Keeping trade secrets secret Featured

8:00pm EDT July 26, 2007

Both retailers and bankers know employees are likely to steal more of their goods or money than an outside thief. The same is true of a business’s intellectual property.

Smart Business asked J. Robert Arnett II of the Dallas law firm of Munck Butrus PC, what a company can do to protect trade secrets and other confidential information.

Can a company prevent an employee from stealing trade secrets when the employee leaves the company?

It is impossible to prevent all theft of trade secrets by employees, but employers can take steps to minimize the risk, including requiring employees to sign noncom-pete and nondisclosure agreements; training and educating employees about the importance of protecting and not disclosing trade secrets and confidential information; limiting access to trade secrets and confidential information to those employees who have a need to know, including password protecting files and limiting access to computer servers; conducting exit interviews to remind departing employees of their duty to not disclose trade secrets and confidential information; and checking what materials the employees are taking with them as they leave. Some companies require terminated employees to leave immediately, retrieve their keys and passcards, disable their computer network access, and have them come back after hours to clean out their offices under supervision.

Are noncompete and nondisclosure agreements valuable tools?

Yes, although they have their limitations and are best used in combination. Non-disclosure agreements prohibit employees from disclosing trade secrets and confidential information both during and after their employment, while noncompete agreements prohibit the employee from competing or working for a competitor after their employment ends. The noncompete agreement reinforces the nondisclosure agreement because it reduces, at least for a time, the former employee’s opportunity to use or disclose trade secrets and confidential information. You cannot stop a thief completely; however, these tools often discourage employees from such activities and provide a stronger basis for seeking relief from the courts if you are victimized.

What are the limitations?

Both have to be supported by consideration; the employee must receive something of value in return for his or her promises. Without consideration the agreements are not enforceable. Noncompete agreements also have to be reasonable as to time, geographic area and the scope of activities restrained, and must be connected to, or part of, an otherwise enforceable agreement. Historically, this has caused problems with enforcing these agreements against at-will employees. If the employee can be fired immediately without any reason, then the courts viewed the agreements as illusory, and nonenforceable, because the employee wasn’t really getting any consideration in return for his or her promises. However, the Texas Supreme Court recently decided that if the employer promises to disclose trade secrets and confidential information and provide specialized training to the employee — and actually does so — that satisfies the requirement of consideration and a noncompete designed to enforce the employee’s promise not to disclose becomes enforceable.

Aren’t trade secrets and confidential information the same thing?

Both require an element of secrecy, but trade secrets are a narrower category. A trade secret is information that is used in a business and provides at least the opportunity for a competitive advantage. Confidential information is any kind of secret information about one’s business. For example, a secret formula used in making your product is a trade secret. Your internal financial data is confidential information.

Trade secrets are entitled to greater protection. Courts are much more reluctant to force a company to disclose its trade secrets in a lawsuit. Trade secrets also are entitled to greater protection after they have been wrongfully disclosed. If a competitor innocently obtains your stolen confidential information there is not much you can do to them. However, if a competitor innocently obtains your stolen trade secret, you can stop them from using it, and they will have liability if they continue to use it after they learn it was stolen.

Is it worth the time and expense of litigating the theft of trade secrets?

The biggest factor is the value of the trade secret to your ongoing business and the potential damage if a competitor is using it. There are basically two remedies: attempting to obtain an injunction to stop the competitor from using the trade secret or further disclosing it, and seeking money damages. It may be important to move quickly and seek an injunction to minimize damage.

J. ROBERT ARNETT II has more than 20 years of experience in business litigation at trial and appellate levels in state and federal courts, as well as before domestic and international arbitration and is a shareholder in the Dallas law firm of Munck Butrus PC. Reach him at (972) 628-3600 or