TEN THINGS: TRADE SECRETS AND PROTECTING YOUR COMPANY

How’s this for a nightmare scenario:  You get a call from the company’s Chief Operating Officer informing you that Ms. Smith is leaving the company to go to work for a competitor.  You’re told she has knowledge and copies of many confidential projects and strategies, including key marketing strategy presentations.   The COO wants to know what can be done to protect the company.  You tell him not to worry because Ms. Smith signed a confidentiality agreement when she joined the company and therefore everything will be fine.  A few days later you need to go back to the COO and tell him everything might not be fine regarding Ms. Smith and, in fact, according to outside counsel, the company has likely failed to do a number of things necessary to protect some of its trade secrets, meaning there may be little that can be done to stop Ms. Smith from divulging those items to her new employer – your competitor.

• What is a trade secret? Your bosses probably think everything the company does is a trade secret.  Unfortunately, that is not the case.  A trade secret is typically a) something not generally known to the public; b) where reasonable efforts are made to keep it confidential; and c) confers some type of economic value to the holder by the information not being known by another party.  What exactly constitutes a trade secret can vary by state (in the US) or by country.  A good shorthand for what constitutes a trade secret is: Any information you would not want your competitors to have.  For an excellent discussion of what is (or is not) a trade secret see Thad Felton’s “What is a Trade Secret.”  Some examples of likely trade secrets include new business models, customer and supplier information (especially around price), marketing strategy, processes and formulae, and other confidential business information. 

3. Catalog your trade secrets. The first thing to do is to inventory all of the company’s trade secrets.  This does not mean a list of patents or trademarks.  While such assets are protected by law, they are publicly disclosed and therefore not confidential.  You should interview key company employees and executives around what they believe are trade secrets (you should also talk with your in-house legal team as they will have input as well) and match that against the definition above.  By creating an inventory of what is considered a trade secret you can a) identify what steps are needed to keep those specific items confidential and protected, and b) be clear with the business what items are not considered trade secrets (i.e., set expectations so there are fewer painful discussions about what the COO thought was a trade secret vs. what actually is a trade secret).  For a great discussion around how to inventory trade secrets, the economic impact of theft, and likely threats, see the 2014 PwC report entitled “Economic Impact of Trade Secret Theft.”

4. As you review your existing agreements or create new ones, keep in mind that the enforceability of these types of agreements (especially non-competes) can vary wildly depending on the jurisdiction.  You can try a “one-size-fits-all” approach but you should not take comfort that an agreement that is, for example, perfectly enforceable in Texas will be enforceable in North Dakota (which prohibits most non-competes) or in Latin America, Europe, etc.  It would be wise to spend a few dollars with outside counsel as part of the update process to best ensure that each of the agreements you are putting in place is state of the art and is enforceable in the most locations/jurisdictions you care most about.
   5. This is another area with spending money with outside counsel regarding your company’s policies would be a worthwhile investment.
      7. Mark confidential documents as “Confidential.” One of the easiest ways to help ensure that confidential documents and materials will be treated as such is to develop a process whereby employees clearly mark such materials as “Confidential” or “Contains Trade Secrets” or some other moniker that will make it absolutely clear that the materials should be treated as a trade secret and extra care is needed in terms of distribution and storage of these materials.  Similarly, if there are meetings where confidential information is going to be discussed, a reminder at the beginning of the meeting about the nature of the information is helpful, along with picking up and properly disposing of any confidential materials handed out at the meeting (assuming they are not otherwise needed by the attendees).
      8. Without need or authorization, takes proprietary or other material home via documents, thumb drives, computer disks, or e-mail. Inappropriately seeks or obtains proprietary or classified information on subjects not related to their work duties.
      9. Interest in matters outside the scope of their duties, particularly those of interest to foreign entities or business competitors.
      10. Unnecessarily copies material, especially if it is proprietary or classified.
      11. Disregards company computer policies on installing personal software or hardware, accessing restricted websites, conducting unauthorized searches, or downloading confidential information.
      12. Works odd hours without authorization; notable enthusiasm for overtime work, weekend work, or unusual schedules when clandestine activities could be more easily conducted.
      13. Unreported foreign contacts (particularly with foreign government officials or intelligence officials) or unreported overseas travel.
      14. Short trips to foreign countries for unexplained or strange reasons. Unexplained affluence; buys things that they cannot afford on their household income.
      15. Engages in suspicious personal contacts, such as with competitors, business partners, or other unauthorized individuals.
      16. Overwhelmed by life crises or career disappointments.
      17. Concern that they are being investigated; leaves traps to detect searches of their work area or home; searches for listening devices or cameras.
          9. Departing employees receive a copy of any confidentiality agreement, non-compete, non-solicitation agreement, etc. that they signed during their employment with the company along with the company’s trade secret policy. The employee should sign a document acknowledging any ongoing obligations.
          10. Reminders about the obligations of the employee around trade secrets and confidentiality post-employment.
          11. Determining whether an employee has any company information at home (hard copy or soft) or stored on any cloud system.
          12. Determining whether the employee is going to work at a competitor and plans on engaging in any competitive activity (if so, that should trigger several additional steps, e.g., non-compete enforcement).  If you know the employee is going to work at a competitor (and there is no non-compete in place), you should consider a short, non-hostile business letter to the competitor’s legal and HR departments explaining that the departing employee has confidentiality obligations and you expect their help in ensuring the employee honors those obligations and will take steps to ensure the employee does not breach any obligations owed to your company in their new job.  Most companies will respect such a letter and take steps to ensure compliance
          13. Employee surrenders all company property including smartphone, laptop, documents, files, materials, etc. (and signs an acknowledgment that he/she has returned all such items and has not kept copies or provided copies to anyone).
          14. Termination (asap) of all passwords, access to information systems/email, identification badge/access to buildings, parking cards, etc.
          15. If there is reason to suspect the employee is a risk of potential misappropriation of company trade secrets, a search of his/her email, hard-drive, computer files, voice mail, for any improper activity.

              Sterling Miller

              10. A strong relationship with HR, Information Security, and Internal Audit are very helpful. Legal should work in concert with these other groups to ensure plenty of communication in the event they see, feel, or hear of trouble (e.g., via an exit interview, investigation, or “water cooler talk”).  Getting this group together in advance to map out in writing what to do and how everyone will work together if there is a trade secrets breach is job one.
              11. Have your outside counsel advisors lined up in advance. Know who you will call in the event you need immediate legal action (e.g., a TRO) or advice.  Ideally, it will be a firm you have already partnered with in terms of preparing and updating the agreements and policies discussed above.  Don’t forget counsel in foreign countries.
              12. Have a good system in place to gather necessary agreements signed by the breaching employee, applicable policies, etc. Counsel will need this for numerous reasons.
              13. Work out in advance with Information Security who to call to terminate system access, revoke passwords, and building access. Also, know who to speak with if you need to preserve hard drives or have email searched.  Time will likely be of the essence in the event of a trade secret breach.  Be sure to have back up numbers.
              14. Think through your potential legal claims (especially by what is available by geography) so when you are asked “what can we do”, you have some parameters you’ve already investigated. This doesn’t mean they will all be available as you gather the facts, but it will be a lot better than saying “we’ll need to look into that and get back to you” given that management will be somewhat frantic if they think trade secrets are walking out the door.  Potential claims include: breach of trade secrets statute/law or unfair competition law (e.g., the Lanham Act or the Uniform Trade Secrets Act – which has been adopted by 46 states in the US), misappropriation of trade secrets (tort), breach of contract, breach of fiduciary duty, tortious interference with business relations, unjust enrichment, inevitable disclosure (which is losing steam as a valid claim), criminal claims, etc.  You should have a good idea of your options in your principal business locations.
              15. Be ready to contact the party that received your confidential information and ask that your trade secrets be returned immediately and/or destroyed, along with an acknowledgment that they have done so.  This can be especially effective if the disclosure is inadvertent.
              16. Know who to contact at local law enforcement and the FBI in the event of a computer crime or theft of trade secrets.
              17. Revisit your trade secret program at least once a year and update as necessary.

              18. March 19, 2015

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