January 04, 2017 Articles

Defending Your Trade Secrets after Employees Leave and Compete

By Jeana Goosmann

An employee informs her boss on a Friday afternoon that she is quitting and going to work for a competitor. Company management learns of this fact soon after her departure. Will she try to take business customers with her? Does she have proprietary information about products or services that would be detrimental to the business if shared with a competitor? Does she understand the company-developed business-process software well enough to describe how it works to a programmer at the new company? If the answer to any of these questions is “yes,” do you have any recourse? It depends.

Keep in mind there are competing interests: A person has a right to start a competing business, or join one, and thus continue to work in a chosen occupation. An employer has the right to protect the confidential and proprietary information in which it has invested significant resources.

Federal and State Trade Secret Acts
It is critical for any business to know how it can protect its trade secrets and how it can recover damages if its trade secrets are misappropriated by its former employees.

What distinguishes a business trade secret from a patent or a trademark? Patents and trademarks are matters of public record, while a trade secret is confidential and proprietary. Patents are issued for the purpose of protecting the rights of inventors, while trade secret law basically protects valuable corporate information from being made public. Some examples of trade secrets include customer lists and manufacturing processes. The Uniform Trade Secrets Act, in part, defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique, or process.”

Patent and trademark infringement actions are typically enforced in federal court, while trade secret lawsuits historically have been filed in state court, applying the Uniform Trade Secrets Act, adopted in nearly all the states. Recently, on May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA). It became effective upon its enactment. In an area that has long been the province of state law, the DTSA now allows a company to bring a federal claim with federal remedies and federal jurisdiction for the misappropriation of trade secrets. Nothing in the act, however, is intended to preempt state law at this time. The DTSA remedies include:

• Ex parte seizures of the property at issue in “extraordinary circumstances” to “prevent the propagation or dissemination of the trade secret.” The court must set a hearing no later than seven days after an order issues.

• Monetary damages for actual loss and unjust enrichment caused by the misappropriation of the trade secret, or a reasonable royalty in exceptional circumstances that render an injunction inequitable.

• For “willful and malicious” misappropriation, a party may recover exemplary damages of up to two times the amount of monetary damages and attorney fees.

• If a claim is made in bad faith or a motion to terminate an injunction is made or opposed in bad faith, the prevailing party is entitled to its reasonable attorney fees.

• In an action brought for wrongful or excessive seizure of property, a party’s recovery of damages for such wrongful or excessive seizure will not be limited by the required security or bond posted with the court.

Steps to Protect Trade Secrets
Obviously, it is better not to wait to take action until trade secrets are in jeopardy. Preventive measures will decrease the likelihood a former employee (or, indeed, a current employee) will disclose trade secrets. And, if someone does disclose—or attempt to use—trade secrets, then proof that the employer considered this information to be valuable and confidential, and took steps to insure its confidentiality, will be very helpful. Consider the following steps to help protect confidential business information:

1. Have all employees execute confidentiality agreements as a condition of new or continued employment. A confidentiality agreement should contain, among other terms, a definition of trade secrets, limitations of how employees can utilize trade secrets, and the types of monetary and injunctive relief the company can recover if the employee breaches the agreement.

2. Require vendors, suppliers, and potential customers to sign nondisclosure agreements about the confidential and proprietary information made available to them, and make the company’s employees aware of that policy. Nondisclosure agreements are typically signed by vendors, suppliers, and potential customers, whereas confidentiality agreements are signed by employees.

3. Conduct regular meetings with employees, independent contractors, and temporary personnel to remind them about what information the company considers confidential and the reasons why it wants to protect it.

4. Identify any information the company considers confidential as confidential and proprietary by either placing it in a separate file or stamping “confidential and proprietary” on it.

5. Limit access to confidential information to only those persons who absolutely must see it. A company can place the information in a separate locked file cabinet or electronic drive, or the company can require selected employees to use a password to gain access to it.

6. When establishing a new employment relationship, the company should inquire whether the previous employer required the employee to sign a confidentiality agreement. This policy promotes awareness by the new employee that his or her future employer respects the confidential and proprietary information of his or her former employer.

7. If the company has been required to enforce a confidentiality agreement, advise other employees, independent contractors, and temporary personnel.

8. Include confidentiality provisions in personnel manuals.

9. Create an understanding among employees, independent contractors, and temporary personnel that any confidential information they create on behalf of the company belongs to the company.

10. Hold thorough exit interviews, and require personnel who have terminated their relationship with the company to return all confidential information that had been in their possession, including any information that is on their office or home computers.

Tiers of Restricted Disclosure in Litigation
Generally recognized tiers of restricted disclosure have evolved to protect oral and written information revealed during discovery in trade secret cases.

The lowest protection of trade secrets is the designation of information as “confidential.” Under such designation, “confidential” information can only be used in that particular litigation, but may be shared with and reviewed by the parties and all employees of the parties, witnesses, experts, legal counsel, and anyone else involved in the litigation process. Such persons should be required to acknowledge the obligation to maintain the information on a confidential basis. Breach of this obligation may result in court-imposed penalties, including contempt of court.

Courts designate the intermediate tier of protection as “attorneys and client representatives.” Under this category, counsel has access to all the opponent’s trade secret information, but only one or a few client representatives, agreed to by the client and the litigation opponent, may receive access to such information. The limited client representative must acknowledge the obligation to refrain from disclosure to any other client employee and abide by the prohibition from use outside the litigation. Enforcement of the restriction may include the court’s contempt powers.

The most restrictive designation is the limitation of information only to legal counsel under the “attorneys’ eyes only” designation. Under this restriction, documents produced and information disclosed are only shared with the parties’ legal counsel, including legal staff, and, under certain restrictions, outside experts. None of the specific information can be revealed to anyone associated with the client or the client itself. However, the party seeking this designation bears the burden of proving that each document labeled as “attorneys’ eyes only” is sensitive enough to warrant such a restriction. Courts strictly adhere to this requirement and have threatened sanctions against the parties that label documents “attorneys’ eyes only” arbitrarily or without “an adequate factual basis.”

Trade Secret Disclosure in Litigation
Those who assert misappropriation of trade secrets claims in litigation face a “catch-22” dilemma. In such cases, plaintiffs must disclose trade secrets under the rules and protections of the litigation discovery process while simultaneously trying to protect those same trade secrets from further unlawful dissemination and use. However, when the case gets to trial, all bets are off. For instance, in the highly publicized 2012 California Northern District Court case of Apple Inc. v. Samsung Electronics Ltd., the designation and protection of “highly confidential—attorneys’ eyes only” documents during pretrial discovery proved good only until trial—at which point the judge refused to keep an important document a secret, and it was made available to the world without restriction. It was promptly picked up by the press, and from there replicated all over the Internet. Caveat: Judges are hesitant to clear the courtroom every time confidential documents or topics are discussed. Attorneys must realize that in the eyes of some judges, claims of confidentiality are often greatly overblown. So, depending on the judge, the confidential documents leading up to trial can become exhibits at trial, where anyone can look at them.

Business owners and their competitors, as well as current and former employees, should have a better understanding of their rights with respect to how a company’s trade secrets can be protected and utilized. A business owner or manager must understand that his or her rights to protect the company’s trade secrets are not automatic. Instead, certain affirmative steps must be taken to limit others’ rights to use this confidential and proprietary information. If the business makes its current and former employees aware of these trade secrets and they still misappropriate them, the company may then be in a better position to obtain court-ordered relief, including the possibility of an award of damages and injunctive relief.

Keywords: litigation, woman advocate, trade secrets, Uniform Trade Secrets Act, Defend Trade Secrets Act, DTSA, attorneys’ eyes only, confidential information, discovery, protective orders

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