Employees Come and Go: Are Your Trade Secrets Safe?



Practice Areas

J. Dickson Phillips III, Mark A. Hiller and Andrew R. Wagner
Triangle Business Journal
Dec. 13, 2019

This article originally appeared in the Triangle Business Journal and Charlotte Business Journal.

As your company considers what gifts to share this holiday season, be sure not to give away your most valuable assets: your trade secrets. Trade secrets are the codes, processes, customer lists, pricing plans, and other confidential technical and business information that fuel your company. And in today's mobile workforce, they may be in danger.

Trade secret misappropriation—meaning unauthorized acquisition, disclosure, or use of the secret—costs United States companies an estimated $180 billion to $540 billion per year.[1] In many cases, the misappropriation is committed not by unknown sources, like hackers, but by your own employees or business partners. So when a key employee leaves to work at a competitor, the employee may be bringing along your trade secrets. Perhaps the employee intends to use them to compete with you—an intentional misappropriation akin to theft. Or perhaps the employee does not know that the information is a trade secret—an unintentional misappropriation that may be no less damaging.

Protecting your trade secrets from being stolen should be your goal, because once the toothpaste is out of the tube, it is hard to put it back, even with a judge's help. How can you protect your secrets? And if your secrets are taken, what can you do? We address those questions below.

What Is a Trade Secret?

Generally, information can be a trade secret if (1) it derives value for your company from not being generally known or readily ascertainable, and (2) you have made reasonable efforts to keep it secret. This definition can encompass technical information, such as formulas, codes, processes, and the like. But it can also include non-technical information, such as customer lists and pricing schedules. Trade secrets can even include public information you have combined in a unique and valuable way, and "negative information" about what processes or techniques do not work.

How To Protect Your Trade Secrets

The law will protect your information as a trade secret only if you take reasonable steps to keep the information confidential. What efforts are "reasonable" depends on facts such as the size and resources of your company and the nature of the information at issue. Below are some generic ways to help keep your information confidential.

Physical Security

Restrict access to confidential information to employees who need it. Shred confidential documents after use or place them in a secured location. Limit access to areas in your office where sensitive information will be discussed, and teach employees not to leave this information unattended. Consider additional protective measures such as ID cards, visitor-logs, or even surveillance cameras or security guards.

Electronic Security

Protect sensitive electronic files and data by limiting access to employees who need it and by using strong passwords or encryption. Install firewalls and anti-virus and anti-malware software and keep them updated. Transmit confidential electronic information only when necessary and using secure methods. Consider restricting the use of external drives and encrypting those drives. Monitor logins and downloads made from unusual locations or during non-business hours.

Employee and Third Party Security

Inform employees what information is confidential by labeling it as such, adding a trade secret policy to your employee handbook, and conducting periodic trainings. Require new employees to sign confidentiality agreements when they are hired and before you disclose to them any confidential information. Also ensure that new employees do not disclose to you any trade secrets of their prior employers. Require contractors and other third parties to sign confidentiality agreements before sharing any confidential information with them. When an employee leaves your employment, revoke the employee's access to your physical spaces and digital network, require the employee to return confidential information or other company property, and give the employee a copy of his or her confidentiality agreement.

What You Can Do If You Think Someone Has Misappropriated Your Trade Secret

Even the strictest precautions may not be enough. If you suspect your trade secrets have been misappropriated, it would be prudent to contact a qualified attorney promptly to assess your rights. North Carolina and federal law offer various remedies to compensate for trade secret misappropriation and, if you act quickly, to prevent further harm. Those remedies may differ depending on which law applies and may include the following:

Injunctive Relief and Seizure

If you believe the misappropriator will continue using your trade secrets, as is often the concern, you can seek a court order prohibiting the misappropriator from doing so. This can be done on an emergency basis, through a temporary restraining order, and for the duration of the lawsuit, through a preliminary injunction. The requirements for these orders are strict and include showing you are likely to win the lawsuit. Federal law also allows a court in narrow circumstances to seize property to prevent misappropriation. If you ultimately win the lawsuit, the court may issue a permanent injunction preventing future misappropriation. If an injunction prohibiting use would be unreasonable, the court may condition future use of the secret on payment to you of a reasonable royalty.

Monetary Damages

Trade secret owners can also recover monetary damages. North Carolina law, for example, allows an owner to recover either its economic loss or the amount by which the misappropriator has been unjustly enriched, whichever is greater. North Carolina law also allows trade secret owners potentially to recover punitive damages and attorneys' fees if the misappropriation was willful and malicious.

Trade secret misappropriation may also constitute an unfair or deceptive trade practice under North Carolina law, entitling the trade secret owner to triple damages. And, with the passage of a federal trade secret statute in 2016, trade secret owners may sue in federal court regardless of the amount of money in dispute and whether the misappropriator is a resident of your state.

We hope this information helps you protect your company's hard-earned confidential information so that your business can thrive. Please note that the information in this article does not constitute legal advice.

[1] http://ipcommission.org/report/IP_Commission_Report_Update_2017.pdf

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