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June 16, 2015 Articles

How to Respond to Trade Secret Theft: The First 48 Hours

Be prepared to take full advantage of what unfolds.

By Ryan M. Billings

The president of a successful and long-standing business client (“Blue-Chip”) comes to you in distress. The president tells you that a senior manager (“Turncoat”) abruptly left Blue-Chip’s employ and joined a competitor (“New-Chip”). Worse yet, the president tells you that she believes Turncoat stole trade secrets before terminating employment and is using them to assist New-Chip in stealing business from Blue-Chip. What do you do?

Day Zero If Blue-Chip relies on trade secrets to compete in its industry, your work should have begun long before disaster struck. There are two key documents that all clients in that position should have. The first is a comprehensive set of employment agreements that companies should require all employees with access to sensitive information and trade secrets to sign, including non-compete, non-solicitation, and nondisclosure provisions as appropriate. Intelligently advising clients as to the content of such agreements requires in-depth knowledge of your jurisdiction’s law, including what courts deem to be reasonable scope and geographic and temporal restrictions. The agreements should include a provision stipulating that an injunction may be issued in the event of breach and a provision requiring the immediate return of all company property and documents, electronic or otherwise, upon termination of employment.

In drafting, try to follow the Goldilocks rule: balancing between too much protection, and the danger that a reviewing court will hold the agreements unenforceable, and too little protection, and the danger that these agreements will not adequately protect the company in the event of employee misconduct. To ensure you have the just the right protections in place, it is essential that you understand Blue-Chip’s business and, most important, how it competes with other companies.

The second key document is a document retention policy, which should be distributed to all employees annually and accompanied by an acknowledgement that all recipients have read and will abide by the policy. Again, this should be tailored to your jurisdiction, but it needs to include, at a minimum, two central provisions: (a) a carefully worded statement outlining Blue-Chip’s record retention policy, in a manner that can be understood and followed by a layperson; and (b) a recital that Blue-Chip owns all property used in the course of employment and all content created or accessed by employees during work operations, including materials that may be considered “personal use.” The first provision will ensure that Blue-Chip’s house is in order if it has to pursue aggressively a competitor’s discovery noncompliance or spoliation. The second will maximize the chances that Blue-Chip can use evidence recovered in the forensic investigation to follow.

If the right agreements were in place before the devastating defection, Blue-Chip is already halfway to an efficient response strategy.

Day One Assuming you have done your due diligence, your documents are in order, and you are well versed in the particularities of your jurisdiction, what next? The first issue you need to consider is whether Blue-Chip needs an immediate injunction.

Injunction. To answer this question, you need to talk to the president. Find out exactly what Turncoat knew, what he could do with the information, and how badly and how quickly Blue-Chip could be hurt by New-Chip’s wrongful use of the ill-gotten trade secrets. Hopefully, given your long-standing relationship with Blue-Chip, you will already have a good handle on its business, including a firm grasp on how Blue-Chip competes with other companies, whether it is on price, volume, service, or another parameter, and the competitive advantage Blue-Chip’s trade secrets provide. If you have not previously discussed this with the president, discuss it now. Get the background sketches of the situation so that you can make informed recommendations and frame the pleadings to follow.

If Blue-Chip is facing a situation where nearly all the damage will be done the instant the trade secrets are disclosed, then the question becomes whether the information is likely to have already been disclosed. If the president knows for a fact it has, then Blue-Chip’s only real remedy will be damages. If there is any chance that the information has not been disclosed, and it would immediately devastate Blue-Chip if such disclosure occurs, then you need to go to court on day one. You will likely maximize your chance of successfully obtaining an ex parterestraining order if you can talk face to face with the judge. That means that state court will be your likely venue, but it depends on your jurisdiction.

Prepare a quick complaint outlining the position Turncoat had, the contracts to which he was subject, the trade secrets to which he had access, and what the president knows about Turncoat joining New-Chip. Emphasize that Blue-Chip will be immediately and irreparably harmed if the trade secret information is disclosed or used. You will need an affidavit from the president, swearing to the harm and underlying facts, and a proposed injunction. Your filing needs to be short, to the point, and put together in such a way that the judge will need less than 10 minutes to read it in its entirety, ask a few questions, and sign an already written order. Call the president or the general counsel of New-Chip, or its outside counsel, if known, to inform them that you will be making the filing before you head to the courthouse. You will want to inform the court that you made an attempt to contact New-Chip in advance of filing. Sometimes the opposing party will stipulate to an injunction, but in this dire situation, you need to get right to court anyway.

The next critical steps. Once you have filed, or if your client’s situation is such that an immediate filing is not needed, you can proceed to your next tasks. Whether or not you attempt to secure an injunction, five things need to happen on day one.

1. Cut off access; secure files and devices. Cut off Turncoat’s remote access to Blue-Chip’s systems, especially email, if this has not already been done, and retrieve all documents and company electronic devices Turncoat has, such as a company laptop or smart phone. Days will matter in reconstructing the timeline and recovering deleted files. Retrieve whatever devices Blue-Chip has that Turncoat used.

2. Issue notification/preservation letters. You need to send letters with verifiable delivery to Turncoat and New-Chip, notifying each that Turncoat is subject to continuing contractual obligations to Blue-Chip, specifying these obligations, demanding that Turncoat and New-Chip preserve all evidence on all devices that may contain discoverable information relevant to the dispute, and demanding that Turncoat immediately return all Blue-Chip devices that Turncoat still has. These letters serve three purposes: (1) They put New-Chip on formal notice that Turncoat is in breach of contractual obligations to Blue-Chip, exposing New-Chip to liability for tortious interference if it continues wrongfully to employ Turncoat and cutting off its claims of ignorance; (2) they provide formal notice of Turncoat’s and New-Chip’s duties to preserve evidence, which will trigger spoliation penalties if documents or data are lost or destroyed after the date of the letters; and (3) they serve as formal requests for the return of needed evidence. Try to keep the facts in these letters to a minimum. You are very early in the investigation and do not want to make claims you will later have to retract or, worse, defame Turncoat or New-Chip.

3. Retain an outside information technology consultant. Retain a competent information technology specialist (“E-Specialist”) and provide that specialist with all of Turncoat’s devices. E-Specialist will perform multiple roles. It will help you ensure that all electronically stored information, including metadata, is properly preserved. It will make forensic copies of and, in some cases, carry out the forensic investigation of the devices Turncoat used in the days and months prior to departure. And, very importantly, it will make sure that your arguments, language, and positions are sound and consistent with cutting-edge technology. E-Specialist can back your play with affidavits or testimony if needed down the road, because you have consulted it heavily throughout the process. Do not be afraid to ask constant questions, even what you might consider to be stupid questions, of E-Specialist. That is why the specialist is there: to educate you on the issues at hand so that you know them cold.

4. Provide advice on communications. Fourth, advise the president on how to respond if Turncoat or New-Chip reaches out to Blue-Chip, the president, or Blue-Chip’s employees. The president’s instinct may be to call the competitor, and New-Chip’s president may have the same urge, especially if the two know each other due to their common participation in the industry. Certainly, Turncoat will have a relationship with the president, and either or both may feel the desire to reach out. Instruct the president not to initiate communications with Turncoat or New-Chip and that if either reach out to her, she can listen, but not comment, and refer all questions to you. You may want to write up a brief statement to Blue-Chip’s employees containing these directions. As with the letters to Turncoat and New-Chip, say nothing more about underlying events than the fact that Turncoat has left Blue-Chip’s employment and the company is taking appropriate steps. This statement may be discoverable, and you do not want to expose Blue-Chip to a defamation claim. In addition, you should advise Blue-Chip to refer to you all questions customers have about the situation. This will shut off inquiries based on curiosity or mild interest.

5.Set up an appointment for day two. Finally, schedule a time to meet face to face with the president on day two. Have E-Specialist plan to attend in person or by phone, and make sure all attorneys who will work on the file can attend.

Day Two Having survived the flurry of day one, take a break. Return your attention to the work you likely deferred when this emergency fell in your lap, and get as far ahead with other files as you can in preparation for the work to come. After giving yourself a mental breather, get ready for your meeting with the president. Sketch out an agenda along the lines below.

The meeting. The meeting on day two may be the most important interaction you have with Blue-Chip during the entire case. The first and most important thing you will do is have the president give everyone a tutorial on Blue-Chip’s business. Have the president explain, at the 10,000-foot level, what Blue-Chip does, how it does it, and how Blue-Chip’s employees participate in the process. Ask why a customer solicits Blue-Chip’s services over a competitor’s, and ask the president to explain what is unique or effective about Blue-Chip, such as its formal or informal mission statement. Determine how trade secrets were developed, the resources required to develop them, and how what Blue-Chip does is different from what its competitors do. Determine what safeguards Blue-Chip undertakes to protect its trade secrets from exposure. Having everyone share a common understanding of the big picture will be invaluable as you proceed.

Next, plan the investigation. Ask the president to set up interviews with key employees. Brainstorm lists of key customers the president would feel comfortable contacting to see if Turncoat or New-Chip reached out to them. Oftentimes, if your client has a good relationship with its customers, the customers will reach out without prompting if they are solicited by Turncoat. Ask if the president would be comfortable asking key customers to complete affidavits. Get a sense of third parties’ likely level of cooperation and how comfortable Blue-Chip would be with subpoenas for testimony and documents if cooperation is not forthcoming. With input from E-Specialist, make a plan for collecting, recovering, and reviewing electronically stored information.

Finally, start framing a time table for litigation. Type up an affidavit as you discuss the facts for the president to review, revise, and sign during the meeting. Coordinate a time to prepare key witnesses for testimony if you moved for a temporary injunction on day one and have a hearing scheduled. Spend time explaining Blue-Chip’s options, the material risks and benefits, and the relative cost of each possible resolution. Discuss possible responses to your letters or lawsuit from Turncoat or New-Chip. Walk away from that meeting with a solid understanding of Blue-Chip’s commitment to see the case through and the extent to which Blue-Chip is willing to devote appropriate resources to the case.

The homework. At the conclusion of your meeting, everyone will have something to do. The president will set up interviews and provide assistance to E-Specialist as necessary. E-Specialist will gather and process appropriate electronic devices and materials. You will begin drafting pleadings (if you did not file on day one) and outlines for oral argument at the injunction hearing (if you did file). As soon as E-Specialist has materials to review, start reviewing them. It is often helpful to start with Turncoat’s emails, walking through the last few days, weeks, or months before departure. This will help inform your working understanding of the timeline and give you your first sense of who Turncoat is as a person. How Turncoat related to the president and to Blue-Chip’s employees, customers, and vendors can give you good insight as to the individual with whom you are dealing. This will be useful in negotiations and depositions.

In cases that are not day-one filers, work through your investigation. Carefully review any communication from Turncoat or New-Chip. It is sometimes the case that the competitor will have been ignorant to some extent of what the departing employee was up to. It is very unlikely that Turncoat was completely candid with New-Chip as to Turncoat’s legal obligations to your client. Restrictive covenants will be shrugged off as unenforceable, and trade secrets will be explained away as common knowledge. When you show that you are serious, sometimes a competitor will investigate the facts and terminate the manager. Most times they will take a hard line initially but have some flexibility in negotiations.

Regardless of whether you try to work something out, you will probably want to file suit at the conclusion of your investigation to keep your opponents honest and the pressure on. Ultimately, you will go where the evidence, developing events, and your client’s directives take you, but if you follow these steps in the first 48 hours, you will be prepared to take full advantage of what unfolds.

Keywords: litigation, business torts, trade secret theft, injunction, forensics

Ryan M. Billings – June 16, 2015