This article explains how companies can handle confidential information properly to reduce leaks to competitors. Once a company identifies what information is or contains a trade secret, it is beneficial to list all trade secrets and sensitive material in a central register or secure computer database. Classifying trade secrets can also help determine how valuable a particular trade secret is to the company. Companies can restrict disclosure of trade secrets to key employees with a “need to know.” They can also require key employees to sign individual secrecy and noncompete agreements, making them personally liable for unauthorized disclosures. If possible, the agreement should be executed before hiring the employee. For those already on the payroll, the agreement should include a statement that the trade secret restrictions are being applied as part of a standard policy applicable to all employees. Companies also need to do their housekeeping. They need a regularly scheduled review of the trade secret portfolio to remove items that should no longer be considered trade secrets and perhaps to reclassify others.
Companies are leaking intellectual property all the time. It comes and goes with employees.
In times like these of recession and cutback, employees leave companies in large numbers, and most of them do so involuntarily. An unemployment rate hovering around 10 percent tells us that most of them have not been hired into new jobs. But sooner or later they will be rehired, perhaps by their former employers or by their old company's competitors.
In flush times, employee turnover is high as employers compete for the best workers. Leaving one job to take another with better prospects is generally reserved for the talented and highly skilled.
When employees walk out the door, regardless of the reason, they leave with valuable experience, including knowledge of their employer's trade secrets. It is tough enough losing a well-trained engineer, but having a company's trade secrets leaked to the competition is an even bigger problem. So, what are the measures that managers and companies can take to protect trade secrets and to ensure that an employee's departure does not unfairly benefit a competitor?
There are a number of steps that companies can take to protect secrets, and the law also provides some protection. But, before we enter a discussion of them, I feel that as a lawyer, I have to write a word of caution: This article is not a comprehensive treatment of the subject and does not constitute legal advice. Readers should seek legal advice before taking any action with respect to trade secrets, and the views in this article are mine. They do not necessarily reflect those of the law firm for which I work.
First, companies should know how courts define trade secrets and what items fall into the category of trade secrets. In layman's terms, a trade secret is any information, including non-technical data, or techniques that are maintained with a reasonable level of secrecy, i.e. kept secret. Aspects of trade secret law are defined by state and federal law, which both follow the international Trade Related Aspects of Intellectual Property Rights agreement. State laws regarding trade secrets generally follow the Uniform Trade Secrets Act, which is a model rule. The majority of states have adopted the Uniform Trade Secrets Act or a modified form of it, and set out the remedies if trade secrets are improperly disclosed.
Under the law of many states, a company may sue if it believes valuable secrets have been improperly disclosed, and winning parties may obtain significant payouts. For example, a trade secrets case recently brought in California state court ended with a settlement agreement of $200 million after a jury found that the defendant, Semiconductor Manufacturing International Corp., had improperly “acquired, used, or disclosed” Taiwan Semiconductor Manufacturing Co.’s trade secrets and violated a previous settlement agreement between the parties.
Under federal law, the Economic Espionage Act defines trade secrets. Under the act, the federal government may impose criminal penalties on whoever uses a stolen trade secret for economic gain and knowingly harms the original trade secret owner. Unlike most state laws, federal law does not create a civil remedy allowing private parties to file suit and recover damages from those whom they believe to have misappropriated trade secrets.
While the Uniform Trade Secrets Act provides a general definition of trade secrets, courts may also consider other factors in evaluating whether a trade secret is in fact “secret,” including the following:
The extent to which the secret information is known outside of the business. Take, for example, the trade secrets relating to a company's process for brewing beer. Courts may consider that the general brewing process is well known outside the business. However, courts will also consider that a unique yeast used in the brewing process is unknown and may be protected under trade secrets law.
The extent to which it is known by employees and others involved in the business. If every employee of a large engineering firm knows the key elements of a machine for manufacturing computer chips, trade secret rights may likely be unattainable in the machine.
The value of the information to the company and its competitors. The more valuable information is to a company and to its competitors, the more likely courts will consider the information a trade secret.
The ease or difficulty with which the information could be properly acquired or duplicated. This factor relates to reverse engineering, which is perfectly acceptable under trade secrets law, because once an unpatented product or technology is sold on the open market, it is in the public domain.
The measures taken to guard the secrecy of the information. Under this factor, courts may consider accessibility and the number of employees given access to the trade secrets.
Clearly, a key part of trade secret protection is keeping the secret. State courts will determine whether information was kept secret by considering factors such as the extent the information is known, the ease of acquiring the information, and measures taken to protect that information. Within the last year, the Court of Appeals for the 10th Circuit ruled that when determining trade secret rights the lower state district court needed to consider whether a process of making a magnesium silicate additive known as Mistron 604AV was known in the public domain and how easily the information could be acquired. Yet, the 10th Circuit emphasized that the presence of all the elements of an idea in technical literature does not necessarily destroy trade secret status because the secret might be in a combination of otherwise well-known principles.
Second, once a company identifies what information is or contains a trade secret, it may be beneficial to list all trade secrets and sensitive material in a central register or secure computer database. Companies may also consider classifying trade secrets. For example, a company may classify information as “top-secret,” “ultra-strict security,” or “for internal eyes only” with a specific description of the persons entitled to access the various classes of information.
Classifying trade secrets will help determine how valuable a particular trade secret is to your company. The classification may also be used to limit access. For large organizations from NASA to Boeing, classification is essential to keep valuable information secret.
Third, companies can restrict disclosure of trade secrets to key employees with a “need to know.” In a given situation, business managers, senior officers, or members of the board of directors may not need to know the actual trade secrets of the company, and it may be appropriate to bar them from sensitive details.
Companies often compartmentalize different aspects of the trade secret thereby limiting the number of employees who know the whole secret. For instance, only key employees may know the ingredients of Krispy Kreme's doughnut glaze while the ingredients of the doughnuts may be more commonly known among employees. After all, statistically speaking, the more people who know the information, the more likely that the trade secret will eventually be disclosed. In general, most people are terrible at keeping secrets. Thus, the fewer people who know the secret, the better chance a company will have of keeping it, which is a key to protection.
Non-Disclosure Within Limits
Fourth, and perhaps most important, companies can require key employees to sign individual secrecy and non-compete agreements making them personally liable for unauthorized disclosures. If possible, the agreement should be executed before hiring the employee. For those already on the payroll, the agreement should include a statement that the trade secret restrictions are being applied as part of a standard policy applicable to all employees. Requiring such an agreement can serve to remind employees of the continuing need to keep sensitive information secret.
However, the agreements may not be enforceable if they do not strike the proper balance between protecting trade secrets and restricting the employee from earning a living based on general industry experience and education. Many states have specific statutes that govern the content of these agreements.
For enforcement purposes, post-employment contractual restrictions must be reasonable in terms of territorial reach, duration, and scope of activity prohibited. To avoid having a court determine whether something is overly broad and thus unreasonable and unenforceable, agreements may include a “severability” clause that instructs the court to enforce the agreement to the extent reasonable.
In addition, the agreement may include some type of consideration. For example, a severance package may be offered to the employee for signing the individual secrecy and non-compete agreements. The Washington State Supreme Court stated a non-compete agreement entered into after employment is valid only when independent consideration is given.
Fifth, companies need to do their housekeeping. They need a regularly scheduled review of the trade secret portfolio to remove items that should no longer be considered trade secrets and perhaps to reclassify others. In addition, key employees who signed secrecy agreements should be notified of the trade secret's status. If suit is filed against present or former employees for a trade secret violation, the periodic review process will reinforce the seriousness of maintaining the secrecy of the trade secrets retained on the roster.
Sixth, periodic educational programs can remind employees of the importance of protecting trade secrets and of the liability for letting a secret out. Reinforcing trade secret policy can help to maintain a corporate culture of diligence. If employees know the importance of maintaining secret information they will be more likely to protect it, as well as fear the consequences of leaking it to anyone.
Seventh, companies can hold exit interviews reminding employees of their obligations to maintain the company's trade secrets even after the employment relationship has been terminated. It may be appropriate to emphasize what could happen if the employee violates a secrecy agreement. In addition, it might be a good idea to ask the employee to sign a written affirmation of the secrecy obligations.
Eighth, identifying competitors and tracking whom they are hiring can yield signs of a leak. If a competitor hires several of your top engineers over a relatively short amount of time, an investigation may be appropriate. Also, track the products your competitors are releasing to market. You may see red flags if a pattern develops between the time your company releases a new product and the release time of eerily similar products from a competitor. Valuable resources to learn about and track the activities of competitors include their Web sites, trade show activities, and white papers.
The relationship between an employer and an employee imposes a duty on the employee not to use or disclose the employer's confidential information, such as trade secrets, to the employer's detriment. Implementing the foregoing suggestions while informing employees of their legal obligations and of the consequences of leaking valuable trade secrets can help protect proprietary intellectual property in times of high employee turnover.