Improvements in the job market over the last several years have increased employee mobility among businesses. As a result, I am seeing a substantial uptick in cases where employees have elected to get a “jump start” on their new jobs by absconding with confidential and proprietary information.
This article discusses:
- The boundaries of what employees may take from their former employers when embarking on new jobs, or starting new businesses.
- Preventive measures to avoid the theft of company information.
- How to stop an ex-employee in their tracks when there has been a theft of confidential or proprietary information.
THE RULES OF THE GAME
Employees who take customer lists, marketing data or strategies, website designs, manufacturing processes, or other company information are often found to have misappropriated “trade secrets.” A trade secret is defined as information, including a formula, pattern, compilation, program, device method, technique or process that both:
(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use.
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
In Arizona, “misappropriation” is defined as either:
(a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.
(b) Disclosure or use of a trade secret of another without express or implied consent by a person who either:
(i) Used improper means to acquire knowledge of the trade secret.
(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.
(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
“Improper means” is defined as including “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.”
To state a claim for misappropriation of trade secrets, one need not allege that the person/party itself stole the trade secrets; it is sufficient to allege that the party is using trade secrets that it knows or has reason to know were acquired through improper means. In other words, misappropriation is not limited to the initial act of improperly acquiring trade secrets; the use and continuing use of the trade secrets is also misappropriation.
THE FINE LINE BETWEEN TRADE SECRETS AND PUBLIC INFORMATION
A customer list may be entitled to trade secret protection when it represents a selective accumulation of detailed, valuable information about customers — such as their particular needs, preferences, or characteristics — that naturally would not occur to persons in the trade or business. On the other hand, matters of public knowledge are not trade secrets. The subject matter of a true “trade secret” must be sufficiently novel, unique, or original that it is not readily ascertainable to competitors.
Whether information constitutes a trade secret is decided on a case-by-case basis. For an understanding as to how the law is applied, observe the following case rulings:
- specific policyholder information, including amount of outstanding loans and dividends accrued, was trade secret
- general knowledge of business and customers acquired during employment was not trade secret
- customer list containing detailed information about customers’ “personality traits, hobbies and likes, credit history, buying habits and pricing agreements” was trade secret
- customer list containing “pricing information and knowledge about particular roofs and roofing needs of customers” was trade secret
- customer list containing client names, “farm description, past insurance coverage, and loss histories” was trade secret
- customer list was trade secret when employer winnowed potential customers down to the “elite” 6.5%
- customer list was not trade secret when compilation process was “neither sophisticated nor difficult nor particularly time consuming,” market was highly competitive, and customers did not have exclusive business relationships
- to be protected as a trade secret, customer list must be “more than a listing of firms or individuals which could be compiled from directories or other generally available sources”
STOPPING WOULD-BE MISAPPROPRIATION: AN OUNCE OF PREVENTION IS WORTH A POUND OF CURE
The best means to protect your company’s trade secrets is not after the proverbial toothpaste is out of the tube, but rather through implementing vigorous and sustained measures to ensure the secrets are not taken in the first instance.
Contact counsel to develop a solid program to protect your trade secrets. Among other things:
- Have employees sign non-disclosure agreements
- Consider non-compete and non-solicitation agreements
- Embed in employee handbooks non-disclosure and other language regarding the confidentiality of company information
- Protect and secure information stored in your company computers and devices
- Monitor employees’ use of company information
- Perform “self-audits” from time to time to ensure that management and employees have not been lax or loose with company information
- Maintain password and information security
- Establish procedures for on-boarding/off-boarding employees
- Consider marking certain documents and materials as confidential
CLAIMS AGAINST EX-EMPLOYEES WHO HAVE ABSCONDED WITH TRADE SECRETS OR OTHER CONFIDENTIAL INFORMATION
In most cases it is wise to send the ex-employee, and possibly their new employer, a “cease and desist” letter. If this proves ineffective and/or significant damage has already been done, employers can seek an injunction to stop the ex-employee from using the information and, separately, seek damages arising from the misappropriation.
In counseling businesses as to whether it is “worth it” to file a lawsuit, I engage in an interactive process with management designed to focus on (1) the damage which has occurred to date; (2) the potential for future business losses; and (3) the risk that other employees or ex-employees will be emboldened into similar misconduct by inaction. This cost-benefit analysis is a perfect way to understand the facts, law, and develop a solid plan going forward.
If you are interested in a methodology for dealing with any kind of contract dispute, read “How to Successfully Handle Any Type of Contract Dispute.”
For further information on contract or other employment law topics, contact Art Bourque at Bourque Law Firm.