Augmented reality tech startup Magic Leap has made headlines for a lot of reasons, including…
- Fundraising $1.4 billion from high-profile investors such as Google, Qualcomm Inc., and Warner Bros.
- Being valued at $4.5 billion.
- Tantalizing consumers with the promise of goggles that will project three-dimensional virtual images into the real world.
- Being super, super secretive.
- Getting sued for wrongful termination by two former employees.
Unfortunately, until Magic Leap releases any of its much-hyped technology (which you can read more about in a recent article in Wired), it may be the lawsuit – as well as the countersuit the company filed against the two employees – that will get the most press.
Wrongful Termination Lawsuit? Employment Practices Liability Insurance Can Help
According to an article in The Indian Express, Gary Bradski and Adrian Kaehler filed a lawsuit against their former employer, Magic Leap, alleging that they were wrongfully stripped of employee stock options worth millions of dollars when they were terminated. The report states Magic Leap's countersuit claims the two spent a year plotting on company time to launch their own virtual reality company. Magic Leap also alleges that the two stole patented technology and shared trade secrets with outsiders.
While the lawsuits wend their way through the legal system, both sides will likely rack up thousands of dollars in legal expenses. However, if Magic Leap carries Employment Practices Liability Insurance (EPLI), some of its legal costs might be covered.
Startup liability insurance policies like EPLI can protect businesses when they're sued over:
- Wrongful termination.
- Wrongful demotion or discipline.
- Sexual harassment.
- Breach of an employment contract.
- Slander or libel.
- Emotional or mental distress.
In Magic Leap’s case, EPLI may cover costs related to the wrongful termination claim, as well as additional claims that could be made, such as…
- Breach of employment contract (those stock options).
- Emotional distress (being sued and called a thief is super stressful).
When Does a Startup Need EPLI?
Legal experts agree that once you start hiring staff, it's time to consider purchasing EPL Insurance.
“Based on the number of claims from employees and the extraordinary cost to defend them, I’d suggest it be added as soon as they hire their first person,” says
Michael Gottlieb, an
attorney and founder of
Momentum Law Group
(@MomentumLawyers), a law firm that represents entrepreneurs.
“It’s a good idea for an IT startup to purchase an EPLI policy as soon as it hires employees so that it has it in place before a possible claim arises,” says
Matthew Odgers (@DentalEsq),
attorney and founder of
Odgers Law Group.
“If a claim is made, it will be too late to obtain an EPLI policy, and you will have to pay any damages out of pocket.”
How to Avoid Discrimination Lawsuits
While an EPLI policy can give you financial protection when an employee sues, obviously it’s better to prevent a lawsuit in the first place. According to
Donna Ballman (@EmployeeAtty), a
labor law attorney based in Fort Lauderdale, Florida, your best bet is to create an employee manual with the help of an attorney that spells out your anti-discrimination policies.
"As you are growing, you need to look at things like getting a lawyer to look at your employee policy handbook," says Ballman. "Make it clear where employees need to report discrimination or other types of legal issues."
Odgers recommends some additional ways to avoid an EPLI claim:
- Train your managers to avoid discrimination when hiring.
- Have an open line of communication with employees.
- Create a process for employees to report discrimination or sexual harassment by their direct supervisors.
- Train supervisors on what behaviors are inappropriate.
- Document everything, and make sure your employees are following the proper procedures.
Could Your Startup Be the Next Lawsuit Target?
Say your company is working on some super cool proprietary technology. What happens if team members jump ship and go to a competitor? Do you need to worry about experiencing a lawsuit similar to Magic Leap’s?
“It’s not super common, often because in early-stage startups, it becomes a he said / she said discussion,” says
Terence Channon (@terencechannon),
managing director of
(@saltminesgroup), a firm that helps startups prepare for funding.
Still, Channon offers a few tips for protecting your business’s intellectual property:
- Fully vet your team prior to hiring, particularly employees that will be key contributors or have access to sensitive information.
- Use business-class tools as much as possible. For instance, use corporate GitHub for managing software code versus allowing developers to keep it on their local machine.
- Purchase computers for employees that remain company property.
- Have an exit interview when an employee leaves. If there are specific things that the employee should not be allowed to disclose or use in future endeavors, put it in a written agreement.
- Document warnings and save them in a folder in case you have to let an employee go.
While it may not be common to face an employment practices lawsuit, it's still a good idea to protect your IT startup during its early stages.
“If you’re a startup and you feel a little nervous about employment law issues, something like EPLI would be a good thing to have for your peace of mind,” says Ballman.
About the Contributors
Donna Ballman is a labor law attorney based in Fort Lauderdale, Florida. Her book, Stand Up for Yourself Without Getting Fired: Resolve Workplace Crises Before You Quit, Get Axed or Sue the Bastards, was named the winner of the law category of the 2012 USA Best Books Awards. She’s been practicing employment law, including negotiating severance agreements and litigating discrimination, sexual harassment, noncompete agreements, and employment law issues in Florida since 1986.
Terence Channon is the managing director of SaltMines Group, a startup studio for early-stage businesses and professional services provider that helps startups prepare for funding.
Michael Gottlieb is the founder of Momentum Law Group, a law firm that represents entrepreneurs. Michael and the other Momentum attorneys have the privilege of working with hundreds of companies throughout the DC metro area, as well as clients throughout the country, serving as their outside counsel and assisting them with corporate and business legal and strategic matters, employment law, commercial real estate, estate planning, and litigation.
Matthew Odgers is an attorney and the founder of Odgers Law Group, a business law practice located in San Diego, California. Matthew works with startups and entrepreneurs on forming business entities, contract drafting and negotiations, employment practices including hiring and firing, and business sales and purchases.