Trade Secrets- Confidentiality and Employee Issues

July 31, 2015

book cropped 2Trade Secrets- Are You Protected?.....We live in a competitive world. The extent to which a company is able to protect its trade secrets is an important factor in its overall ability to survive and prosper. In the employment context, complicated legal issues arise when a departing employee is in a position to use and/or disclose confidential information to a competitor.

Complicated legal issues also exist when hiring the employee of a competitor. An important step for a company when using Legal Risk Management (LRM) is to implement processes to protect trade secrets and confidential information.  Also, a company needs to protect itself from unfair competition claims, as well as prevent the raiding of its employees.  All are wrapped up in trade secrets.

1.  Understanding What Constitutes a Trade Secret

If trade secrets are important and are protected- what are they?

In the US , The National Conference of Commissioners on Uniform State Laws approved the Uniform Trade Secrets Act ("UTSA") in 1979 which defines  a trade secret is somewhat broader terms than the definition under older doctrines.  It is defined as:

  • "trade secret means information, including a formula, pattern, compilation, program, device, method, technique or process that:
  • derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and
  • is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 

How do courts look at trade secrets?  Courts in the US tend to look at 6 factors when deciding whether information constitutes a trade secret or not.  They are:

  • The extent to which the information in question is known outside the business;
  • The extent to which the information is known by employees and others involved in the business;
  • The extent of the measures to safeguard the secrecy of the information;
  • The value of the information to the competitor;
  • The amount of effort or expense required to develop or compile the information; and
  • The ease of difficulty with which the information could be properly acquired or duplicated by others.

The determination of whether information constitutes a trade secret is extremely fact specific, and the courts have reached opposite conclusions on the same types of information depending on the facts presented. Two principal factors create the difference between cases that recognize information as a trade secret and cases that do not. First, courts determine whether the information is truly secret, i.e. not in the public domain or easily accessed. Second, courts determine whether the employer has taken reasonable steps to protect the secrecy of the information.

1.1.     Communicating Confidentiality

A company or organization should communicate with employee's regarding its policies on confidentiality. Confidentiality policies should be included in employee handbooks and employees should receive periodic reminders regarding the confidentiality policy and any contractual obligations regarding confidentiality.

Document control is another essential means to communicate confidentiality. Document controls can be put in place that are simple and routine. Upon termination of employment, exit interviews should be conducted to remind the employee of their obligations regarding confidentiality.  

Note: During the exit interview, the employer should remind the employee of his or her confidentiality obligation including: 

The types of confidential information that the employee previously had access to during his/her employment;

Any agreements with the employee regarding confidentiality or competition issues;

The employee's obligation to return any confidential information (make sure you remind employees to return all electronic information stored in all locations, including personal laptops or home computers);

The duties of the employee's new position; and

The employee's responsibility not to use or disclose confidential information

2.    Contractual Protections

A properly drafted confidentiality agreement which contains a restrictive covenant can be an effective tool for preventing trade secret disclosure. But what is meant by the term "restrictive covenant?" It can cover a wide array of devices including:

  • A restriction upon use or disclosure of trade secret or other confidential information (a confidentiality agreement);
  • Assignment of property rights (an invention assignment agreement)
  • A restriction upon participation in competitive activities for a specified period of time (a non-compete agreement);
  • A restriction upon soliciting the customers of the employer (a non-solicitation agreement); and
  • A restriction upon soliciting or attempting to induce employees to leave the employer (a non-solicitation agreement).

All of these types of restrictive covenants have a potential role to play in an ongoing effort to protect trade secrets.    It is advised that to ensure the proper use of restrictive covenants, you conduct an audit of outstanding agreements to check whether appropriate restrictive covenants are properly used.

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