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By Sterling Miller
Sterling Miller has more than 20 years of in-house legal experience as General Counsel, Corporate Secretary, and Chief Compliance Officer of Sabre Corporation and Travelocity.com. He currently is Senior Counsel to Gober Hilgers and writes the Ten Things You Need to Know as In-House Counsel blog.
How’s this for an in-house counsel’s nightmare? Your Chief Operating Officer informs you that Ms. Smith is leaving the company to work for a competitor, taking with her knowledge and copies of many confidential projects and strategies, including key marketing strategy presentations. You tell the COO not to worry because Ms. Smith signed a confidentiality agreement. Then outside counsel alerts you that the company’s failure to do a number of things necessary to protect some of its trade secrets may mean you cannot prevent Ms. Smith from divulging those items to her new employer—your competitor.
Pretty rough day at the office, right? You can find yourself in this exact scenario if the company and legal department failed to have the right agreements, policies, training and plans in place. While there is never a 100% guarantee, in-house counsel can do a number of things to increase the company’s ability to protect itself. The following practical tips help ensure your protection program works.
Know what a trade secret is. Your bosses probably think everything the company does is a trade secret. Unfortunately, that is not the case. The definition can vary by state (in the U.S.) or by country. Good shorthand for what constitutes a trade secret is: Any information you would not want your competitors to have. For an excellent discussion of what is (or is not) a trade secret, see Thad Felton’s “What is a Trade Secret?” Some examples of likely trade secrets include new business models, customer and supplier information (especially around price), marketing strategy, processes and formula, and other confidential business information.
Keep it secret—every day. If the company doesn’t take appropriate steps to keep information confidential it can lose the ability to claim such items are trade secrets. In the example above, if the company handed out copies of its future marketing plans to customers without any type of non-disclosure agreement in place or failed to label the plans as “confidential,” there may not be any way to keep Ms. Smith from handing those plans over to her new employer. Courts generally look at:
Catalogue your trade secrets. You need an inventory of all of the company’s trade secrets, excluding patents or trademarks, which are already protected by law and are publicly disclosed and therefore not confidential. Interview key company employees and executives and your in-house legal team. Compare what is on their lists of trade secrets against the definition above. An inventory helps you identify what steps are needed to keep those specific items confidential and protected and be clear with the business what items are not considered trade secrets (i.e., set expectations so there are fewer painful discussions about what the COO thought was a trade secret vs. what actually is a trade secret). For a great discussion of how to inventory trade secrets, economic impact of theft and likely threats, see the 2014 PwC report “Economic Impact of Trade Secret Theft.”
Have the right agreements in place. Core to any protection strategy is ensuring several key agreements are in place and regularly reviewed and updated. First, courts want to see such agreements in place when analyzing whether the company took the proper steps to maintain confidentiality. Second, provisions drafted 10 years ago probably do not cover new situations and circumstances, such as social media or smartphones. Now is a good time to review and refresh your contractual protections (and don’t forget to consider having the agreements available in foreign languages to increase your ability to enforce the provisions outside your home country). Core agreements include:
In the example above, if the company has a valid non-compete in place, it is unlikely Ms. Smith is heading out the door to work for a competitor in the first place.
As you review or create agreements, keep in mind that their enforceability (especially non-competes) can vary wildly depending on the jurisdiction. Do not take comfort in a “one-size-fits-all” approach. Spend a few dollars for outside counsel to participate in the update process to best ensure that each agreement is state of the art and is enforceable in the locations/jurisdictions you care most about.
Have the right policies in place. The next step is to ensure your policies educate employees and prevent trade-secret leaks and to ensure you can convince a court that the company took the right steps to keep its trade secrets “secret.” Policies should include discussions about:
This is another area where spending money on outside counsel is a worthwhile investment.
Conduct training. It’s one thing to have the right agreements and policies in place, but if your employees are not taught nor regularly reminded how to protect trade secrets, a court may not be convinced that you are investing enough to protect them. The best training includes examples of things your company believes are trade secrets. Training should be conducted for all new hires and yearly for other employees. You can conduct most training via an online program. Better yet, add several live training events every year (including webcasts) where members of the legal department discuss trade secrets and confidentiality directly with employees. A number of third-party vendors can help set up an online training program. Likewise, regular company-wide email reminders from the legal department about trade secrets and confidentiality will be helpful. Be sure to require that employees acknowledge they received the message and understand its contents. You and your team should be on the lookout for potential problem areas, including giving reminders—gentle at first—to colleagues who trip up (e.g., forget to mark confidential documents properly). View these as teaching moments and an opportunity to provide additional value to the company. Your ultimate goal should be to develop a strong company-wide culture around confidentiality and protecting trade secrets.
Mark confidential documents as “Confidential.” One of the easiest ways to help ensure that confidential documents and materials will be treated as such is to develop a process whereby employees clearly mark such materials as “Confidential” or “Contains Trade Secrets” or some other red flag that makes it absolutely clear that the materials should be treated with care. A reminder to attendees before a meeting involving confidential information, and picking up and properly disposing of any confidential materials handed out at a meeting (assuming they are not otherwise needed by the attendees) go a long way toward protection.
Recognize warning signs. Management, legal, HR and other personnel should be trained to recognize “red flags.” Unhappy employees are among the biggest risks. For example, employees who received layoff notices, were passed-over for promotion, refused exit interviews or are required to follow a PIP (performance improvement plan) may warrant closer observation. The FBI’s “Insider Threat: An Introduction to Detecting and Deterring an Insider Spy” says it is a warning sign when an employee:
Do exit interviews. Departing employees constitute one of your biggest risks for trade-secret theft. Work with the HR team to develop an exit checklist that ensures:
If there is no non-compete in place, consider a short, non-hostile business letter to the competitor’s legal and HR departments explaining the departing employee’s confidentiality obligations, that you expect their help in ensuring they are honored and that you will take steps to ensure they are.
Have a plan. You have your new agreements, state-of-the-art policies, and a well-trained work force, but it’s all for naught unless you have a plan for what to do when your trade secrets are threatened. When developing a plan you should:
Being prepared for a trade-secret breach should be one of your key goals for the year. Prevention is key, because once a trade secret is revealed, it may be too late to undo the harm. If you and your team haven’t thought about this issue in a while, now is the perfect time to dust things off. This is a tricky area of the law, so experienced outside counsel can add a lot of value to your efforts.