September 28, 2020 Articles

Tips for Protecting Trade Secrets in the Face of Remote Workforces, New Technology, and Laid-Off Employees

As companies adapt to our rapidly changing circumstances, they may inadvertently place the protection of their trade secrets on the backburner.

By Jeremy Cohen, Marcus Mintz, and Erik Weibust

As a result of the COVID-19 pandemic, many companies have rolled out new (and often unsecure) technology and have relaxed existing security measures in the name of efficiency and convenience. As companies continue to adapt to these rapidly changing circumstances, they may inadvertently place the protection of their trade secrets on the backburner. However, if companies want to maintain control over their most important intangible assets, they must affirmatively act to protect their trade secrets during the pandemic and as the economy continues to reopen.

“Reasonable Measures” to Protect Trade Secrets with a Remote Workforce

In the understandable rush to “flatten the curve” and keep employees and communities safe, many businesses have hastily provided remote access to systems and data, without ensuring that new technologies are secure or without implementing and strengthening remote work policies and procedures. In fact, some companies are actually relaxing security standards in the name of convenience and efficiency. Unfortunately, some opportunistic employees may exploit this new arrangement for nefarious purposes, while even well-intentioned employees may be careless and expose confidential information without intending to or without realizing that they have done so. Either scenario can lead to equally bad business and competitive outcomes. It can also lead to bad legal outcomes because both the Defend Trade Secrets Act and the Uniform Trade Secrets Act require parties to take “reasonable measures” to protect trade secrets—even during a pandemic. Reasonable measures should include the following:

  • Setting clear expectations. Companies should clearly define what information is a trade secret and what actions are expected of employees and business partners who have access to such trade secrets. The best way to do so is through plainly worded policies, contracts, and communications. In addition, marking documents “confidential” and implementing electronic pop-up reminders at log-in will act as constant reminders that the information being accessed is confidential and must be safeguarded.
  • Training. A company can have all the policies in the world, but if its employees are not properly trained and reminded of these policies, they can be ineffective and not worth the paper they are written on. Particularly for workforces that are new to remote work and companies that are rolling out new technology, training is imperative. For example, remote employees should be trained generally on securing confidential information, but they also should be reminded about more basic, but often overlooked, precautions, such as keeping sensitive documents out of camera view during videoconferencing, limiting printing as much as possible, not transferring data off company servers, and securely destroying or shredding any documents that may contain confidential information.
  • Monitoring. After setting expectations and training employees, companies must make sure that employees comply. Software can help companies monitor access and use of their systems and provide alerts when an employee engages in suspicious behavior, such as downloading, printing, or emailing sensitive information without an obvious business justification.
  • Technical infrastructure. Appropriate software solutions will not only help companies monitor data access and transfer but also proactively protect company information. We recommend requiring two-factor authentication upon log-in to company systems, limiting access to sensitive data to a need-to-know basis, restricting transmission of data outside the company’s servers and systems, and protecting the company from unauthorized access by third parties. And any companies that have relaxed security standards in the name of convenience and efficiency should take the opportunity now to strengthen them again.

If you are unsure whether your company is taking “reasonable measures” to protect its trade secrets, consider retaining experienced legal counsel to perform a trade secret audit.

Enforcing Non-Competes During Times of High Unemployment

Tens of millions of people have lost their jobs since the pandemic began, with many more sure to follow. While non-competes are an important tool to protect trade secrets, many companies are asking whether they are enforceable against employees who have been laid off. According to the latest edition of Seyfarth’s 50 State Desktop Reference: What Businesses Need to Know about Non-Competes and Trade Secrets Law (2019–2020 ed.), 28 states permit enforcement of non-competes against discharged employees, 3 likely would do so, 9 would not, and in 10 states, the issue is unresolved. There are, of course, nuances in each state and in each case.

Another, perhaps more appropriate, question is whether companies should enforce non-competes and other restrictive covenants in the current climate of high unemployment. The answer to this question will largely depend on company culture and the facts of the case—the more egregious an employee’s conduct, and the more serious the threat to a company’s trade secrets (or customer goodwill), the more likely a company will feel compelled to enforce a non-compete against a laid-off employee (and the more likely a court will treat it as an emergency under current circumstances).

Prior to taking any action against a departing employee during a time of high unemployment, however, companies should consider the actual risk that the former employee poses by working for a competitor, potential alternatives to litigation, and the public relations ramifications of filing a lawsuit. Nevertheless, companies should not tolerate misappropriation of trade secrets under any circumstances and should take all action necessary to protect those rights.

Preparing for and Pursuing Trade Secret Litigation During the Quarantine

While COVID-19-related court closings and filing limitations present a new obstacle to protecting trade secrets, this crisis does not give wayward employees and unscrupulous competitors carte blanche to steal trade secrets. To the contrary, even without ready access to courts, there are many steps employers can, and should, take to protect their trade secrets and preserve their rights. Indeed, many litigation and pre-litigation tasks do not require in-person contact, or even court action, to commence or complete.

  • Investigations. One of the first things a company should do when it suspects that its trade secrets have been compromised is to conduct an investigation. Doing so will identify and ensure preservation of evidence and is critical to the ability to demonstrate the need for emergency injunctive relief. Because each case is fact-specific, there is no one-size-fits-all formula for conducting investigations of this nature. Typically, they include (i) a forensic examination of electronic devices and computer systems, (ii) witness and exit interviews, and (iii) ongoing monitoring and surveillance. While COVID-19 has changed the physical location of employees, witnesses, and electronic devices, a full investigation still can, and should, be conducted when a company has reason to believe its information has been misappropriated.
  • Cease-and-desist letters. A cease-and-desist letter puts the recipient on notice of potential claims and makes certain demands to avoid litigation. Some of these demands, however, may be considered all bark and no bite during the current situation because of the limited availability of emergency relief in court. To avoid any such misconceptions, consider acknowledging the situation and stating how the company intends to navigate it.
  • Stipulated injunctions and expedited discovery. Sometimes, in trade secret and restrictive covenant litigation, the parties will agree to limited restrictions on the defendant (such as not to use or disclose confidential information) and ask the court to enter those restrictions as a stipulated injunction to avoid the time and expense of an evidentiary hearing. While the stipulated injunction is pending (or even if the parties cannot agree on one), the parties can agree to engage in limited expedited discovery. This may be a particularly appealing option during current conditions if the parties will agree to it.
  • Emergency injunctive relief. There may be situations where the only or best option is to go to court and request emergency injunctive relief. This is particularly the case when there is evidence of actual or threatened trade secret misappropriation. Litigants, however, should be mindful about what constitutes an “emergency” in today’s environment. One court recently wrote, in a scathing opinion not dealing with trade secret misappropriation, “The world is facing a real emergency. Plaintiff is not.” Another court bemoaned “the incorrect and, frankly, reckless designation of this dispute as an ‘emergency.’” Other courts have been more forgiving, and several have issued emergency injunctive relief in trade secret cases, but parties must consider whether their issue fits within the local definition of an “emergency” so as to avoid the ire of the court and an early litigation loss. If your company’s trade secrets are not at immediate risk of loss, carefully consider whether an actual emergency exists before seeking relief based on such an “emergency.”

Enforcing Rights Against Financially Troubled Wrongdoers

Another ancillary effect of COVID-19 is the expected wave of bankruptcy filings. This poses the question: What to do when a wrongdoer is insolvent or about to file for bankruptcy protection?

If in doubt about the financial solvency of a wrongdoer, promptly filing litigation and seeking injunctive relief in the preferred jurisdiction are critically important. After a bankruptcy case is commenced by filing a bankruptcy petition, that petition automatically triggers an automatic stay of nearly all pre-bankruptcy litigation, enforcement, or collection activities. Violation of the automatic stay can subject a party to claims for punitive damages and attorney fees. The effect of the automatic stay may be used to persuade a court that emergency injunctive relief is necessary to protect a plaintiff’s rights against a financially insolvent wrongdoer before a bankruptcy petition is filed.

Consider seeking relief against both the wrongdoer and, if the wrongdoer is an individual (e.g., a former employee or the employee of a business partner), any related entities. By seeking relief against multiple parties, the bankruptcy automatic stay is less likely to bring the entire trade secrets enforcement litigation to a halt, given that it applies only to parties in bankruptcy. There is also a higher likelihood that at least one defendant will be solvent and able to satisfy a damages award.

Most bankruptcy courts recognize that a pre-bankruptcy injunction will continue in full force and effect so as to enjoin ongoing wrongful conduct. Thus, acting quickly can preserve critical protections of the trade secret owner’s rights. And, to the extent justified by the facts and circumstances, a plaintiff can seek to modify the automatic stay to permit completion of pre-bankruptcy litigation including injunctive relief and damage awards.

In the event a wrongdoer files a bankruptcy petition before injunctive relief can be obtained, all is not lost. A majority of bankruptcy courts recognize a plaintiff’s right to pursue narrowly tailored injunctive relief in bankruptcy court. Regardless of whether pre-bankruptcy claims have been reduced to judgment, a trade secret plaintiff must consider whether to file a proof of claim with the bankruptcy court in order to receive any payment on damages claims. Often the answer to this question is a simple yes. However, complex issues of jurisdiction can arise that may alter this analysis. In addition, a willful and malicious misappropriation may constitute a basis to exclude any money damage award from discharge in bankruptcy. This would permit the plaintiff to pursue full collection after the bankruptcy case is closed.

Succeeding in a Post-Pandemic World

Many states have begun emerging from shutdown orders or guidelines. But even the most optimistic scenarios of the next several months are fraught with uncertainty. Nobody can predict when the economy will fully reopen or what that even means in the post-COVID-19 business world. Will increased remote work become the new standard? If not, how long will it take before the majority of the workforce returns to the office? We also do not know when the next pandemic will strike or even if new outbreaks of COVID-19 will occur in the future.

Amid all of these uncertainties, one thing is certain: At some point, either the business world will return to its pre-pandemic “normal” or a new post-pandemic “normal” will emerge. In either case, protecting trade secrets will remain vital for businesses that want to maintain their competitive edge. In addition to the steps laid out above, companies should consider the following as they develop return-to-work action plans:

  • Shore up technical infrastructure. Many corporate information technology (IT) departments have been stretched to capacity (and beyond) as they support a newly remote workforce, effectively working triage for several months without the time, resources, or mandate to focus on big-picture, long-term strategic issues. As emergency work levels off, IT departments, working together with management, should shift their focus to shoring up their technical infrastructure in a thoughtful manner.
  • Review internal documentation. Companies should also take the opportunity to review and strengthen agreements, policies, and procedures concerning the protection of trade secrets—or implement such agreements, policies, and procedures if none currently exist—to account for a more remote workforce. They should also consider conducting a trade secret audit.
  • Enforce Company rights. If any employees, business partners, or other bad actors have taken advantage of this unprecedented situation to misappropriate trade secrets, companies should take legal action to enforce their rights. More courts are reopening their doors to nonemergency matters each day, and that trend will continue. Even some courts that are hearing only emergency matters are including trade secret matters as emergencies.

Conclusion

The COVID-19 pandemic has led to major changes in the workplace and beyond, some of which will no doubt be permanent. But that does not mean companies cannot (or should not) protect their trade secrets. The law continues to require that companies take reasonable measures to protect trade secrets, and more practically, doing so may ultimately be the difference between a company weathering the current crisis or going out of business.

 

Jeremy A. Cohen, Marcus L. Mintz, and Erik W. Weibust are litigation partners in Seyfarth’s New York City, New York; Chicago, Illinois; and Boston, Massachusetts offices, respectively.

Note: This article summarizes a series of COVID-19-related posts they wrote for Seyfarth’s Trading Secrets blog while working remotely.


Copyright © 2020, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).