This article was originally published in Management Review Magazine, American Management Association, March 1993
An employee is leaving to work for a competitor. What can you do to prevent valuable trade secrets from walking out with him?
The distressed manager of a company with manufacturing trade secrets has just been given summary notice that a key employee is departing to join a competitor. She fears the departing employee will take sensitive information with him to compete unfairly against the company. She calls upon her legal counsel.
"Was the employee required at the time of hiring to sign a confidentiality agreement?" asks counsel. "No," she answers. "Were any of these sensitive documents labeled 'confidential;" counsel inquires. She sheepishly replies, "No. Everyone 'understood' that these materials were confidential."
Having a good idea what to expect next, counsel asks to see the portion of the company policy manual dealing with maintaining the confidentiality of information. No such luck. Were there, at least, short memoranda circulated to employees reminding them of their duty to maintain the company's proprietary information as confidential? Alas, she admits, even that 10-minute exercise was not undertaken.
By now, the manager senses the lost opportunities she had to protect her company's valuable information and wonders if all is lost. Counsel reassures her that it is not. However, they now are dealing with a problem of trade secret "first aid." They are forced to focus on what immediate steps can be taken to prevent or mitigate disaster.
Unfortunately, I encounter this situation all too often in my law practice. But before I discuss what trade secret first aid is available, I need to describe what we are talking about. A trade secret is any information that has economic value by virtue of its not being generally known to competitors, so long as reasonable efforts are undertaken to keep the information secret.
Manufacturing and start-up companies have many trade secrets, particularly in the areas of research, databases and process technology. All companies-especially those with a salesforce--have other valuable confidential business information as well.
Considerable effort and expense is invested in contacting potential customers and developing a business relationship with them. Cold calls to prospects rarely result in an immediate, successful contact. Continued efforts over time, including market research, often are needed to locate and develop rapport with the real decision maker. Time and money translates to the bottom line. A customer list is not simply a list of Fortune 500 companies. It often contains a number of pieces of valuable information: a concentrated summary of leads who have demonstrated an interest or need in the product; the name of the main contact person at the customer organization, without going through the three or four layers you had to go through; the buying history of the customer, reflecting who is a key account and thus a key target; pricing information, which may affect one's bidding strategy; and information about one's suppliers and sources of materials.
Other business information, such as marketing plans and financial information, also are obvious documents to protect. Even information of what does not work or who is not a good prospect can be a trade secret: Why give a competitor free information of the blind alleys he should avoid?
Allowing competitors to use your confidential information is costly. A competitor does not need to expend the same resources you spent, and thus has a lower overhead to compete against you. By spotting opportunities from your confidential information, it can rifle shot your best customers and avoid wasting efforts on less likely prospects. Trade Secret First Aid
What can you do the very day you learn of the departing employee's plans? What can and should you do, perhaps even before you are able to get in touch with your lawyer? The exit interview may be your only, or the last best, opportunity. Meet with the employee before his or her departure and think, "DRAW"--which is an acronym I devised to cover the four main points you should cover in an exit interview to protect trade secrets:
D - Remind the employee of his or her duty to preserve the confidentiality of sensitive information, even after termination of employment. Give specific examples of any information the employee may have.
R - Obtain the return of all company materials.
A - Request that the employee sign an agreement/acknowledgement, stating that he or she will honor these obligations. Even if the employee refuses, you have lost nothing in asking.
W- Ask where the employee is going, what the employee will be doing there and how the employee will be able to avoid using the company's trade secrets in carrying out those tasks.
There are other self-help measures you will be tempted to take. Be careful. It may be a good idea to contact the people who have hired the departing employee to "warn" them of their access to your trade secrets. However, you better consider consulting with a knowledgeable attorney first. You may unwittingly engage in libel against the employee, and no one wants to face the return fire of a countersuit if this gets messy. Beware of threatening the departing employee with going to the police. That may constitute criminal extortion. In some states, like California, you cannot even withhold the remaining pay or commissions, even if you know you have suffered grievous financial loss by the employee's actions. Of course, you should begin an immediate internal investigation of what may be missing or what has been accessed. You may even wish to call customers to learn if they have been contacted by the departing employee, but be careful about making accusations. Threat of Litigation
In the face of a serious threat, if your departing employee or rival appears uncooperative, litigation may be the only alternative. Access to the courts gives you some potent weapons. You may be able to obtain an immediate temporary restraining order and/or preliminary injunction. Such an order can bar use or disclosure of secret information pending trial, at which time such an order can be made permanent. Return of any materials taken or improperly withheld is also possible in such an order. Additionally, of course, you may seek damages for profits you have lost or anticipate losing. Punitive damages is another remedy and even an award of your company's attorneys' fees is a possibility in some states.
But maybe you forgot how we got to this dilemma. "Two Ounces" of Prevention
Become proactive. Before trouble strikes, put into place a security program such as the following: Most easily, remind employees in the personnel manual and in periodic memoranda that you have certain specified trade secrets and set forth security procedures that should be followed. Mark as "confidential" all proprietary documents, selectively and consistently. Distribute confidential documents on a need-to-know basis. Require all involved employees to sign a confidentiality agreement when hired. Make key areas more secure. Monitor visitors' access. Shred sensitive documents when they are no longer needed. Centralize the review of information which personnel propose to divulge in publications or speeches. Seek a consultant about installing protective devices in your computer software. Record and date engineering notebooks in bound volumes. Require vendors, consultants, licensees and joint venturers to sign confidentiality agreements where appropriate.
If you have done all this, you can conduct the "exit interview" with each departing employee without speaking through clenched teeth.
Robert Payne is a partner in the intellectual property law firm of LaRiviere, Grubman & Payne, located in Monterey and San Jose, California. He practices intellectual property litigation, primarily in the patent and trade secret fields.