Employee Defection & Trade Secrets Digest


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The Employee Defection & Trade Secrets Digest is a unique publication dedicated to covering developments, trends and strategies related to the issues that arise when employees move between competitor firms.

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Employee Defection & Trade Secrets Digest

  1. 1. Fisher & Phillips LLP The Employee Defection & attorneys at law Solutions at Work® Trade Secrets Digest 2009, No. 1 www.laborlawyers.com The Employee Defection & Trade Secrets Digest is a unique publication dedicated to covering developments, trends and strategies related to the issues that arise when employees move between competitor firms. The law of employee defection and trade secrets is about much more than non-competes and trade secrets. It encompasses a range of issues including common law claims such as breach of duty of loyalty, civil conspiracy and unfair competition, to statutory claims such as those arising under the federal Computer Fraud & Abuse Act. ANAL Y S I S CONTENTS • Demystifying California: Demystifying California: Can California Non-Compete and Trade Secret Law Employers Protect Against the Dangers page 1 Posed by Departing Employees? • Can Litigation Place Your Trade secrets at Risk? By Ron S. Brand that Section 16600 should be interpreted page 4 as broadly as its language reads. In fact, the Employers with California operations California Supreme Court recently affirmed • The Computer Fraud & Abuse Act routinely attempt to restrict the ability of their Section 16600’s prohibition against covenants page 6 former employees based in California from not to compete. See Raymond Edwards II v. • “Wipe That Memory Clean” – engaging in unfair competition by using Arthur Andersen LLP (2008) 44 Cal.4th 937, Memorizing Trade Secrets a variety of post-employment restrictive 946-947. Nevertheless, there is hope for page 9 covenants (such as covenants not to compete employers with California operations who want and covenants not to solicit customers). to protect their legitimate business interests • “Garden Leave” Unfortunately, many of these employers are (including their trade secrets) and who want to Emerging in the U.S. unaware of California’s strong public policy seek relief for the acts of unfair competition of page 10 against post-employment restrictive covenants, their former employees. Not only are there and simply do not know the types of restrictive four statutory exceptions to Section 16600, but • Implementing a Trade covenants that are actually enforceable in California courts have carved out a few Secrets Protection Program California. Accordingly, these employers use exceptions that provide significant protections page 12 restrictive covenants that, while enforceable in to employers in California. The types of post- other states, are unenforceable in California. employment restrictive covenants that are • State Information Security This leads to situations where employers do not generally found to be valid and enforceable in Law – Informing Clients When obtain the benefit of what they bargained for, or California are: (1) a covenant not to compete Their Information is Taken page 17 worse, open themselves up to liability for authorized by statute; (2) a covenant not to engaging in unfair competition themselves. solicit customers while making use of the • Protecting Trade secrets California has a long history of protecting former employer’s trade secrets or confidential page 19 the interests employees have in their own proprietary information; (3) a covenant not mobility and betterment, and ensuring that they to solicit employees; (4) a covenant not to • Contact Information retain the right to pursue any lawful employ- engage in acts constituting unfair competition; page 20 ment and enterprise of their choice. This policy (5) confidentiality, non-use and non-disclosure is expressed in California Business and Profes- agreements; and (6) employee’s agreement to sions Code section 16600 (“Section 16600”), assign inventions. which provides: “Except as provided in this chapter, every contract by which anyone is Covenants Not to Compete Authorized by restrained from engaging in a lawful profession, Statute trade or business of any kind is to that extent A covenant not to compete is the most void.” California courts have repeatedly held restrictive type of covenant an employer can © 2009 Fisher & Phillips LLP Continued on page 2 Atlanta Charlotte Chicago Columbia Dallas Denver Fort Lauderdale Houston Irvine Kansas City Las Vegas Louisville New Jersey New Orleans Orlando Philadelphia Portland ME Portland OR San Diego San Francisco Tampa
  2. 2. A N A LY S IS Continued from page 1 use to restrain its former employees. It prohibits an employee from Employer Liability for Attempting to Enforce Invalid Covenant working for his or her former employer’s competitors for a period Not to Compete of time, within a defined geographic radius. As discussed Employers who ignore Section 16600 by using an unenforce- above, Section 16600 voids covenants not to compete altogether. able covenant not to compete to prevent former employees from (Moreover, Section 16600 extends to covenants by which a former obtaining employment by a competitor may be opening themselves employee is penalized (e.g., by forfeiting pension rights) for up to liability for engaging in unfair competition. California Business competing with his or her former employer after leaving its and Professions Code section 17200 prohibits unlawful, unfair or employment. See Muggill v. Reuben H. Donnelley Corp. (1965) 62 fraudulent business practices in whatever context such activity Cal.2d 239, 242.) might occur, including an attempt to enforce a covenant not to However, California Business and Professions Code sections compete under Section 16600. See Application Group v. Hunter 16601-16602 (“Sections 16601-16602”) provide four exceptions Group, Inc. (1998) 61 Cal.App.4th 881, 906-907. Moreover, an to Section 16600’s prohibition of covenants not to compete: (1) any- employee who is fired for refusing to sign an invalid covenant not one selling the goodwill of a business; (2) a shareholder “selling or to compete may be able to claim a wrongful termination in violation other disposing” of all of his or her shares in a corporation; (3) a of public policy based on the employer’s violation of Section 16600. shareholder of a corporation that sells all or substantially all of its See Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th 1425, 1439; operating assets and goodwill (or any division or subsidiary), or all D’Sa v. Playhut, Inc. (2000) 85 Cal.App.4th 927, 933. of the shares of a subsidiary; or (4) a partner upon dissolution of Covenant Not to Solicit the partnership, the partner’s Customers withdrawal from the partnership A covenant not to solicit or disposition of the partner’s customers prohibits the former interest. To be enforceable employee from soliciting busi- under Sections 16601-16602, a ness from certain customers of covenant not to compete must the former employer. A covenant also be reasonable in scope; it not to solicit customers is must be shown to be reason- treated as a covenant not to able and necessary to protect compete under Section 16660, the buyer’s interest in terms of since a former employee has duration, activity and territory. the right to compete with his or her former employer, even for Sale of Business And its business of those who had Goodwill been customers of the former This exception allows the employer, provided such com- buyer of a business to prevent petition is fairly and legally the seller from diminishing the conducted. See Reeves v. value of the business that has Hanlon (2004) 33 Cal.4th just been purchased. 1140, 1149. However, Califor- nia courts have recognized a “Sale or Other Disposition” of judicially created exception to All Shares Held by Share- Section 16600 for cases where holder a former employee uses a California courts have interpreted this exception to require that former employer’s trade secrets or confidential proprietary a covenant not to compete is valid only when the sale is of a information to solicit the business of the former employer’s substantial interest in the employer-corporation so that the customers, and will enforce a covenant not to solicit customers in shareholder, in transferring all of his or her shares, can be said to such a case. See Thompson v. Impaxx, Inc. (2003) 113 Cal.App.4th transfer his or her interest in the employer-corporation’s goodwill. 1425, 1425; Morlife v. Perry (1997) 56 Cal.App.4th 1514, 1526. See Bosley Med. Corp. v. Abramson (1984) 161 Cal.App.3d 284, A few California courts, without discussion, appear to uphold 290. Employer-corporations cannot use this provision as a covenants not to solicit customers without determining whether the subterfuge by requiring an employee to purchase a single share information used was in fact a trade secret or confidential propri- and agree not to work for a competitor. When all the shares of the etary information. See Golden State Linen Service, Inc. v. Vidalin employer-corporation are sold, even a minority selling shareholder (1977) 69 Cal.App.3d 1, 9 (covenant not to solicit customers may be bound by a covenant not to compete with the purchaser. “appears to be valid and enforceable insofar as it provides that the See Vacco Industries, Inc. v. Van Den Berg (1992) 5 Cal.App.4th affected employee will not solicit Golden State’s customers after 34, 38-49. leaving its employ”). Nevertheless, the vast majority of California courts have determined that a covenant not to solicit customers is only enforceable to the extent necessary to protect an employer’s 2 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  3. 3. A N A LY S IS trade secrets or confidential proprietary information. Accordingly, Covenant Not to Engage in Acts Constituting Unfair employers with California operations need to tread carefully when Competition attempting to enforce a covenant not to solicit customers in a A covenant not to engage in acts constituting unfair situation where evidence of use of trade secrets or confidential competition have been upheld by California courts. See Metro proprietary information is lacking. Traffic Control, Inc. v. Shadow Traffic Network (1994) 22 An issue often litigated regarding covenants not to solicit Cal.App.4th 853, 862. The term “unfair competition” under customers is whether the former employee actually solicited the California law includes a broad rage of conduct, including: customers. Under California law, a former employee has the right (1) competitive acts by current employees that are adverse to the to mail announcements of his or her new employment to the former interests of his or her current employer; (2) current or former employer’s customers, even if their identities are trade secrets. employee’s misappropriation of employer’s trade secrets or See Aetna Bldg. Maint. Co. v. West (1952) 39 Cal.2d 198, 203. confidential proprietary information, and other employer property; Indeed, merely informing customers of a change in employment, (3) soliciting former employer’s customers while making use without more, does not constitute solicitation. Under California law, of trade secrets or confidential proprietary information; and customer contact constitutes solicitation when it “personally (4) soliciting employees to leave the employer. petitions, importunes and entreats. . .customers to call. . .for information about the better products or services the departing Confidentiality, Non-Use And Non-Disclosure Agreements employee can provide and for assistance during the transition The most basic and widely used restriction, a confidentiality, period.” See American Credit Indem. Co. v. Sacks (1989) 213 non-use and non-disclosure agreement is used to ensure that an Cal.App.3d 622, 636. employer’s trade secrets or confidential proprietary information will Even in the absence of a covenant not to solicit, California not be disclosed to competitors or misused by the former employee. common law and statutory law protects California employers. California courts have consistently upheld such agreements to Indeed, a former employee is prohibited from using his or her protect an employer’s strong interest in its trade secrets and former employer’s trade secrets or confidential proprietary informa- confidential proprietary information, and have consistently tion to solicit his or her former employer’s customers, and a former found that Section 16600 does not invalidate such agreements. employee is prohibited from destroying his or her former employer’s See Readylink Healthcare v. Cotton (2005) 126 Cal.App.4th 1006, business relationships with its customers through improper means 1022. (e.g., trade disparagement). Employee’s Agreement to Assign Inventions Under California law, persons employed to create or deign “[T]here is hope for employers with new products may not put the results of their work to their own use California operations who want to protect or benefit. All the creations and designs of the employee that relate to the employer’s current or anticipated business belong to the their legitimate business interests. . . .” employer. Many times an employer will require its employees to assign to the employer all inventions created by the employees, Covenant Not to Solicit Employees (“Anti-Raiding Covenant”) even if created at home and on their own time. However, pursuant A covenant not to solicit employees prohibits a former to California Labor Code section 2870(a), such an agreement is employee from soliciting other employees to join a new business not enforceable if (1) the employee did not use any equipment, (the so called “anti-raiding covenant”). Under California law, such supplies, facility, or trade secrets of the employer; (2) the invention a covenant may be valid and enforceable even in the absence of was developed entirely on the employee’s own time; and (3) the trade secret misappropriation or unfair competition, as long as it is invention does not relate to the employer’s business or to the reasonable in time and scope. See Loral Corp. v. Moyes (1985) employer’s actual or demonstrably anticipated research or 174 Cal.App.3d 268, 280. However, a covenant not to hire development, or does not result from any work performed by the employees (as opposed to a covenant not to solicit them) is employee for the employer. According to California Labor Code unenforceable. As the court of appeals noted in Loral, “Equity will section 2870(b), an agreement to the contrary is against California not enjoin a former employee from receiving and considering public policy and will not be enforced. Additionally, when applications from employees of his former employer, even though requesting an employee to sign an agreement for assignment of the circumstances be such that he should be enjoined from inventions, the employer must notify the employee in writing that soliciting their applications.” the agreement does not apply to inventions that are fully protected under California Labor Code section 2870(a). 3
  4. 4. I N PRA C TIC E You Just Stole My Trade Secrets . . . Want Some More? Can Trade Secret Litigation Place Trade Secrets at Risk? By Michael R. Greco lists of general areas of information which contain unidentified trade secrets.” Id. It is 4:15 on Friday afternoon. The office manager and Courts often require much more than just a description of a entire sales team from your Chicago office have just plaintiff’s alleged trade secrets. In IDX Systems Corp. v. Epic resigned without notice to join a competitor. The Systems Corp., 285 F.3d 581 (7th Cir. 2002), the plaintiff tried office manager attended all of the company’s to argue that “a 43-page description of the methods and processes strategic planning meetings in late 2007, which led to underlying and the inter-relationships among various features the rollout of your 2008 business plan. The sales reps making up IDX’s software package” is specific enough. IDX, 285 control two of the company’s top five accounts, and it F.3d at 583. The appellate court’s response was, “No, it isn’t.” Id. appears they have already started calling the clients, Courts understand why plaintiffs do not want to identify perhaps even prior to their surprise resignation. their trade secrets with specificity. “Reluctance to be specific is Various client files are missing or incomplete, and understandable; the more precise the claim, the more a party does certain computer files appear to have been to tip off a business rival to where the real secrets lie and where the downloaded and then deleted. Your CEO’s first rival’s own development efforts should be focused.” Id. However, inclination is to pursue immediate legal action against courts also recognize that generalized lists of trade secrets do little the former employees and the firm that hired them. to enable a plaintiff to prove its case, and deprive a defendant of its “We need to find out what they took, when they took right to challenge the plaintiff’s case. Indeed, even Coca-Cola, the it, and how they are using it!” His second remark is a holder of what is arguably the world’s most widely recognized question: “What do you mean we might have to show trade secret, was not immune from producing its trade secrets: our trade secrets to our competitor if we file a “The potential harm that would come from public disclosure of the lawsuit?” formulae for old Coke, new Coke, diet Coke, and caffeine free Coke is great, but virtually all of that harm can be eliminated with stringent protective orders and other safeguards.” Coca-Cola Bottling Co. v. “[C]ourts have warned plaintiffs of the Coca-Cola Co., 107 F.R.D. 288 (D. Del. 1985) (internal citation risks they run by failing to identify specific omitted). So what is a plaintiff to do if it wishes to minimize disclosure of its trade secrets during litigation while maximizing its trade secrets and instead producing long ability to discover what information may have been taken by lists of general areas of information which defendants? Here are five tips to keep in mind: contain unidentified trade secrets.” 1. Narrowly identify the trade secrets at issue. It is not uncommon for trade secret plaintiffs to allege that Further disclosure of trade secrets through litigation is a valid everything and anything qualifies as its trade secrets. concern. Courts around the country have held that plaintiffs must Plaintiffs commonly assert broad allegations claiming that specifically identify the trade secrets at issue. This means that trade the allegedly misappropriated trade secrets include secret plaintiffs may have to actually disclose the trade secrets they secret formulas, customer lists, customer preferences, believe the defendants misappropriated, and not just in a summary, business methods, etc. Although such descriptive descriptive fashion. In one case, a plaintiff identified the trade phrases may be appropriate for a publicly filed complaint, secrets it believed to be at risk by producing “six single spaced, the time may come in litigation when specificity is typewritten pages listing by general item and category hundreds of required. If that happens, a broader description of pieces of [the company’s] internal information.” AMP Inc. v. trade secrets may backfire and necessitate a broader Fleischhacker, 823 F.2d 1199, 1203 (7th Cir. 1987). The plaintiff’s disclosure. A narrow description targeted on the precise list included: “business and strategic planning information for the secrets at issue can go a long way towards limiting the Components & Assemblies Division; new product development discovery sought by defendants. information; manufacturing information, including equipment, processes, cost and capacity information; financial information, 2. Make sure claims are based on fact, not including product-line profit-margin, sales, and budget information; speculation. Many trade secret plaintiffs cast a wide net and marketing and customer information.” An appellate court found in framing their allegations. Plaintiffs sometimes argue this rather extensive, yet non-specific, list to be insufficient and that they were not around when the misappropriation took stated: “[C]ourts have warned plaintiffs of the risks they run by place, and therefore they need to thoroughly review all of failing to identify specific trade secrets and instead producing long the defendants’ files so they can identify the stolen trade 4 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  5. 5. I N PRA C TIC E secrets. Defendants counter by arguing that plaintiffs should not be granted access to a competitor’s trade secrets for the mere price of a filing fee. Courts are more likely to permit plaintiffs to take discovery, and to limit defendants’ counter-discovery, if the allegations at issue are rooted in fact. Consequently, detailed allegations focused on narrow trade secrets arising out of concrete circumstances (e.g., the defendants downloaded our written 2008 strategic business plan) will go a long way toward limiting discovery to truly necessary issues. 3. Avail yourself of procedural protections. Statutes and court rules provide ways in which plaintiffs can be protected against further misappropriation. For example, the vast majority of states across the country have enacted a version of the Uniform Trade Secrets Act. These statutes commonly require that a court “shall” preserve the secrecy of an alleged trade secret by reasonable means which may include, but are not limited to, granting protective orders in connection with discovery proceedings, holding in camera hearings, sealing the records of the action, and ordering any person involved in the litigation not to disclose an alleged trade secret without prior court approval. Similarly, state and federal rules of court commonly provide for the issuance of protective orders directing that a trade secret or other confidential research, development or commercial information shall not be disclosed or be disclosed only in a designated way. 5. An ounce of prevention is worth a pound of cure. As noted above, in order to succeed on a trade secret 4. Assert credible non-trade secret claims that focus on claim, a plaintiff must establish that the information at defendants’ conduct. Trade secret plaintiffs have the issue is in fact a trade secret. To do so, plaintiff must burden of establishing more than misappropriation; demonstrate that information was the subject of efforts they must establish that the allegedly misappropriated that are reasonable under the circumstances to information qualifies as a trade secret in the first place. maintain its secrecy. Ironically, if a company takes To meet this burden, extensive disclosure may be reasonable steps to ensure the secrecy of its necessary. Asserting non-trade secret claims may information, it may actually prevent misappropriation enable a plaintiff to frame issues for discovery by more from occurring in the first place. For more detail heavily focusing claims on the defendants’ conduct. on steps that companies can take in an effort For example, information taken from a computer may to protect their trade secrets, see infra articles give rise to a claim under the federal Computer Fraud & entitled “Implementing a Trade Secrets Protection Abuse Act (“CFAA”). Although the CFAA has many Program” and “Protecting Trade Secrets: Confidential specific requirements, a plaintiff need not establish that Information and Customer Relationships Audits.” the information at issue constitutes a trade secret. Consequently, plaintiffs can argue that CFAA claims In sum, a trade secret plaintiff may risk further disclosure of require greater disclosure from defendants because they trade secrets if it commences litigation, but careful planning and focus more squarely upon what the defendants took, and solid legal counsel can help manage that risk and minimize when and how they took it. Other claims, such as a unnecessary disclosure. breach of duty of loyalty and breach of non-disclosure agreements, may carry the same benefit. This article originally appeared in the April 2009 issue of Risk Management magazine, which you can find at www.rmmagazine.com. Copyright 2009 Risk and Insurance Management Society, Inc. All rights reserved. 5
  6. 6. S TR A TE GY The Computer Fraud & Abuse Act: A Powerful Litigation Tool for Employers? By Heather Z. Steele to interpret the requirements necessary for an employer to establish a claim under the CFAA. The results, however, are not always The Computer Fraud and Abuse Act, 18 U.S.C. § 1030, consistent. To establish liability under the CFAA, an employer (“CFAA”) is an expansive federal statute that imposes both criminal is likely to have to show that an employee either fraudulently and civil penalties associated with unauthorized access of comput- or “intentionally” accessed a protected computer “without erized information. Since its amendment in 1994 to include civil authorization or in excess of one’s authorization” and that as a remedies – which permit any person who suffers damages or loss result of this conduct, caused “loss to 1 or more persons during any resulting from a CFAA violation to maintain a civil action against 1-year period . . . aggregating at least $5,000 in value.” See 18 the violator for compensatory damages and injunctive relief – the U.S.C. § 1030. Most courts interpreting the CFAA in the departed CFAA arguably has evolved into a powerful tool that employers can employee context have debated two specific requirements: use against departing employees and their new employers. (1) what constitutes “without authorization or in excess of one’s Specifically, an employer confronted with evidence that a former authorization” under the CFAA; and (2) what is necessary to prove employee accessed its computer systems without or in excess of the requisite “damage” and/or “loss” under the CFAA. his or her authorization can assert a CFAA claim and receive the benefits of being able to bring its action in federal court, as well as Without and/or In Excess of Authorization: avoiding many of the burdens associated with claims based on The majority of courts interpreting the CFAA’s “without trade secret misappropriation, such as the burden of proving the authorization” or “in excess of one’s authorization” requirement trade secret status of the information at issue and the burden of have found that an employee exceeds the scope of his or proving that the former employee is actually using, or threatening authorized access to an employer’s computer systems once the to use, the information. employee begins acting for a purpose against the employer’s best As CFAA claims against former employees have become interests, acting for a competitive purpose and/or acting as more commonplace, numerous courts have had ample opportunity someone else’s agent. For example, in a recent decision by the Would you like to receive updates via e-mail concerning breaking devel- opments about employee defection issues? We would be pleased to include you on our distribution list. Send us your e-mail address. Contact: Michael R. Greco mgreco@laborlawyers.com 6 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  7. 7. S TR A TE GY United States District Court for the Southern District of New York, work-issued computer and/or that her authorization ceased Calyon v. Mizuho Securities USA, Inc., No. 07-Civ. 2241, 2007 U.S. when she began acting outside the scope of her employment. Dist. LEXIS 66051 (S.D.N.Y. Sept. 5, 2007), the Court considered The employer relied on prior case law and the Restatement of actions that often time occur in the departing employee context — Agency to argue that “the authority of the plaintiff’s former an employee resigns, copies allegedly confidential information from employees ended when they allegedly became agents of his former employer’s computer system, and then e-mails the defendant.” The Rooth Court found support for the employer’s information to his personal e-mail accounts and/or to his new contention that its former employee had begun acting as an agent employer. Id. at *2. In considering those facts, the Caylon Court of its competitor at the time she downloaded and/or attempted to held that the employees’ actions established the basis for a claim access the employer’s ACT Database and, therefore, granted the under the CFAA because “the plain language of the statute seems employer’s motion for a preliminary injunction against its former to contemplate that, whatever else, ‘without access’ and ‘exceeds employee. But see Condux Int’l. Inc. v. Hangum, No. 08-4824, 2008 authorized access’ would include an employee who is accessing U.S. Dist. LEXIS 100949, at *14-15 (D. Minn. Dec. 15 2008) documents on a computer system which that employee had to (adopting narrow interpretation of “without authorization” know was in contravention of the wishes and interests of requirement of the CFAA, stating that a broader interpretation his employer.” Id. at *4. See also Pharmerica, Inc. v. Arledge, No. “incorrectly focuses in what a defendant did with the information 8:07-cv-486-T-26MAP, 2007 U.S. Dist. LEXIS 19992 (M.D. Fla. after he accessed it (use of information), rather than on the March 21, 2007) (holding that a former employee violated the appropriate question of whether he was permitted to access the CFAA by downloading and deleting trade secret information for information in the first place (use of access)”). B&B Microscopes v. competitive use and, therefore, without authorization). Armogida, 532 F. Supp. 2d 744 (W.D. Pa. 2007) (refusing to follow Numerous other courts have reached similar conclusions. the reasoning that once an employee begins violating a duty of In ViChip Corp. v. Lee, 438 F. Supp. 2d 1087 (N.D. Cal. 2006), the loyalty to his employer any authorized access is withdrawn, and United States District Court for the Northern District of California holding instead that the employee had authorization to use his held that a former CEO’s unauthorized destruction of the former employer’s laptop). corporation’s electronic files entitled the corporation to summary judgment on its CFAA claim. Id. at 1100. The former CEO admitted that he deleted ViChip’s computer files, but argued that his The majority of courts . . . have found that actions were “technically authorized” since he did so while still an an employee exceeds the scope of his officer and director of ViChip and, therefore, with authorization. Id. The ViChip Court found the defendant’s arguments unpersuasive, or authorized access to an employer’s relying on International Airport Centers, LLC v. Citrin, 440 F.3d 418 computer systems once the employee (7th Cir. 2006) for the proposition that “an employee could still be deemed to have accessed the employer’s computer ‘without begins acting for a purpose against the authorization,’ even though the agent’s employment had not yet employer’s best interests terminated, and that liability could attach under the CFAA.” See ViChip, 438 F. Supp. 2d at 1100. The ViChip Court further indicated that the former CEO had a duty of loyalty to the Damage/Loss: corporation and that this duty led to an agency relationship The concepts of “damage” and “loss” are broadly defined between the parties. Id. The Court held that when the former under the CFAA. The CFAA defines “damage” as “any impairment CEO decided to delete the corporation’s computer information (in to the integrity or availability of data, a program, a system, or preparation for termination of his employment with the company), information that causes loss aggregating at least $5,000 in value the former CEO breached his duty of loyalty and terminated his during any 1-year period to one or more individuals.” See 18 U.S.C. agency relationship with the company – thereby, terminating his § 1030(e)(8). Congress defined “loss” under the CFAA to mean authorization to access company files. Id. “any reasonable cost to any victim, including the cost of Many courts have focused on the termination of the agency responding to an offense, conducting a damage assessment, relationship when considering whether an employee’s access to restoring the data program, system, or information to its condition his or her employer’s computer systems was “without authorization” prior to the offense, and any revenue lost, cost incurred, or other or “in excess of [] authorization.” In Book Wholesalers, Inc. v. consequential damages incurred because of interruption of Rooth, No. 04 CV 2428 DMS, a 2005 unpublished decision from service.” See 18 U.S.C. § 1030(e)(11). In considering what is the United States District Court for the Southern District of necessary to establish the requisite damage and/or loss under California, the Court considered the actions of a former employee the CFAA, courts have often times reached differing results – some of a book vendor who left employment and took her employer’s finding that damage and loss can include loss of business, trade ACT Database (containing over 11,000 files for customers and secret information, etc. and others limiting the statute’s definition potential customers across the nation). The employer claimed that of lost revenue to address only revenue lost due to an interruption although the employee did have authorization to access the ACT in services of the computer network. Database during her employment, she did not have authorization The United States Court of Appeals for the Ninth Circuit to download the entire ACT Database to either her personal or recently held that lost revenue, including loss of good will, counts Continued on page 8 7
  8. 8. S TR A TE GY Continued from page 7 toward reaching the damage and loss requirements of the CFAA. In Creative Computing v. Getloaded.com LLC, 386 F.3d 930 (9th Cir. 2004), the defendant objected to the decision of the United States District Court for the District of Idaho, which required it to pay damages for loss of business and business goodwill in conjunction with a CFAA claim. Id. at 935. The Creative Computing Court found the defendant’s objection without merit, indicating that “[w]hen an individual or firm’s money or property are impaired in value, or money or property is lost, or money must be spent to restore or maintain some aspect of a business affected by a violation, those are ‘economic damages’ covered by the CFAA.” Id. See also Frees, Inc. v. McMillian, 2007 U.S. Dist. LEXIS 57211, at *15 (W.D. La. Aug. 6, 2007) (“interpreting the [CFAA] to limit the recovery of lost revenue would lead to absurd results . . . When a defendant copies unauthorized data to gain a competitive edge, it makes no sense to limit the plaintiff’s recovery when the lost revenue is a direct result of defendant’s misconduct”). Similarly, in C.H. Robinson Worldwide, Inc., v. Command Transportation, No. 05 C 3401, 2005 U.S. Dist. LEXIS 28063 (N.D. Ill. Nov. 16, 2005), the plaintiff alleged that the defendants violated the CFAA and that as a result of defendants’ actions, plaintiff suffered loss, including loss of the value of trade secrets and other confidential information and loss of competitive advantage. Id. at * 3. Defendants filed a motion to dismiss, alleging that plaintiff failed to properly allege the requisite damage and loss as required by the CFAA. Id. at *2. The C.H. Robinson Court held that “[c]aselaw supports an employer’s use of the CFAA’s Civil Remedies to sue former employees and their new companies who seek a competitive advantage through wrongful use of information from stability, or accessibility of the computer data itself”). Other courts the former employer’s computer system” and that, therefore, the following a similar analysis have indicated that the end use of the plaintiff properly alleged “loss” under the CFAA based on its information to compete unfairly, and which results in lost business allegations of loss in value of trade secrets and loss of competitive or goodwill, is not the type of loss contemplated by the statute. advantage. Id. at *4. See, e.g., Civic Ctr. Motors, Ltd. v. Mason Street Import Cars, Ltd., Other courts, however, have refused to count a loss of 387 F. Supp.2d 378, 382 (S.D.N.Y. 2005) (holding that loss business or loss of clients towards meeting the $5,000 “loss” of “competitive edge” claim not caused by computer impairment or threshold. In Nexans Wires v. Sark-USA, Inc., No. 05-3820-CV, computer damage was not cognizable under the CFAA). 2006 WL 328292 (2d Cir. Feb. 13, 2006), the United States Court of Appeals for the Second Circuit interpreted the CFAA strictly, Conclusion holding that lost revenue considered under the statute includes only An analysis of the current state of the law on CFAA claims revenue lost from an interruption of service. The Nexans Court indicates that, under the right circumstances, the CFAA is a stated that “the plain language of the statute treats lost revenue as powerful litigation tool that employers can use to obtain injunctive a different concept from incurred costs, and permits recovery of the relief and monetary damages against a departed employee and his former only where connected to an ‘interruption in service.’” Id. at or her new employer. The body of law applying the CFAA to *2. See also Hangum, 2008 U.S. Dist. LEXIS 100949, at *22-24 employment cases involving the unauthorized access of protected (finding that although the employee’s activities “may well have computer information has grown significantly over the last few compromised or diminished the confidentiality, exclusivity, or years. There is little doubt that the number of these claims will secrecy of proprietary information…the plain language of the continue to grow in the future. [CFAA] requires some alternation of or diminution of the integrity, 8 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  9. 9. A N A LY S IS “Wipe That Memory Clean?” or “Just Keep It Inside?”: Competing Views On Memorization of Trade Secrets By Heather Z. Steele majority position among the states that have adopted the UTSA is that memorized information can be the basis for a trade secret When an employee with knowledge about his employer’s trade violation. The Ohio Supreme Court held that a former employee’s secrets resigns, the employer may be rightfully concerned about use of customer information committed to memory constitutes a the possibility of trade secret misappropriation. Some courts are violation of the UTSA because nothing in the Act nor the commonly willing to grant trade secret protection to memorized information, recognized six-factor test for determining trade secret status while other courts focus on whether the information was taken in a indicates that a distinction should be made between information tangible format (e.g., documents or electronic media). in tangible versus memorized form. Id. By way of further Historically, among those courts holding that departing example, courts acting under the UTSA in Arkansas, employees are free to rely upon their memory, their California, Florida, Illinois, Iowa, Massachusetts, Pennsylvania, holding has generally relied Rhode Island, and Washington upon the Restatement (Third) of have all indicated that informa- Unfair Competition § 42, which tion contained solely in an provides that “[i]information employee’s memory may be that forms the general skill, protected as a trade secret knowledge, training, and experi- belonging to an employer. See, ence of an employee cannot be e.g., Ed Nowogroski Ins., Inc. v. claimed as a trade secret by Rucker, 137 Wash.2d 427 a former employer.” In an early (1999); Morlife, Inc. v. Perry, 56 decision on the issue by the Cal.App.4th 1514 (1997); Allen United States District Court v. Johar, Inc. 308 Ark. 45 for the District of Nebraska, (1992). See also North Atlantic Cudahy Co. v. American Labo- Instruments, Inc. v. Haber, 188 ratories, Inc., 313 F.Supp. F.3d 38, 46-47 (2d Cir. 1999) 1339 (D. Neb. 1970), the (citing Milgrim on Trade Secrets Court indicated that an for the proposition that “[t]he employee who did not utilize majority rule is . . . that appro- printed documents, but rather priation by memory will be knowledge gained from con- restrained under the same stant exposure to his former circumstances as will appropri- employer’s business informa- ation by written list”). But see tion, did not misappropriate L&B Transport, LLC v. Busby, trade secrets. Some state court decisions have similarly recognized No. 06-310-FJP-SCR, 2008 U.S. Dist. LEXIS 32590, at * the distinction between physical documents and memorized 10-34 (M.D. La. Feb. 13, 2008) (refusing to grant trade secret information. In Peace v. Conway, 435 S.E.2d 133, 135 (Va. 1993), protection to customer lists, employee lists and/or pricing informa- the Supreme Court of Virginia held that the former employees, who tion located in a former employee’s memory even though Louisiana “did not take any documents or utilize any property that belonged enacted a version of UTSA); Avnet, Inc. v. Wyle Labs, Inc., 437 to [their former employer]” did not “employ improper methods by S.E.2d 302, 305 (Ga. 1993) (ordering defendants to return to utilizing their memories to compile a list of the names of [the former their former employer tangible documents containing customer employer’s] customers and soliciting business from those information, but stating that the former employees were at liberty to customers.” See also, Metal Lubricants Co. v. Engineered use such information to the extent it existed in their memories Lubricants Co., 284 F. Supp. 483, 486-87 (E.D. Mo. 1968) (holding notwithstanding Georgia’s enactment of the UTSA). that information that could be readily assembled from memory is Employers should be mindful of these competing schools of not a trade secret); Gulf Toy House, Inc. v. Bertrand, 306 So.2d judicial thought and should take steps to protect their confidential 361 (La. Ct. App. 1975) (“Louisiana courts have refused to issue an and trade secret information by way of contract. Contracts should injunction against solicitation of customers of a former employer clearly spell out what information is considered confidential, and where the ex-employee did not use a secret list and merely relied they should contain restrictions against the use and disclosure of on memory.”). such information, regardless of whether it is contained in hard copy Courts holding the opposite way have generally relied or intangible format. Utilizing contractual restrictions of this nature upon the widely enacted Uniform Trade Secrets Act (“UTSA”). For may also have the secondary benefit of increasing the chance that example, in Al Minor & Associates, Inc. v. Martin, 881 N.E.2d 850, confidential information qualifies for trade secret protection. 853-54 (Ohio 2008), the Ohio Supreme Court indicated that the 9
  10. 10. GROWIN G TR E N D “Garden Leave” Emerging in the U.S By Christopher P. Stief § 367, which embodies the familiar rule from first year law school Contracts class that contracts for personal services may not be Can you require your key employees to give lengthy advance specifically enforced (whether the reasons behind that rule really warning of their intent to resign, then send them home as soon as are implicated by injunctive enforcement of a garden leave clause they give notice, and prohibit them from competing in any way until are open to debate, because the employee would not be forced to the notice period expires? The answer may well be, “Yes.” Long a go anywhere near the employer; rather, the employee would simply staple of United Kingdom employment agreements, so-called be at home). “garden leave” clauses are quietly emerging as a more common tool for American businesses to protect themselves against some The Benefits of Garden Leave Clauses of the harms caused by defection of key employees to competitor In its pure form, “garden leave” is a notice-of-termination firms. Many of the early adopters in the United States have provision like those involved in the Bear Stearns cases, requiring been financial services firms such as Bear Stearns, Citigroup, the employee to give substantial advance notice to the employer of Morgan Stanley and Cantor Fitzgerald, perhaps because financial the employee’s intent to resign. For the duration of the notice firms have a substantial employee presence in both the New York period, the employee is relieved of work duties and sent home and London finance markets. Many of these firms and others have to “work in the garden.” The employer agrees to pay the implemented thirty, sixty or ninety-day notice provisions for key employee full salary and benefits during the notice period, without upper level employees. But other industries are taking notice, as requiring the employee to come to work, and the employee is reported in a July 2008 article in Business Insurance magazine, correspondingly prohibited from commencing any competitive entitled “U.S. Brokerages Eye U.K.-Style ‘Garden Leave’ For conduct such as solicitation of clients or co-workers. This clause Defectors.” provides the employer with many of the benefits of a non-compete agreement by requiring the employee to remain “on the sidelines” “[B]ecause garden leave clauses offer for a bargained-for period of time, but reduces some of the financial hardship to employees that courts sometimes cite as a factor compensation during the employee’s militating against full injunctive enforcement of covenants not time on the sideline, the use of these to compete. The benefits to an employer are numerous, as long as the agreements can help blunt defenses employee at issue poses enough competitive risk that it is worth based on economic hardship by ensuring the expense for the company to pay him to sit on the sideline. Under a carefully drawn “garden leave” clause, for the duration of that the employee has income during the the notice period: leave period.” • the employee remains “employed” and as a result During the recent spate of departures following Bear Stearns’ continues to owe a duty of loyalty to the company; well-publicized problems, courts in Massachusetts and New York had a chance to interpret and consider the enforceability of notice • the employee loses access to records and information provisions signed by key Bear Stearns executives. As is so often systems, and consequently cannot view or copy the case in employee defection litigation, the results were varied confidential business information; and not readily reconcilable. In one case, Bear Stearns & Company v. Kym S. Arnone, a New York state court issued a preliminary • the employee is under an obligation not to transmit injunction against a former Bear Stearns executive who was any confidential or proprietary information to his future seemingly abiding by her ninety-day notice clause by staying home, employer, and confidential or proprietary information in but who admitted that she had been calling clients to inform the employee’s memory may be stale or forgotten by the them that she would be at Lehman Brothers after ninety days. The end of the notice period; court prohibited the executive from “soliciting, contacting or communicating” with clients. By contrast, a Massachusetts federal • the employee is barred from soliciting clients and/or court denied Bear Stearns’ request for a preliminary injunction co-workers to follow the employee to his or her future against a former executive, Douglas Sharon, who began work employer; and immediately at Morgan Stanley. Interestingly, the court found that Bear Stearns was likely to prevail on its claim for breach of the • the employer is given time to replace the employee and notice provision, but reasoned that ordering specific performance of time to allow that replacement to develop relationships the ninety-day clause would violate the principle that a person may with the departing employee’s client base and business not be forced to continue in an at-will employment relationship contacts free from competition from the departing against his will. The court cited Restatement (Second) of Contracts employee. A condensed version of this article was published in the November 2008 Issue of Corporate Counsel, and this article is reprinted here by permission. 10 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  11. 11. GROWIN G TR E N D In addition, a garden leave clause has the added attraction that it may well increase the chances of success for your company when it comes time to seek injunctive enforcement. The growth of garden leave clauses is, at least in part, a response to the frustration some employers have experienced with the unpredictability of enforcement of traditional non-compete clauses. Indeed, in Great Britain as well as the United States, a common judicial concern with some non-compete injunction cases has been the personal impact on the employee of enforcing a non-compete clause that might prevent a former employee from earning a living, particularly where the employee may be the sole breadwinner for his or her family. In fact, the Federal Rules of Civil Procedure and similar provisions in state court require the court to consider the impact of the proposed injunction on the defendant. But because garden leave clauses offer compensation during the employee’s time on the sideline, the use of these agreements can help blunt defenses based on economic hardship by ensuring that the employee has income during the leave period. covenant. A clause can be structured that works in a manner akin Garden Leave in the United States to unemployment compensation, under which the former employee Adoption of garden leave clauses in the United States has must document efforts made to obtain alternative employment, and included two conceptually distinct forms: (1) a pure form, in which the failure to document such efforts can be grounds for the former the concept of the “notice clause” is retained, and the employee employer to withhold compensation during the restricted period. remains a paid employee during the notice period, and (2) a This entails a substantial amount of ongoing entanglement with the “non-compete with pay” model, in which employment terminates, former employee, and some companies simply do not want to be but the company agrees to pay its former employee certain hounding former employees for documentation of their efforts to compensation during the restricted period, which may or may not find work each week. be conditioned on proof of the employee’s inability to find other work as a result of the clause. There is very little published case law Conclusion in the United States interpreting the pure form of notice provision, Garden leave notice clauses may well become more common such as the Bear Stearns cases, but published decisions generally in United States companies. The pre-existing “non-compete with have noted the reduced impact on the employee when interpreting pay” cases suggest that some American courts have begun to “non-compete with pay” agreements, although other factors accept the core concepts of garden leave. Yet companies must continue to be important. One court favorably cited the “safety net” remember that courts likely will analyze garden leave clauses as clause in an agreement between Campbell Soup and one of its restrictive covenants. This means they will be subject to the same former employees. See, Campbell Soup Co. v. Desatnick, 58 F. heightened scrutiny generally applied to non-compete agreements. Supp. 2d 477, 482 (D.N.J. 1999). The agreement to pay full salary When rolling out a new clause, it is important to pay attention to the during the injunctive period likewise was cited as a factor by the requirements of specific state laws, such as those governing courts in Minnesota Mining and Mfg. Co. v. Francavilla, 191 F. adequacy of consideration and scope of acceptable restraints. Supp. 2d 270, (D. Conn. 2002), Natsource LLC v. Paribello, 151 F. By following these guidelines, a well-drafted garden leave clause Supp. 2d 465, 470 (S.D.N.Y. 2001), Aetna Ret. Servs., Inc. v. Hug, has a better chance of enforceability under the laws of most states. 1997 Conn. Super. LEXIS 1781, at *30-31 (June 18, 1997), Maltby But there are key variations in the law from state to state, so there v. Harlow, Meyer Savage, Inc., 637 N.Y.S.2d 110, 111 (N.Y. App. is no one agreement that can be rolled out as a single national form. Div. 1997), and Lumex, Inc. v. Highsmith, 919 F. Supp. 624, 629 A successful roll-out of a garden leave clause requires a similar (E.D.N.Y. 1996). In some cases, such as the 3M case, payment to level of attention as a national roll-out of a non-compete clause: a the employee during the restricted period is conditioned on his single version can work in many states, but there are some key demonstrating that he was unable to find employment consistent states that may well need special treatment, including California, with his ability and education solely because of the non-compete Georgia, Louisiana, Wisconsin, and others. 11
  12. 12. I N PRA C TIC E Implementing a Trade Secrets Protection Program By Ron S. Brand and Robert Yonowitz trade secret, you will be in the best possible position to succeed in litigation stemming from this theft. This article discusses what might In the business world, information can make the difference constitute your company’s trade secrets, provides guidance on how between success and failure, or profit and loss. It is estimated to implement a proactive corporate program to protect trade that 70% of the value of an average business is held within secrets from improper and unauthorized access or disclosure, and its information systems. Although a tremendous amount of discusses the forensic steps you can take to catch an employee information can be obtained through legal means, such as stealing your company’s trade secrets. searching public records, some unfortunately believe that the best way to get at a company’s trade secrets or other confidential The Growing Magnitude of Trade Secret Theft information is to steal them. Since most businesses depend on In 1999, Fortune 1,000 companies lost more than $45 information, corporate espi- billion from the theft of trade onage is a problem of gigantic secrets, according to a survey proportions. The types of by the American Society for information unscrupulous indi- Industrial Security (“ASIS”) and viduals or competitors seek PriceWaterhouseCoopers. are client lists, financial data, The Pacific Northwest National research and development Laboratory, under contract by work, merger and acquisition the Federal Bureau of Investi- plans, and unannounced gation, developed an economic product specifications and loss model in an attempt to prototypes. Any of this infor- assess economic losses result- mation could greatly benefit a ing from trade secrets theft. competitor, while at the same The model showed that theft time the theft of this informa- of trade secrets caused over tion could have a devastating $600 million in lost sales and financial effect on a business. the loss of 2,600 full-time For example, the theft of a jobs per year. Today, statistics customer list (which is the drawn from various industry number one item stolen by employees), could be sold to a sources show that losses due to trade secret thefts are estimated competitor or used by the employee to start his or her own at $150 billion a year. Average employee trade secrets theft now company, which in either case would affect the profitability of the costs about $25,000 per incident, while a computer-assisted victim company. employee trade secrets theft runs about $430,000. Moreover, these figures do not take into account the fallout from trade secret theft. The fallout can include destruction of the company’s reputation, the Statistics drawn from various industry inability to stay in business, the damage to employee morale, and sources show that losses due to trade the time and energy taken from productive projects to deal with secret thefts are estimated at $150 billion the theft. a year Many Companies are Poorly Protected Despite the significant risks corporate espionage poses to When litigation over trade secrets ensues between employees companies, few companies spend the money needed to secure and companies, such as litigation related to enforcing confidentiality and protect their trade secrets and to train their employees to agreements, non-solicitation agreements and covenants not to safeguard their trade secrets. According to Dan Swartzwood, compete, the preservation of electronic evidence is nearly always corporate information security manager with Compaq Computer crucial to the outcome of the litigation. Too often companies that Corporation who testified at a Congressional Subcommittee become embroiled in such litigation find that the electronic evidence hearing, the vast majority of the money that companies spend on they thought they could rely upon simply no longer exists and security is spent on physical and electronic measures designed cannot be recovered. Or, companies find that the integrity of the to keep outsiders from penetrating corporate networks. However, evidence has not yet been preserved, so that it cannot be used according to the ASIS, 75% of the thieves are employees or effectively in such litigation. independent contractors. The reality is that companies do little to This article seeks to show you how to protect your company’s protect trade secrets from either the untrained or disgruntled trade secrets so that in the event one of your employees steals a employee. 12 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  13. 13. I N PRA C TIC E One reason why many companies do little to protect their trade • If the information relates to customers, whether the secrets is that they fail to ask themselves the following critical information is of the type that customers have in their question until after a trade secret problem arises: Of all the things possession and are willing to provide to competitors in I know about my company, what information would I not like to have the same industry; in the hands of my competitors? If companies would only ask themselves that question regularly and institutionalize a process • How difficult is it for competitors to duplicate the for identifying and protecting that information, much trade secret information on their own; theft could be avoided. Another reason is that many companies simply do not like to spend money on a problem they do not think • Whether the company intentionally or inadvertently they have. Unfortunately, most companies have this problem. disclosed the information in industry publications, trade shows or on its web site; and What are Your Company’s Trade Secrets? The first step in assessing whether your company is • If the information involves a compilation of data, how adequately protected, or in increasing the protections you have in much of the underlying data is available publicly and how place, is to determine which of your company’s information is difficult or unique is the compilation process. legally and practically protectable. There are two primary sources for defining trade secrets: statutes based on the Uniform Trade In the litigation context, the key to a company’s success or Secrets Act (“UTSA”), which many states have adopted with failure of its trade secret argument is whether reasonable attempts various twists, and common law factors traditionally used by courts were made to protect its trade secrets from improper and in various jurisdictions. Under the UTSA, a trade secret is defined unauthorized access or disclosure. As discussed more fully below, as follows: it is extremely important that you take proactive measures to protect your company’s trade secrets. The stories are legion of companies Information, including a formula, pattern, compilation, failing to prove trade secrets because they did not take reasonable program, device, method, technique, or process, that: steps to preserve their secrecy long before litigation occurs. By the (i) derives independent economic value, actual or time trade secret status is being advanced or challenge, whatever potential, from not being generally known to, and not steps were taken or not taken to protect trade secrets will be the being readily ascertainable by proper means by, other ones that usually determine the outcome of a case. persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are How to Implement a Trade Secrets Protection Program reasonable under the circumstances to maintain its Once you have identified your company’s trade secrets (or secrecy. perhaps more pointedly, the information for which you seek trade secret protection), the next step is to identify the specific physical, Using either the UTSA or common law factors, or a variation information technology and other security protocols your company of their themes depending on the state, courts have held that trade can take to protect such information. So, what can your company secrets may include such diverse information as pricing and bidding do to protect its trade secrets from thieves? The first line of defense formulas, feasibility forecasts, product designs, financial data, against any form of corporate espionage is to implement a trade contract bids, internal marketing profiles, and other methods and secrets protection program. This consists of a three-pronged systems by a company. Two of the most commonly litigated approach: (i) addressing employment relationships; (ii) controlling examples of potential trade secrets are customer lists and the access to your company’s trade secrets; and (iii) knowing your knowledge or training that a company claims it imparted to an company’s employees. employee and which it now wants to protect. The decisions handed down by courts across the country A. Address Employment Relationships demonstrate that virtually any type of information can be considered a trade secret, depending on the situation. Several i. Require Your Employees to Sign Confidentiality factors are relevant in assessing whether particular information Agreements, Non-Solicitation Agreements, constitutes a trade secret: Covenants not to Compete, and Assignment of Invention Agreements • How much time and effort did the company put into developing the information; As a basic first step, to the extent permitted by applicable law, you should have your company’s employees sign confidentiality • If the information relates to customers, whether the agreements, non-solicitation agreements, covenants not to information is available through directories, industry compete, and assignment of invention agreements. publications or on-line resources; A confidentiality agreement accomplishes four primary purposes: (i) it acknowledges that the employee has been or will be Continued on page 14 13
  14. 14. I N PRA C TIC E Continued from page 13 exposed to certain company trade secrets and other confidential and the internet; (ii) physical access to trade secrets; and proprietary information; (ii) it identifies this information with at (iii) telecommuting; (iv) employee privacy concerns; and (v) vendors least some degree of particularity; (iii) it prohibits unauthorized use and third party access to confidential information. or disclosure of this information; and (iv) it requires the return of all trade secrets and other confidential and proprietary information iii. Train Your Company’s Employees on separation from employment and requires employees to sign a termination certificate declaring that all trade secrets have Third, train your company’s employees and new-hires annually been returned. in basic security awareness, the company’s security policies A non-solicitation agreement prohibits a departing employee and procedures, their security responsibilities, and the proper from soliciting, directly or indirectly, the company’s customers or procedures for reporting and dealing with theft of trade secrets. clients, regardless of where they are located, to do business with Furthermore, consider including in the employees’ personnel the employee. The primary requirement for a non-solicitation files documents that show the steps taken to inform him or her agreement is to identify the customers or clients that an employee about the confidentiality obligations – such as a copy of the signed cannot solicit. As a general rule, courts do not require that a confidentiality agreement, receipt of the employee handbook and specific geographical territory be included in the agreement, other key policies, a review of the trade secrets protection program, although various states do differ on this issue. In addition, when and a record of attendance at training meetings that address the determining whether a non-solicitation agreement is reasonable, need to protect trade secrets. courts will often consider the extent to which the employee had actual contact with the customers or clients. Some states, like California, are more restrictive and require that, in order to be Employee terminations create a particu- enforceable, a non-solicitation agreement must be coupled with a larly likely window for loss of trade strong interest in confidential customer or client information. A covenant not to compete – also known as a “non-competi- secrets. Failure to take reasonable steps tion agreement” or “non-compete agreement” – protects two in the event of a termination can result in aspects of corporate life: (i) customers or potential customers, and business interests that a company has spent considerable effort loss of critical information, or loss of trade developing and which are vital to its financial health; and secrets protection. (ii) confidential information, which, if possessed, used or disclosed to unauthorized third parties could result in significant financial harm to the company. Most courts will enforce covenants not iv. Protect Your Company’s Trade Secrets Upon an to compete, as long as they are drafted in accordance with state Employee’s Termination law. As a general rule, covenants not to compete are enforceable only to the extent that they protect the legitimate business interests Employee terminations create a particularly likely window for of companies (such as protecting trade secrets) and they contain loss of trade secrets. Failure to take reasonable steps in the event reasonable time and territory restrictions. To be reasonable as to of a termination can result in loss of critical information, or loss of territory, a covenant not to compete should at most only address trade secrets protection. In order to preserve your company’s trade that territory in which the company actively conducts business secrets, the termination or resignation of an employee with access (although it is safer to restrict the territory to that in which the to this highly sensitive information should trigger related security employee was actively engaged). To be reasonable as to time, a precautions. good rule of thumb is that most courts will enforce restrictions up to You should immediately disable the accounts and access two years; three to four years will be closely scrutinized and held to privileges of the terminated employee, and change all passwords, a more rigorous standard; and five years or more will be virtually remote access codes, and, in appropriate instances, even VPN unenforceable (except perhaps in a sale-of-business context). and dial-in numbers immediately at the time of termination. An assignment of invention agreement is a provision or Also, you should “unplug” a terminated employee’s computer separate document that “assigns” to the company any inventions or systems and remove dial-up modems from the terminated new discoveries made by an employee or independent contractor employee’s workstation. Such actions will prevent the employee during the course and scope of his or her employment or work from accessing files after leaving. Examine the employee’s for hire. Some states, such as California, regulate the use of computer/laptop before he or she leaves to determine if the assignment of inventions agreements by requiring certain notice to employee has accessed and/or copied sensitive information employees (Lab. Code § 2870). in recent months. Conduct an exit interview and remind the employee during the exit interview of his or her continuing duty not ii. Implement Appropriate Security Policies to disclose trade secrets, and reference any documents to that effect. At the exit interview, request that the employee return all Second, implement policies, to be signed by all of your company property. Consider using a checklist for returning company’s current employees and new-hires, addressing the company equipment, keys and confidential information. You might following areas: (i) the use of computers, e-mails, voice mail also consider obtaining from the departing employee information 14 The Employee Defection & Trade Secrets Digest | 2009, No. 1
  15. 15. I N PRA C TIC E about his or her new employer, which could help you determine the potential risk of any unauthorized disclosure or use of trade secrets. B. Control Access to Your Company’s Trade Secrets Controlling access to your company’s trade secrets means keeping the trade secrets confidential and providing access only to those having a legitimate need for it. This is especially important in protecting trade secrets because one or more critical elements of proof under most state laws is showing that steps were taken to protect the secrecy of the information. i. Secure the Physical Environment Examples of how you can secure the company’s physical environment include: • Restricting access to servers, routers, and other network technology to those whose job responsibilities require access; • Installing surveillance equipment to monitor access to servers and other critical systems; • Keeping wire closets, server rooms, phone closets, and other locations containing sensitive equipment locked at all times; ii. Manage Access to the Company’s Computer • Keeping an inventory of the equipment and periodically System Resources checking for missing equipment; Examples of how you can manage access to the company’s • Placing locks on computer cases to prevent hardware computer system resources include: tampering; • Implementing passwords for all employees for access to • Locking file cabinets and offices that store sensitive all critical system resources; information; • Making sure passwords are set up with multiple • Designating all documents containing trade secrets characters (including numbers and letters); or confidential information as “confidential” and implementing procedures to help ensure that all • Requiring employees to change their passwords at least documents deserving the “confidential” designation are every 60 days and preventing them from reusing old appropriately marked when initially created; passwords; • Cross-shredding all paper documents containing confi- • Periodically training employees in password selection dential information before trashing them; and protection and training them not to tell their passwords to others; • Securing all dumpsters and posting “NO TRESPASSING” signs; and • Implementing controls on employees’ use of the internet, the sites they can visit, and the software they can • Making sure all discarded magnetic media are erased. download; and While it is not necessary for your company to utilize every one • Monitoring and logging employees’ internet actions. of the above-mentioned protocols in order for information to qualify as a trade secret, your company’s failure to take routine physical precautions may lead a court to deny trade secret protection. Continued on page 16 15