Editor: Intellectual property is one of a company’s most valuable assets. Why are trade secrets particularly at risk when an employee leaves a company?
Steiner: So much of a company’s value comes not from its physical plant, equipment or any other so-called bricks and mortar that make up its operations, but rather from its know-how. Depending on the circumstances, this may include product formulations, unique methods and processes for running its business, the compilation of customer data, the confidential terms under which it does business with vendors, and other information that is not generally available to competitors or the public.
The ability of an employee to take this data is often a mouse click away. A pocket-sized thumb drive can store millions of pages of information and can easily walk out the door on the employee’s last day. Sometimes employees may even believe – or claim – that the data is theirs because they worked on developing the information at the company.
Because data, along with its associated value, is so highly and easily portable, it is at risk whenever an employee with access to trade secrets leaves the company. The information can be removed without notice and subsequently be put to use by a competitor.
Editor: Please describe methods of protecting a company’s intellectual property, including through use of restrictive covenants within an employment contract.
Steiner: There are a number of ways to protect a company’s IP. The common law and, in 47 states that adopted it, the Uniform Trade Secrets Act, provide protections for a company’s non-patented intellectual property. These laws require, among other things, that a company restrict access to information in ways that are likely to prevent its dissemination to those without a right to the information.
Companies can do more than rely on laws against the theft of trade secrets. They can have employees sign restrictive covenants that contractually limit a former employee’s activities with a competitor post-employment. These agreements typically contain provisions that memorialize the employee’s obligation to maintain the confidentiality of the former employer’s information, as well as provisions regarding the solicitation of customers or employees and, in certain cases, covenants not to compete for a set period of time in a given geographic area.
Editor: What is the impact of BYOD and cloud computing on efforts to protect trade secrets?
Steiner: Bring your own device policies and cloud computing technology present a host of legal and security issues that need to be addressed. While these issues don’t materially impact the traditional language of restrictive covenants, they do provide more methods for trade secret information to leave the employee’s work location. For example, if employees are allowed to use personal devices for work purposes, their devices inevitably will store company information. When employees leave, they take personal devices that now store a mix of company-owned and strictly personal information. Since the company has no right to the device itself, in the case of an uncooperative employee, it will be difficult to ensure that company data is removed from the device. Likewise, allowing more places in which data can be stored beyond the company’s reach increases the probability that an employee will take the position that it was not reasonably protected as a trade secret.
Therefore, employers that have a BYOD policy subject themselves to additional risks. For employees who are allowed to use personal devices for business purposes, it is a good idea, as part of that policy, to get a written acknowledgement that allows the employer to access the device and remove the company’s information. Equally important, the company should establish procedures in coordination with its HR and IT departments to implement the accepted policy when the employee leaves.
Editor: What are your suggestions for updated language to address these issues?
Steiner: An employer needs to understand how its business has evolved over time and how each employee’s duties and responsibilities have changed, particularly in the case of a long-term employee who has risen through the ranks and has greater access to information. The restrictive covenant that a new employee signed when she was one of hundreds of sales associates with a limited territory may no longer be applicable when, 10 years later, she is running the sales department nationally. If that employee decides to leave and join a competitor, the employer doesn’t want to find out, for example, that her original restrictive covenant only limits her from soliciting a handful of customers on Long Island. So from time to time, restrictive covenant programs need to be revisited to make sure they are serving the present needs of the company. That said, employers must keep in mind differing state laws, which in certain instances limit the enforcement of restrictive covenants in ongoing employment situations.
More recently, employers have started to use clawback provisions in incentive compensation programs that require the employee to surrender employment benefits if he or she goes to work for a competitor during a certain period of time. In some states, including New York, these provisions are subject to less scrutiny than traditional non-competes.
Editor: How should employers be rethinking corporate IP policies as they relate to employee mobility?
Steiner: There is no way to guarantee trade secret protection, but an employer can put itself in the best possible position to prevent the theft of trade secrets and, in the event they are stolen, to convince a court that the information taken in fact was a trade secret and should be returned. One way to do that is to have a good confidentiality provision in an employee handbook or in other documentation signed by the employee, in which the employee acknowledges that the employer in fact does have trade secret information and that steps are taken to limit the dissemination of that information. These provisions should describe both the type of trade secret information held and the steps taken to keep it a secret. Of course, this also creates an obligation for the employer to actually implement the restrictions acknowledged by the employee, for example, by restricting access to certain pieces of information on a need-to-know basis through the use of passwords for gaining access, first to the employer’s computer system and then to specific databases on that system.
Editor: Similarly, what should a hiring company be asking about restrictions on job candidates?
Steiner: First, a hiring company should always ask if the prospective employee has a restrictive covenant. If so, the company should ask for a copy and review it with a clear sense of what the employee’s job responsibilities were with the former employer and what the employee’s job responsibilities will be with the new employer. In many cases, the restrictive covenant at issue, assuming it is enforceable, won’t prevent the employee from going to work for a competitor. The agreement will only restrict what the employee can do with the new employer, so job duties can be structured in such a way as to not run afoul of the employee’s restrictive covenant obligations. In addition, when hiring someone from a competitor, the new employer should make clear that it does not want and will not accept any information from the prior employer. In other words, the employee should be told “don’t bring anything with you.”
Editor: How can an employer protect itself from an incoming candidate’s misrepresentation of obligations or restrictions?
Steiner: Unfortunately, even if the new employer asks all of the right questions about the existence of a restrictive covenant and gives the correct warnings about its policy of not accepting or wanting trade secret information from the former employer, it can still be surprised.
I have seen situations where a new employee legitimately did not believe she had a non-compete – she had forgotten about it, and it did not come to light until the prior employer sent a cease and desist letter enclosing a copy. And plenty of times, a new employee is discovered to have copied information before leaving an old employer despite warnings not to do it. Both situations quickly become the new employer’s problem, but neither is sure to lead to litigation if it is correctly managed.
If a non-compete or other restrictive covenant comes to light, the first step is to have competent counsel analyze its enforceability, including a realistic assessment – based on the level of the employee, the remaining time duration of the restriction, and other dynamics – as to whether litigation is likely. If it is, legal often will need to make a difficult call to inform the new employee’s superior that job functions must be restructured in light of the non-compete. In rare cases, where job functions cannot be restructured or it is not worthwhile to do so, the new employer may need to terminate the new employee.
Discovering that an employee has brought over information is a serious situation that should not be ignored and, in almost every instance, can be resolved if the information is promptly returned and other assurances are provided. The employer, though, should think seriously about the magnitude of the conduct and whether it still wants to employ that individual.
Editor: Describe some of the litigation issues involved in cases that center on a violation of a restrictive covenant.
Steiner: Most of the restrictive covenant work I do never ends up in litigation. Clients will send me a restrictive covenant, either one that a potential hire has with her current employer or one that a newly departed employee had before going to a competitor. The two primary issues are enforceability of the restrictive covenant in general and as it relates to the facts of the particular case. The advice we provide covers both and includes consideration of applicable state law, which varies materially from state to state. With respect to the current and past employer, I want to know everything about the employee’s duties, responsibilities and level of access to company information, as well as the circumstances of the employee’s departure. In some states, if the employee was terminated without cause, a non-compete is unenforceable. These factors determine the strength of a case for enforcement of the restrictive covenant, and ultimately they influence the advice I give to clients as to whether the employee should be hired or, in the case of a former employee, whether my client should press the issue with the new employer.
Editor: What can a company do to avoid injunction lawsuits aimed at stopping misappropriation?
Steiner: Courts want to see that companies are acting responsibly and have done what they can to avoid litigation – particularly where a request has been made for a temporary restraining order (TRO) or preliminary injunction (PI). Put simply, if the company discovers improper conduct by its new employee, it should take reasonable steps to fix the situation.
In almost every case where I have had to go to court for an injunction, it is because my client identified an issue, we engaged the other side, and the new employer ignored the issue by refusing to do anything. This type of conduct is tailor-made for an injunction. In that situation, at some point in the first few minutes of my argument, I will tell the court everything we did to avoid having to ask for an injunction and how despite our efforts, we were ignored or were not taken seriously.
I recently had a case where we sent a cease and desist letter, to which the new employer simply responded that the covenant was not enforceable, and because of a difference in title, even if it was enforceable, it was not being violated. The letter essentially told my client to pound sand. The client decided to sue and brought a motion for TRO and PI. When I sent my adversary the papers, he called and was incredulous that we decided to file suit. Needless to say, his response letter was presented front and center in both my papers and our argument as to why we had to go to court and needed a TRO, which we got.
So if you want to avoid being on the wrong side of an injunction, take a reasonable position and attempt to find a solution. That is not always possible, and if your adversary is unreasonable and intent on suing, you may end up in court, but at least you can tell the judge you took the issue seriously, did what you could, and only ended up in court as a last resort.
Editor: Please discuss the Defend Trade Secrets Act of 2014 (DTSA) and whether it is preferable to the Uniform Trade Secrets Act (UTSA).
Steiner: There is some debate as to whether DTSA is preferable or even necessary given that every state has laws providing trading secret protection and, again, 47 have adopted the UTSA. For a party seeking to remedy a theft of trade secrets, the DTSA provides some added rights that are not present under the UTSA. So, if you are the plaintiff in a dispute over the theft of trade secrets, for example, the DTSA allows for companies to litigate in federal court as a matter of right; it contains a longer statute of limitations at five years, rather than the UTSA’s three-year period; and it permits punitive damages at three times actual damages as opposed to the UTSA’s cap of two times. It also contains a provision that allows plaintiffs to seek an ex parte order for the seizure of property used to commit a violation.
Editor: Please describe Kelley Drye’s interdisciplinary trade secrets group.
Steiner: We handle a fair amount of trade secret and restrictive covenant litigation, which is a huge plus for our clients and for my practice. Our experience on both sides of the issues allows us to anticipate all possible arguments. It provides good insight into how a dispute over theft of trade secrets or violations of restrictive covenants will play out, and it lets us advise our clients accordingly on everything from the likelihood of success to the cost of litigating the matter.
Kelley Drye’s practices that touch on these matters run from Labor and Employment to Corporate, from IP and Patent Litigation to Commercial Litigation, and issues in each of these areas can come up, so it is good to have people on call to assist where necessary. Collectively, we have handled these cases across almost every industry imaginable, including financial services, pet products, diagnostic testing services, cosmetic ingredients, and consumer health products. Some cases have involved senior executives, and others have involved sales people. Many are resolved quickly and prior to any litigation being filed, while others have gone all the way to trial and verdicts. Put simply, we have seen it all.
Published October 17, 2014.