Protecting Trade Secrets in the Hiring and Firing Process

Craig Johnson
June 19, 2006 — 2,877 views  
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Virtually any information that is kept secret and is considered to be of value may constitute a trade secret. This includes not only scientific and technical data, but also marketing strategies, product formulas, customer lists, pricing or financial information or other information used in business. To protect such information, the Uniform Trade Secrets Act, which has been adopted in most states, provides for money damages and injunctive relief for the unauthorized disclosure or use of trade secrets, as well as the unauthorized acquisition of trade secrets where such information was acquired by improper means. Further, the federal Economic Espionage Act, 18 U.S.C. Section 1831, provides criminal penalties for theft of trade secrets affecting interstate commerce.

Although these laws provide significant protections for the owners of trade secrets, they may also create traps for the unwary. For example, in hiring an employee who formerly worked for a competitor, an employer may become liable for misappropriation if that employee discloses or uses the competitor’s trade secrets for the employer’s benefi t. In order to protect one’s own trade secrets from misappropriation, as well as to prevent liability for the misappropriation of another’s trade secrets, employers should be encouraged to adopt compliance programs to address these issues before they arise.

Intake Considerations

At the new hire or intake phase of a business operation, the principal concern is to protect the employer against the inadvertent misappropriation of another’s trade secrets. In some cases, merely hiring a competitor’s employee to perform substantially the same work as the competitor may expose an employer to liability for misappropriation under the doctrine of “inevitable disclosure.” In Pepsico v. Redmond, 54 F.3d 1262 (7th Cir. 1995), for example, Quaker Oats hired a former high-level executive of Pepsi to operate Quaker’s newly formed beverage operation, which was in direct competition with Pepsi. The court enjoined the executive from performing certain duties for Quaker for a time, where the performance of these duties inevitably would have resulted in disclosing or using Pepsi’s marketing plans and other trade secrets. In contrast, hiring an employee who simply takes general business knowledge from one job to the next would ordinarily not constitute misappropriation because such knowledge is not protected as a trade secret. See Rivendell Forest Prods., Ltd. v. GeorgiaPacifi c Corp., 824 F. Supp. 961 (D. Colo. 1993).

A compliance program should include steps to identify and deal with potential employees who may bring a risk of misappropriation or “inevitable disclosure.” Among other things:

• Candidates, particularly from same-industry competitors, should be asked whether they had access to any trade secrets of a former employer.

• Candidates should be asked if they have signed any confidentiality agreements or noncompete agreements, and the employer should obtain a copy of any such agreement before hiring the candidate.

• New employees who have had access to a former employer’s trade secrets may be asked to execute an agreement to not disclose or use such information during the course of their new employment, which may provide evidence to rebut intentional misappropriation claims.

• All new employees who will have access to trade secrets should be required to execute nondisclosure agreements at the time of hire as a condition of employment. Existing employees, consultants, interns or temporary employees given access to trade secrets should also be required to execute nondisclosure agreements, although some consideration above and beyond a mere continuation of employment may be required.

• Key employees may be required to execute noncompete agreements. The noncompete agreement should be narrowly tailored, carefully describing the relevant market, the nature of the competition in the market, the conduct prohibited by the agreement and how the covenant is necessary to protect the employer’s trade secrets.

Ongoing Monitoring

After the initial hire or intake of employees, the emphasis of the compliance program shifts to protecting the employer’s own trade secrets. Unlike patented or copyrighted materials, which are protected for a statutorily prescribed time, trade secrets can potentially retain protection in perpetuity if they are kept secret. An employer must take reasonable steps under the circumstances to maintain the secrecy of such information; otherwise, trade secrets protection may be lost. To protect the employer’s trade secrets:

• All information considered a trade secret should be identifi ed and labeled as “confidential.” In some cases, a general description of the categories of information the employer seeks to protect may suffice. These designations should be periodically reviewed and updated.

• All employees should be informed as to which information the employer considers trade secrets and their obligation not to disclose or use such information. Such policies may be set forth in any employee handbook or materials provided to the employee at the time of hire.

• Employees should be required to sign a written acknowledgement that the compliance policies have been reviewed and are understood by the employee.

• Trade secrets policies should be reviewed with the employee on a periodic basis, such as during an annual review.

• Access to trade secrets should be limited to those employees who are required to use such information as part of their normal work activities, and trade secrets should be kept in areas that are inaccessible to the public.

• All materials for publication or presentation should be submitted to a manager or compliance offi cer prior to publication or distribution to avoid the potential disclosure of trade secrets.

Terminations; Departures

Finally, a compliance program must protect against the loss of trade secrets when a key employee is terminated or departs, through the loss of documents, computer fi les or even the memory of confidential information an employee may take to a new position. This may include the following:

• Exit interviews should be required for all departing employees during which the employer should ask whether the employee possesses any originals or copies of the employer’s files, documents or other information, including copies made on a home computer, and, if so, that any such information be returned to the employer.

• Departing employees should be advised of their continuing obligation not to use or disclose the former employer’s trade secrets. The employee should be provided a copy of any applicable nondisclosure or noncompete agreements.

• The employer may require a departing employee to execute a termination certificate that acknowledges the continuing obligation to maintain the secrecy of the former employer’s trade secrets.

A proper trade secrets program is a minimal investment that may result in substantial savings by avoiding loss of the employer’s trade secrets and providing protection against misappropriation claims.

Craig Johnson

Kutak Rock LLP