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Thursday October 26 02:00 PM EDT Net2Phone sues rival for hiring its employees

By Wylie Wong, CNET

Net2Phone has sued rival start-up 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.”