A recent California appellate court decision serves as a cautionary reminder that employee departures can create significant legal and operational risks when confidential information, customer relationships, and business opportunities are involved. In Guild Mortgage Co. v. CrossCountry Mortgage LLC, the California Court of Appeal reinstated numerous claims brought by an employer that alleged a competitor business orchestrated a coordinated effort to recruit its employees, divert customers, and obtain valuable business information before those employees resigned.
What Happened?
According to the lawsuit, Guild Mortgage alleged that a competing mortgage company engaged in an 18-month effort to recruit key employees from one of Guild’s branches while those employees were still actively working for Guild. The complaint alleged that employees accessed company systems and copied confidential business information, including customer data, employee information, and prospective borrower information, before resigning and joining the competitor. Guild further alleged that the competitor used this information to gain a competitive advantage and facilitate the transition of customers and business opportunities. The alleged effort ultimately resulted in the departure of virtually the entire branch workforce.
Guild previously obtained nearly $11 million in damages against its former employees through arbitration and pursued separate claims against the competing company. While a lower court initially dismissed those claims, the California Court of Appeal reinstated them, allowing the case to move forward.
Why This Matters for Employers
The decision highlights several risks that employers face when key employees leave for a competitor:
- Loss of confidential business information
- Unauthorized access to company systems
- Customer diversion before employee departures
- Misuse of prospect and lead data
- Coordinated team resignations
- Disruption of operations and client relationships
The court also reaffirmed that employees owe duties of loyalty to their employer while they remain employed and that employers may have multiple legal avenues available when those duties are violated.
Compliance and Risk Management Lessons
1. Restrict Access to Sensitive Information
Employers should regularly review who has access to:
- Customer lists
- Prospect pipelines
- Pricing information
- Payroll and employee data
- Financial records
- Strategic business information
Access should be limited to employees with a legitimate business need.
2. Monitor Unusual Data Activity
Many employee-raiding disputes involve allegations of downloading, copying, emailing, or transferring company information shortly before resignations. Employers should consider implementing controls that monitor:
- Large file downloads
- External email forwarding
- USB device activity
- Cloud storage uploads
- Unusual system access patterns
3. Strengthen Offboarding Procedures
A well-designed offboarding process can help minimize risk when employees leave. Best practices include:
- Immediate termination of system access upon separation
- Recovery of company devices
- Review of confidentiality obligations
- Exit certifications confirming return of company information
- Documentation of customer and account transitions
4. Protect Customer and Employee Data
Whether information qualifies as a trade secret is often heavily litigated. Employers should not rely solely on trade secret laws for protection. Instead, organizations should maintain written policies addressing:
- Confidential information
- Acceptable technology use
- Data security
- Employee privacy
- Information retention and destruction
5. Coordinate HR, IT, and Leadership Teams
Employee departures frequently involve issues that extend beyond HR. Effective protection requires coordination among:
- Human Resources
- Information Technology
- Payroll and Operations
- Legal Counsel
- Executive Leadership
A unified response can help identify risks before they become costly disputes.
The Forework Perspective
This case illustrates the importance of understanding what the key business assets are, and how to protect them. It’s a matter of business survival. Businesses cannot sleep on these practices; asset protection is a daily obligation of the business C-suite executives and ownership. At Forework, when onboarding clients, we take a detailed approach to understanding your business and your key assets. We automate the protections discussed her whenever possible (e.g., proper confidentiality agreements and procedures, careful off-boarding procedures, and carefully written nonsolicitation agreements), but we also counsel our clients to ensure they are watchful of what is happening in their businesses, so that they can respond quickly and properly to any situations that involve employees (current or former) attempting to “steal” employees, vendors, patients, customers, or otherwise unfairly gain a competitive advantage.