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Net2Phone has sued rival start-up Dialpad.com for hiring two of its
executives, the latest example of the fierce competition among tech
companies to attract and retain employees.
At stake is the ability of workers to pursue new job opportunities after
signing contracts that bar them from working for the competition
immediately.
The issue is complicated by the Internet age, as employees can often work
anywhere in the country and different U.S. states have their own laws
governing such contracts. What constitutes competition is also muddied
because Net companies often change business strategies in their quest for
profits.
In a suit filed last month in U.S. District Court in New Jersey,
Internet-phone company Net2Phone
sued California-based Dialpad for
luring away two employees. The two workers--who handled Net2Phone's business
development in California--were also named in the suit.
The two California-based employees are seeking to get out of their
contracts, called "non-compete agreements," and have filed suits in
California against New Jersey-based Net2Phone. While non-compete agreements
are standard practice, California is more liberal about allowing workers to
test the job market, and state laws generally prohibit such contracts,
according to attorneys who specialize in labor laws. New Jersey, where
Net2Phone is located, generally supports the agreements.
"In California, there's a history of free competition for employees. And
with the Internet, there's a lot of movement in (Silicon) Valley by
employees, both from the senior-most levels on down," said Dialpad's
attorney, Therese Stewart. "What this suit is about is whether companies who
want to get into Internet-based businesses located outside of California can
enforce these out-of-state agreements--and change the way employment is done
here in California."
A Net2Phone attorney could not be reached for comment.
In its suit, Net2Phone claims the two employees--Jill Marie Sinclair, now
Dialpad's business development director, and Walter Doyle, now
Dialpad's executive vice president--were privy to confidential Net2Phone
information, such as future business strategy. And because they went to work
for another Net telephony company, Net2Phone claims the pair violated their
contracts, which stated they would not work for a competitor for one year
after leaving Net2Phone.
"The employee defendants' employment with a competitor and use and
disclosure of Net2Phone's confidential information will cause Net2Phone
irreparable harm," the suit said.
The two companies offer either cheap or free long-distance phone calls over the Net. Earlier
this year, long-distance giant AT&T bought a stake
in Net2Phone.
The New Jersey judge has since issued a preliminary injunction preventing
the two employees from working for Dialpad until the suit is resolved.
Net2Phone is also seeking unspecified damages and the amount the two
employees received in salary, bonuses and stock options while they worked
at the phone company. Dialpad attorneys are considering whether to
appeal the injunction.
In his suit, Doyle, formerly Net2Phone's vice president of business
development, argued that he knew no confidential information about
Net2Phone, that his new job duties are different, and that Dialpad is
not a competitor and has a different business model. Doyle also argued that
California law should apply since he works and lives in California.
Doyle said morale was low in Net2Phone's California office because
executives were often late in giving out promised bonus checks, leading some
employees to find work elsewhere. He also claims in court documents that Net2Phone is selectively enforcing the employee non-compete agreements.
One attorney who specializes in non-compete agreements said the lawsuits
between the two Net-based phone companies are just the latest that pit
employers against employees located in different regions of the country.
"In the United States, the general policy is to encourage and favor employee
mobility, but the courts want to know companies' justification in
restricting them," said attorney Michael Epstein, who runs the intellectual
property practice at New York-based law firm Weil Gotshal & Manges.
"Preventing people from working for a competitor is not enough," Epstein
added. "You have to say these people have access to confidential
information, trade secrets and future business strategies. That's reasonable, and judges will then consider upholding the contract.
"This is a big issue in California," he said. "This is what allowed Silicon
Valley to develop so well, precisely because employees were free to move
around, and anything that interferes with that is no good. That may cause
the California courts to step in."
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