protecting your valuable information€¦ · what are trade secrets? trade secrets are comprised of...

LOS ANGELES NEW ORLEANS NEW YORK SACRAMENTO SAN FRANCISCO WASHINGTON DC

ATLANTA AUSTIN BOSTON CHICAGO DALLAS HOUSTON LONDON

WHEN KEY EMPLOYEES LEAVE:PROTECTING YOUR VALUABLE INFORMATION

Jennifer A. KenedyP. Russell PerdewKelly J. Thurman

ATLANTA AUSTIN BOSTON CHICAGO DALLAS HOUSTON LONDON LOS ANGELES NEW ORLEANS NEW YORK SACRAMENTO SAN FRANCISCO WASHINGTON DC

PROTECTION OF INTELLECTUAL PROPERTY• Copyrights and trademarks protect the expression

of information, but not the information itself.

• Patents protect information, but are difficult to obtain, require public disclosure of the information, and provide protection for only a limited amount of time.

• TRADE SECRET PROTECTION protects information for which copyright, trademark, and patent protection is unavailable or insufficient.


WHAT ARE TRADE SECRETS?Trade secrets are comprised of information that is: • not generally known• developed through the investment of resources• protected from disclosure through reasonable

measures, and• would provide a competitor with an unfair

competitive advantage because they did not make the same investment of resources to develop the information.


EXAMPLE: COCA-COLA FORMULA

• Copyright could have prevented re-producing the formula, but not using the underlying information.

• The formula could have been patented, but that would have only lasted 20 years.

• Because Coke decided to keep the formula as a trade secret, however, the formula is protected to this day, and can remain protected indefinitely.


TRADE SECRET PROTECTION BASICSFour Steps to Establish Trade Secret Protection:

1) IDENTIFY the information you want to protect;

2) Take steps to PROTECT the trade secrets;

3) INVESTIGATE any potential theft or misuse of trade secrets; and

4) LITIGATE to protect trade secrets where necessary.


IDENTIFYING THE INFORMATION YOU WANT TO PROTECT


IDENTIFYING POTENTIAL TRADE SECRETS

Trade secret information generally meets two criteria:

• valuable because it is not generally known by competitors or by the public; and

• reasonable efforts are made to keep the information confidential.

Boiled down, the key concept is“VALUABLE SECRECY.”


EXAMPLES OF TRADE SECRETS

• Customer/account/client lists and related information (preferences, account information, expirations)

• Scientific data (chemical process, manufacturing methods, machines, devices)

• Business information (strategic/marketing plans, financial information, pricing)

• Computer programs and/or data compilations

• Specialized knowledge


MEASURING THE ECONOMIC VALUE OF SECRECYEconomic value =

• You invested a significant amount of time and money to develop the information; and/or

• Competitors would gain an unfair advantage if they were given access to the information.


PUBLICLY-AVAILABLE INFORMATION

Although information generally has to be “secret”to qualify as a trade secret, sometimes a trade secret can contain publicly-available information.


CUSTOMER LISTS AS TRADE SECRETS• Is the identity of customers contained on the list

generally unknown?

• Does the list contain key contacts within a corporate customer?

• Does the list contain information about customer preferences, buying history, or other non-public information that would be useful for a competitor?

• Is it the compilation of the list that makes the list valuable?


PROTECTING TRADE SECRET INFORMATION


PROTECTING POTENTIAL TRADE SECRETS

To seek legal protection for information, you must take reasonable steps to keep the information secret. You don’t have to do everything possible, but you need to take reasonable measures.

Protecting trade secrets should involve restrictions on both:

(a) the trade secret information, and(b) the employees who will receive and use

the information.


• Keep copies of the information in locked file cabinets or on password-protected computers.

• Limit access to areas of your office and computer network where information is stored and used.

• Place limits on copying and distributing information.

• Require responsible handling of the information.

• Use e-mail filters to prevent the sending of confidential information,and put paper copies on paper that prevents photocopying.

• Place conspicuous “confidential information” banners in the header, footer, or elsewhere on documents containing trade secret information.

Store the information securely, like you would cash or any other valuable.

INFORMATION RESTRICTIONS


• Adopt a policy that describes the information that you consider confidential, and describes the limitations on use of the information.

• Communicate and conduct training on the policy frequently.

• Require employees to sign agreements in which they acknowledge the confidentiality policy, and agree to maintain the confidentiality of trade secret information, both during and after employment.

• Conduct exit interviews of all departing employees to remind them of their obligations under the confidentiality agreement that they signed.

• Send confidentiality agreement to competitor/new employer immediately.

EMPLOYEE RESTRICTIONS


INVESTIGATING POTENTIAL TRADE SECRET THEFT


RESPOND IMMEDIATELY!

• Often, the value of a trade secret is lost once a competitor has access to it, so you need to move quickly to prevent or limit that access.

• Courts will be much less willing to protect trade secrets if you cannot demonstrate that you acted diligently in trying to protect information.


WHAT SHOULD THE INVESTIGATION INVOLVE?

The investigation should focus on finding any improper use or transmission of protected information.

• Develop a checklist to respond to a report of potential theft/misuse, or the departure of an employee in a competitively-sensitive position.

• Place the responsibility for conducting the investigation on one person or a small group of people to maximize uniformity.

• Check building access logs and electronic access or print logs to see if there are any unusual patterns.

• Image the employee’s hard drive or relevant sections of a network drive, and stop any automatic deletion of relevant information. Search the computer and e-mails for any indication that information was improperly copied or e-mailed, and for evidence of communications with competitors.


Interview the employee involved. Present suspicious information and ask for an explanation. A good explanation can reduce time and money for further investigation.

Reach out to customers to determine if the employee has been soliciting customers on behalf of a new employer.

Talk to competitor. The competitor may be unaware of misuse and interested in acting responsibly.

WHO SHOULD THE INVESTIGATION INVOLVE?


LITIGATING TO PROTECT TRADE SECRET INFORMATION


BEGIN THE LITIGATION PROCESS IMMEDIATELY

• You must act quickly to protect information, and to demonstrate diligence to the court in that matter.

• Show in future matters that you have consistently acted to protect trade secrets.

• “No Tolerance” Policy = Deterrent Effect.• What state you are in dictates strategy.


TYPES OF RELIEF AVAILABLEYou can seek two kinds of relief:

• INJUNCTIVE RELIEF to prohibit a former employee and/or a competitor from disclosing or using information for the benefit of a competitor, and

• DAMAGES caused by the employee’s improper disclosure or use of information.

You can seek both types of relief at the same time.


THE NATURE OF INJUNCTIVE RELIEF

An injunction generally does two things:

1. Prohibits the employee from using or disclosing trade secret information; and

2. Requires the employee to return all trade secret information.

You can get a temporary injunction within days of the employee leaving, pending a fuller

presentation of the evidence.


WHAT DO YOU NEED TO SHOW TO GET AN INJUNCTION?

You will need to demonstrate:

1. You will likely be irrevocably damaged, such that the harm done cannot be fixed by an award of monetary damages, if the employee is permitted to use or disclose the trade secret.

2. You have a reasonable likelihood of ultimately winning on your claims after the full hearing. (Texas: probable right of recovery)


Your request for an injunction must be supported by evidence, typically affidavits from knowledgeable individuals.

Examples of evidence to be prepared when requesting injunctive relief can include:

• An affidavit from an IT professional who located electronic evidence of the theft;

• An affidavit of customer(s) who can report having been solicited by an employee on behalf of a competitor;

• Relevant written agreements and policies;

• Written solicitations sent by the employee to customers;

• Copies of e-mails used by the employee to transmit trade secret information;and

• Redacted versions of the trade secrets to demonstrate the type of information but not the content.

EVIDENCE IN SUPPORT OF INJUNCTIVE RELIEF


EVIDENCE ESTABLISHING THAT A TRADE SECRET EXISTSYou will also need an affidavit from a management level business person who can establish that the information should be considered a trade secret, including:

– A general description of the information;– The investment made to develop the information;– The advantages a competitor would gain if given access

to the information; and– The steps that are taken to keep the information

confidential.


MONEY DAMAGESTypes of compensation you can receive include:• Lost profits from misappropriation;• Compensation for money invested to develop trade secret

information;• Disgorgement of profits earned by the employee and the

competitor;• Disgorgement of earnings from the former employee if

disloyal; and• Punitive damages or attorneys’ fees for willful conduct and

for breach of contract in Texas cases under Tex. Civ. Prac. & Rem. Code § 38.001 et. seq.


TYPES OF CLAIMS AVAILABLE

Different types of legal claims can be asserted to protect trade secrets, depending on what State you are in and what steps you have taken to protect the information.

The type of claim you make will influence the type(s) of relief that you can ask for.


COMMON CLAIMS

• Misappropriation of Trade Secrets

• Breach of Contract

• Intentional Interference with Contract

• Breach of Fiduciary Duty / Duty of Loyalty

• Computer Fraud and Abuse Act


MISAPPROPRIATION OF TRADE SECRETS• Use where a former employee, and/or his new employer,

are using your trade secrets. No contract necessary.• Threatened misappropriation can justify injunction.

• Some states have adopted the Uniform Trade Secrets Act (UTSA). Other states - common law trade secret claims.

• Texas: No UTSA, generally follow Restatement definition; TX Criminal Statute (Penal Code Section 31.05) may apply

• Texas: Heightened scrutiny/penalties in personnel placement industry - own statute protects “service files”

• In UTSA states, you can generally get attorneys’ fees or punitive damages if you can show willful misappropriation.


BREACH OF CONTRACT/ INTERFERENCE WITH CONTRACT• Use if a former employee is violating a confidentiality agreement. • Tortious interference with contract against a competitor who

knowingly assists your former employee in breach.• Many states restrict the enforceability of employment agreements.

Maximize the potential for enforcement by:– Requiring employees to sign agreement at the start of his employment

rather than during employment;– Providing the employee some benefit beyond continued employment

in return for signing the agreement; – Requiring that a new agreement was signed after any significant

changes in the employment relationship.• Tortious interference claim requires showing that the competitor

knew about the contract, so send them a copy as soon as possible.


BREACH OF CONTRACT-- TEXAS NON-COMPETITION AGREEMENTS• Recent shift in how Texas courts interpret

non-competition provisions in employment at-will situations.

• Non-competition agreements should not be as difficult for employers to enforce as in the past.


BREACH OF CONTRACT-- TEXAS NON-COMPETITION AGREEMENTS• Alex Sheshunoff Management Services,

L.P., v. Kenneth Johnson and Strunk & Associates, L.P., 209 S.W. 3d 644 (Tex. 2006).

• Issue – When does the consideration (confidential information) needed to support a non-competition agreement have to be exchanged in order for there to be an enforceable agreement?


BREACH OF CONTRACT-- TEXAS NON-COMPETITION AGREEMENTS• Mann Frankfort Stein & Lipp Advisors, Inc. v.

Fielding, No. 07-0490, Texas Supreme Court, April 17, 2009.

• Issue: Does an employer have to make an express promise to provide the employee with confidential information in the agreement in order for there to be an enforceable non-competition agreement?

• Focus should now be on the requirements of the Texas Covenants Not to Compete Act with respect to the reasonableness of the terms of the agreement.


BREACH OF FIDUCIARY DUTY / DUTY OF LOYALTY• Use if your employee began misappropriating trade secret

information while still working for you.

• Some states also allow you to bring a claim against the new employer for aiding and abetting a breach of fiduciary duty or the duty of loyalty if they actively assisted the employee to misappropriate the trade secrets while they were still employed by you.

• This claim can allow you to recover any wages earned by the employee during the period of disloyalty.


COMPUTER FRAUD AND ABUSE ACT• This claim may be available if your employee is accessing

documents on your computer system that they are not authorized to access.

• This claim is also available where your employee is authorized to access the document, but accesses it for an unauthorized purpose.

• You will need to show that you have incurred investigative and/or remedial costs resulting from the employee’s unauthorized access to bring this claim.

• This claim can provide federal jurisdiction over your lawsuit.

• The statute does not provide for punitive damages or attorneys’ fees.


CONCLUSION

To take advantage of trade secret protection, you must:

(1) Clearly identify what information should be considered trade secret information;

(2) Develop/implement plan for diligently protecting trade secrets;

(3) Develop protocol for investigating any potential theft of the trade secrets; and

(4) Aggressively and consistently litigate to protect the trade secrets if needed.


CONCLUSION

By implementing a successful trade secret program, companies can:

– Save profits which otherwise would have been lost to competitors through the use of trade secret information; and

– Deter employees from leaving with trade secret information if they know that any theft of trade secrets will be fully and aggressively pursued.

– Deter competitors from encouraging employees to take trade secret information.


CONCLUSION

Protecting trade secrets is an ongoing process that requires continued attention and diligence, but the rewards are large

and quantifiable.


WHAT WE DO FOR CLIENTS• New hire reviews - can we hire this person?• Draft non-solicit, non-compete, non-disclosure,

confidentiality provisions in sales agreements and employment agreements

• Customized trade secret theft prevention protocol • Investigate theft of information - departure protocol• Litigate nationwide to protect clients from theft of

trade secrets and defend against claims• In past 2 years, cases in AL, AZ, CA, CO, CT, FL,

HI, IL, MD, MA, NH, NY, OH, TX, VA


CONTACT INFORMATION

• Jennifer Kenedy(312) [email protected]

• Rusty Perdew(312) [email protected]

• Kelly Thurman(214) [email protected]

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