific combinations of them are not, and therefore trade secrets.
Here's the great part: As a hedge fund, you don't even need to be granted the TRO. You merely file it and get discovery going. The effect is the same. Why? Consider:
Discovery is key in the tactic. The hedge fund can insist on a core dump of, for example, every email the former employee has written since employment, including material from personal email accounts.
Well, sure, that's painful, but no big deal. The former employee can just go back to work and make money to pay the defense lawyers. Sure, if you can find an employer willing to retain you and your methods when it might mean unlimited liability for every dollar you make for them thereafter. And if you try to convince a prospective employer that you aren't infringing? Well, the complaint is sealed. There's no way for them to know. Not like it would do them any good anyhow, they haven't disclosed the trade secret's nature yet.
This can go on for years, and is rather expensive for the individual to defend effectively.
So what is one to do?
Punt?
