How to protect your business secrets when employees depart Featured

4:39pm EDT March 1, 2011
How to protect your business secrets when employees depart

Every business has information and practices that, if disclosed to a competitor, could be disastrous to its livelihood.

A trade secret is information that has independent economic value to outsiders, is not generally known outside your business and cannot be readily discovered through proper means. Reasonable efforts must be taken to protect that information to show that it is considered valuable and confidential.

Smart Business spoke with M. Alim Malik, a shareholder with Jackson DeMarco Tidus Peckenpaugh, about how to understand the priorities in protecting trade secrets, in order to get a better understanding of the current landscape.

Should all businesses develop and implement a program to protect their secrets?

Many companies turn their attention to trade secrets only when a key employee departs for a competing business, armed with the former employer’s secrets such as manufacturing know-how, a formula, a business plan, or lists of customers or costs. If a former employee solicits the customers of the former employer, it could prove disastrous to the competitive position of the former employer.

Trade secret disputes are very fact-intensive. The ability to meaningfully prosecute or defend a case will depend on what steps a company has taken to ensure that its trade secrets remain secret. Failure to have an ongoing protection program will put the company at a disadvantage when seeking court remedies, as the first line of defense is to argue that there are no trade secrets at issue.

A robust and written trade secrets policy is critical for any business. This is particularly so in California where the inevitable disclosure doctrine (in some jurisdictions employers can prevent former employees from working for a competitor because the former employee will inevitably disclose the former employer’s trade secrets) has been rejected in favor of free employee job mobility.

So if Company A does not label its information confidential, has no written policy on confidentiality, and keeps the information in an unlocked file in an open area, the material is unlikely to qualify as a trade secret. By contrast, if Company B restricts access to its files, controls the circulation of sensitive information, and marks as confidential all files containing proprietary information, then Company B would have a strong basis upon which to obtain an injunction and other remedies (including damages and attorneys’ fees) in the event there is a misappropriation by a former employee.

Businesses should not view departed employees alone as a threat to their secrets. Competitor spying is also common in today’s business environment. There are potential criminal issues that spring from the misappropriation of trade secrets under statutes that ban economic espionage or prohibit illegal access to computers.

Any company that does not have a policy or written documentation (for example, through separate employee and vendor non-disclosure agreements, or an employee handbook) should conduct an audit to determine what valuable secrets it has, how they are managed, and how best to keep them secret.

When should a business implement a protection program?

The earlier a company acts to protect its trade secrets the better. Clarify in writing, at the time an employee is hired, the company’s position on trade secrets, including use and access to these materials. This can be a non-disclosure agreement that is signed along with other employment-related agreements, or an employee handbook that covers use of secrets, which the employee acknowledges he or she has read. Also, to reduce the risk of litigation by the former employer of a new hire, it is advisable to ask the new recruit if he or she is subject to any non-compete agreements, and, if so, to review any such agreement with your counsel to determine the potential impact of such a hire. You should also caution the new employee not to use or disclose any of the former employer’s secrets to you or any of your other employees.

What should employers do when employees depart?

In the event a key employee leaves, it is imperative that the company have a plan to deal with customer inquiries, prevent withdrawal of sensitive information, remind the departing employee of his or her confidentiality obligations and to consider the necessary legal action. Conduct an exit interview and ensure that all files and corporate equipment have been returned. In the event of a breach of confidence, the company should act quickly. If there is a significant delay in seeking an injunction, that remedy may be lost, as the courts will deem urgency to be lacking. Money damages and other remedies remain available, but, in many trade secret cases, the real war is fought at the injunction level.

How can businesses better protect themselves?

Relying on a ‘non-compete’ agreement signed by a former employee to prevent that person from competing is a widespread practice. This is particularly true of businesses that have their legal documents generated outside California, where there is a tendency to have a ‘one-size-fits-all’ agreement to be used in multiple states. In many states, non-compete agreements may be enforceable. In California, the opposite is true, as non-compete agreements are generally deemed void as a matter of public policy.

There is an emphasis instead on trade secrets law, hence the paramount need to protect trade secrets. A non-compete agreement has value in California when one business is purchasing the substantial stock of another, and the buyer wishes to protect its investment. Under those narrow circumstances, a non-compete agreement may well be deemed enforceable against the seller. However, these documents need to be carefully evaluated to ensure their enforceability, and that the business objectives of the buyer are being met in the transactional documents.

M. Alim Malik is a shareholder with Jackson DeMarco Tidus Peckenpaugh and chair of the Employment and Litigation Groups. He is a contributing author in Trade Secret Litigation and Protection in California (State Bar of California 2009, 2ed.). Reach him at (949) 851-7458 or amalik@jdtplaw.com.