September 28, 2020 Articles

Top 10 Things Companies Can Do to Protect Their Trade Secrets When an Employee Resigns

Employee departures always create the possibility of trade secret misappropriation. Here’s how to protect against that danger.

By Susan Guerette
Employers should always be ready to protect  confidential information after an employee departs.

Employers should always be ready to protect confidential information after an employee departs.

Credit: Fang Xia Nuo, Getty Images/iStock

When an employee resigns, it is often done without advance notice and the employer does not have time to prepare. If a process is not in place, the employee may have packed up his or her office and left for a direct competitor without a single question having been asked. Employers should have a checklist ready so that they can ensure that they have taken steps to protect the company’s confidential information, safeguarded valuable customer relationships, and ensured that they can sue the employee if they learn of unlawful conduct. Keeping these steps in mind will enable the company to be in the strongest position to protect its confidential information, trade secrets, and business relationships.

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1. Conduct an Exit Interview

This is a crucial step in the process to ensure that the departing employee does not have, and is not taking, any confidential or customer information when he or she leaves. However, it is also important that the company use this opportunity to ask the employee where he or she is going and what his or her position will be at the new company. If the employee will be working with customers, the company should ask if the employee has contacted clients about his or her new employment and has plans to contact customers on joining the new firm. This may enable the company to find out if the employee has breached his or her fiduciary duty to the company and whether the employee might be planning to solicit customers or otherwise compete for business. During the exit interview, the company should ask the employee to sign a certification that he or she does not have any customer information, whether in hard copy or electronically, and has not provided it to any third parties. Even if the employee refuses to answer these questions or to sign the certification, these may be facts that can be used to discredit the employee if it becomes necessary to go to court to seek injunctive relief.

2. Preserve Potentially Relevant Devices            

If the employee used a company laptop or a company-issued cell phone, these should be retrieved from the employee and set aside. It is important to ensure that they are not put back into circulation if there are any concerns about the employee’s future employment. If the company allows another employee to use them, relevant information may be destroyed. At the same time, the company should consider whether to check the devices for evidence that the employee may have taken confidential company information. A review of the computer should enable the company to discern if a flash drive was inserted and whether information was transferred onto it. The company should also remove the employee’s access to its electronic systems to prevent any unauthorized access.

3. Check for a Possible Confidentiality Breach            

In addition to reviewing the former employee’s devices, the company should review the employee’s email account to see if he or she may have emailed confidential company information to a personal account, such as a personal gmail or Yahoo account. The company’s information technology department may also be able to tell if the employee has saved documents to a cloud account or recently accessed sensitive, confidential documents. This is also a chance to check for mass deletions of sensitive documents or customer information that would be helpful to the new representative taking over that business.

4. Reassign Clients            

If the employee worked with company customers, the company should ensure that someone is assigned to take over those accounts. By ensuring that there is no breach in continuity of service, the company will be more likely to keep the customers it has. The employee who will be working with these customers should be reminded that he or she should not disparage the former employee. In addition, the company should review what the new employee should say if a customer asks about the former employee. The company should make sure that the new employee does not insinuate that the former employee retired or otherwise left the industry.

Similarly, consideration should be given to what the new employee should say when asked where the former employee went. While it is not the new employee’s job to advertise for the former employee, if the new employee refuses to say where the former employee went, it may bolster an argument by the former employee that he or she had to contact clients to provide his or her new contact information so that the clients would be able to transfer their business to them if that was their choice. At the same time, the company should make sure that the new employee is attuned to any evidence of misconduct by the former employee. As the new employee is calling on clients, he or she needs to know to tell you if he or she hears from any customers that the former employee is contacting them, servicing their accounts, or working in a restricted territory. By keeping an ear out for any relevant information, the new employee will be able to help the company ensure that the former employee is abiding by any continuing legal obligations.

5. Check Social Media

Today, much of a competing employee’s work is done through social media. LinkedIn, Facebook, and other sites have become a key way for employees to reach out to customers. When an employee merely updates his or her employment profile, a notification will be sent to all of the employee’s contacts. The employee is also able to post announcements and direct-message contacts. The company should check these sites to see if there is any indication that the employee is reaching out to customers or working in a prohibited area. If the company had restrictions on the use of social media or linking with customers, it should be sure to pull those policies for reference if it decides to send a demand letter.

6. Consult the Former Employee’s Coworkers

While the former employee’s coworkers may be reluctant to provide information on their former colleague, there is little to be lost by checking in with them to see if the former employee shared information about his or her plans. Colleagues are often the best source of information as to the former employee’s next steps and potential competition. The company may also learn that the former employee is soliciting these employees, adding the breach of a non-solicitation provision to potential claims.

7. Pull the Employee’s Personnel File and Assess the Employee’s Legal Obligations

This is where the rubber meets the road and the company will need to determine whether its employment agreement will be enforceable in these circumstances. This entails assessing which law will control and then determining whether there may be any challenges to enforceability. For example, did the employee sign the agreement after commencing employment, and does the controlling state require new consideration for a restrictive covenant? If so, was there a promotion or some other benefit given at the time the contract was signed? With the passage of legislation limiting the enforceability of restrictive covenants in some states, such as Maryland, New Hampshire, Rhode Island, and Washington, the company needs to make sure that it can still enforce the agreement against the former employee. A solid legal analysis will help the company assess its options if the employee takes steps to compete with the company.

8. Look for Unusual Activity

In addition to checking computer files and electronic devices, the company should also look at the standard ways that employees take confidential information. Is there a record of unusual printing? Are any files missing from file drawers or cabinets? The company should also check its office entry and exit security logs to see if the employee was keeping unusual hours, coming in early, staying late, or working weekends. The fact that an employee worked longer hours than usual just before resigning should send up a red flag.

9. Put the Employee and the New Employer on Notice of Their Legal Obligations            

Either before the employee leaves the company or as soon as possible thereafter, the company should provide the employee with a copy of the employment agreement. The company needs to ensure that the employee cannot say that he or she was aware of a confidentiality agreement or restrictive covenant. If there is a question about compliance, the company should consider demanding that the employee provide assurances that he or she does not have possession of any company information, has not provided any confidential information to third parties, will not solicit the company’s customers, and will not compete within a restricted area. Finally, the company should assess whether to send a letter putting the former employee’s new employer on notice of any contract. The company needs to assess whether there is any question that the employment agreement is enforceable; otherwise, that letter could result in a tortious interference claim by the former employee.

10. Line Up Counsel

If the former employee is soliciting customers or competing in violation of an agreement, the company will want to move quickly to seek temporary or preliminary injunctive relief. Not every attorney has the ability to ramp up quickly and get into court to shut down employee violations before the business transfers. The company should line up counsel who specializes in this area. And, if you are that counsel, make sure the company knows to contact you when it loses a valuable employee or one who could threaten the company’s business, so that you can guide the company through this process and even begin preparing injunctive papers to stay ahead of the competition.

Susan Guerette is a partner with Fisher Phillips in Philadelphia, Pennsylvania.

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