June 16, 2017
By Dylan W. Wiseman
There are countless articles explaining what is a trade secret, and addressing recent legal developments. This article identifies 10 areas that, if successfully handled, can greatly improve your business’ odds of winning a trade secrets dispute. The focus of this article in on practical, real-world pointers which can make a major difference.
1. Improve Your Company’s Agreements.
When was the last time your company updated its confidentiality and intellectual property assignment agreements? There have been some major developments in California law in the last few years, and the federal government enacted the Defend Trade Secrets Act (DTSA) in May of 2016.
The DTSA has some extremely important terms that impact every employer. For example, under the DTSA, if employers fail to update their agreements to include the DTSA’s whistle-blowing terms, the employer cannot recover its attorney fees or exemplary damages. The importance of that term cannot be understated—imagine reporting back to your company’s board of directors that the business prevailed on its DTSA claim, but cannot recover its fees because it did not update its agreements to comply with the DTSA.
2. Have California-Specific Agreements.
In 2016, the California Legislature passed Labor Code Section 925, which make unlawful employment agreements which contain out-of-state choice of law provisions or which require that employees adjudicate claims outside of California. The law applies to all employment contracts entered into, modified or “extended” after Jan. 1. Given that most employment agreements are at-will, a good argument exists that “extended” would apply to at-will employment agreements.
As a general rule, the more specific the information is identified, the more likely courts in California are likely to uphold the term. Every business has information which, if it fell into the hands of a competitor, would be damaging. For that reason, companies should identify in their confidentiality agreements the information which they seek to protect. We recommend specific terms like “compilations showing customer identities,” “pricing and cost information, including the cost of goods sold and margins,” “budgeting and sales forecasts,” “information regarding prototypes, including failure rates,” “schematics and CAD files,” and “the findings of our research and development.” Again, when your company updates its confidentiality agreement and intellectual property assignment terms, it should also tune up the scope of protected confidential information.
3. Take Reasonable Measures to Protect the Trade Secrets.
Both the DTSA and California’s version of the Uniform Trade Secrets Act require that employers take “reasonable measures” under the circumstances to protect the alleged trade secret information. Your business does not need to operate as Fort Knox, but it is important to have both physical security measures in place, and to implement technical security measures.
For physical security measures, start by considering your walk from your car to your desk. Physical security measures can include, a secured parking garage, a security officer in the lobby, a check in sheet for all visitors, video cameras, key card access to an elevator, a receptionist to check in visitors, locked file cabinets, name badges with locks that open doors, a methodology to limit access where the information is housed, confidentiality agreements, and an employee policy manual which addresses confidentiality.
Technical security measures include password protected devices, the ability to remotely access or wipe devices, firewalls, passwords and configuring the network so that information is accessed on a need to know basis.
4. Improve Your Company’s “Off-Boarding” Practices.
Nearly 80 percent of all trade secret theft is internal, and involves information taken from within a company. There are numerous ways to remove data from a company, including through electronic storage devices, the cloud, and California also recognizes that employees can misappropriate trade secret information by using their knowledge of trade secrets and disclosing or using that for competitors. Please review my related article on the fundamentals of California trade secret law.
When employees who have access to the crown jewels announce they are leaving, HR and IT should develop a plan to preserve the devices used by the departing employee. Whether a company ultimately seeks to proceed to litigation will often depend upon the evidence preserved by HR and IT.
If you suspect wrongdoing, consider preserving the devices through a forensic image. Forensic images are exact replicas of the devices, and can be made a little expense by a vendor and withstand court challenges to their admissibility. Should litigation be in the cards, a skilled technician can review the forensic images and comment upon the unearthed evidence.
Consider rethinking your company’s computer usage policy. While the benefits of a Bring Your Own Device (BYOD) work environment may be appealing, the legal expenses around extracting the company’s data from a device owned by a former employee are significant. In contrast, collecting and analyzing data from a company owned device is a simple exercise and can be done quickly.
HR should also conduct an exit interview to remind the departing employee about his signed confidentiality provisions and identify the company’s expectation about how the departing employee should return company property. Most departing employees only have a vague recollection of the packet of materials they signed years earlier when starting employment. Reminding departing employees of the company’s expectations at the exit interview can often prevent the misuse of information.
Often departing employees will refuse to participate in the exit interview process, or will decline to identify their new employer. Those are red flags. However, employees often update their LinkedIn accounts after leaving, and their colleagues may be good sources of information to interview on that topic.
5. Conduct an Investigation into the Departing Employee’s Final Months.
When employees who had access to trade secrets depart, the company should conduct an investigation focusing on the last few months before they left. At this juncture, it makes sense to call the company’s lawyer to seek guidance about the investigation.
During witness interviews, co-workers will often recognize that, in retrospect, the former employee’s conduct seemed odd. It is often helpful to obtain statements from existing employees while their recollections are fresh. Also, keep in mind that what you tell the former employee’s colleagues, may likely make its way back to the former employee.
If the departing employee was in a sales role, experience shows they often reach out to existing customers while still employed to see if they can secure the business for a competitor. Likewise, departing sales employees frequently attempt to slow down transactions to move them to a competitor.
An investigation into electronic evidence should be conducted by a qualified forensic technician and in conjunction with the company’s lawyer. Lawyers and forensic technicians can also help track the evidence with chain of custody documents. Further, reports prepared by the forensic technician in conjunction with the lawyer are also entitled to the lawyer’s work product privilege.
It may also be helpful to hire a private investigator to work with the lawyer. The private investigator can help identify where the former employee is working, and can help determine if customer relationships are jeopardized.
The nature and extent of an investigation will depend on the circumstances and the urgency of the situation.
6. Hold On to the Business.
Companies should always attempt to retain the business put at risk by a departing employee. In the hours and days following the departure, we recommend mobilizing a team of co-workers to take appropriate steps to help retain the business.
In a technical field, its often beneficial to review the departed employee’s records to determine what steps would best enable the company to retain its competitive advantage. In a sales environment, mobilizing the other sales personnel to meet with key clients can help reduce the damage caused by a former employee’s use of customer list or pricing information. Carefully worded communications with customers can often help retain the business by showing a continued commitment to the relationship and service. It is always preferable to document these retention efforts.
7. Keep a Central Reporting Structure.
Managing information while the business is determining whether it wants to proceed with litigations presents challenges. We recommend establishing a reporting structure with a small group of personnel who interact with the lawyers. Quite often, businesses need to be nimble in the stressful times following a suspected trade secret theft. Having clearly defined responsibilities for the response team often pays dividends.
8. Understand How Hard to Fight.
Setting reasonable and clear objectives from the outset is important. There are two factors which typically determine how hard to fight—the nature of the information, and the risk to the business.
Obviously, where the information uploaded to the cloud is crucial to the company’s success, and the former employee’s role with the competitor presents risks to the bottom line or the company’s goodwill, then it makes sense to prepare for protracted litigation.
Oftentimes, the investigation raises more questions than it answers. Under those situations, how hard to fight depends, in part, upon how quickly the questions can be answered to the company’s satisfaction. Quite often, the only way to obtain answers is through the litigation discovery process by gathering documents, taking depositions and issuing subpoenas. Trade secret litigation matters often burn fast and bright for a few months until the smoke clears through the discovery process.
Further, it may make sense to keep your powder dry. Conducing and investigation which assuages the company’s concerns by establishing that its trade secrets are not at risk is also valuable.
9. The Letter to the Competitor and/or the Former Employee.
Based on the investigation, the company should consider sending a letter to the competitor and/or the former employee. If the investigation’s results are inconclusive it makes sense to send a letter to the former employee reminding her about the terms of the company’s confidentiality and intellectual property assignment agreement. Having a lawyer send the letter on the company’s behalf helps convey the gravity of the situation.
If the investigation shows that the former employee poses a risk to the company’s intellectual property, then a cease and desist letter should be sent by the lawyer. The cease and desist letter should describe the facts unearthed by the investigation, and identify what the company expects will occur. For example, “By the close of business on Friday, please return the USB device we show you connected the day of your departure,” or “immediately stop using our trade secrets information to target and solicit our valued customers.” The cease and desist letter should also invite the new employer to conduct its own investigation.
Likewise, the cease and desist letter should contain a demand that the former employee and her new employer preserve certain electronic evidence.
10. Appreciating That Trade Secret Litigation is Considerably Different From Commercial Litigation.
Trade secret litigation moves at a pace which is often foreign to typical commercial litigators. Quite often the business whose information is put at risk seeks a temporary restraining order, followed by a motion for a protective order to govern the handling of evidence, followed by a preservation order, followed by expedited written discovery and depositions, followed by a preliminary injunction.
The pacing of the dispute can prove to be taxing upon the business, and is made worse by inexperienced legal counsel. Meanwhile, there are often expensive and time consuming disputes regarding whether the trade secret at issue has been defined with sufficient particularity to move forward with the discovery process.
Trade secret disputes also inherently require a strong understanding of how electronic evidence is kept and moved. Further in May of 2017, the ABA issued its ethics opinion directing trade secret lawyers to have encrypted email for communications with clients.
Unlike most commercial disputes, the discovery process typically occurs under a protective order. These disputes often involve rather technical sealing motions to preserve the confidentiality of the evidence.
Indeed, California even has a separate set of jury instructions for trade secrets disputes.
Trade secret litigation matters are often hard-fought and stressful. In short, before your business invests in proceeding with litigation, make certain your lawyer has the requisite experience, knowledge and technical resources sufficient to handle the particular demands of a trade secrets dispute.
In conclusion, by focusing on the topics in this article, your business should help improve its odds of prevailing in a trade secrets dispute.
Dylan W. Wiseman is a Shareholder in Buchalter’s Intellectual Property, Litigation, and Labor & Employments Practice Groups in the San Francisco office.
Source: Corporate Counsel