New Year, New Trade-Secrets Issues

Now that New Year’s is behind us, companies face one of the riskiest times of the year for protecting their trade secrets and proprietary information.

As I’ve discussed in the past, employee departures present perhaps the greatest risk of unwanted trade-secret disclosure. And many employees who want to leave wait until after they receive their year-end bonus. With this increased employee movement comes an increased risk of misappropriation.

This is a great time of year to review employee intake and exit procedures. Departing employees need to be made aware of their legal obligations regarding the company’s proprietary or confidential information. This is best done through an exit interview. Whenever possible, a departing employee should sign an acknowledgement of her obligations.

During the exit interview, the company should learn as much as possible about where the employee will be working next. This helps identify situations where proprietary information is at risk. In such situations, an attorney should be consulted. For more details about exit interviews, see this prior post.

Similarly, when hiring new employees, companies need to make sure the new employees will not be violating any restrictive covenants signed with former employers. During the hiring process, potential new hires need to be asked directly whether they have signed any such agreements. And once hired, they should confirm this in writing. If a company wants to hire someone who signed a restrictive covenant with a former employer, the company must consult with an attorney first.

If the new employee will be bound by a restrictive covenant such as a noncompete, make sure it is actually signed. (This may seem obvious, but it’s not uncommon for a noncompete agreement to go unsigned.)

By improving employee intake and exit procedures, companies can significantly reduce the risk of trade-secret misappropriation and expensive litigation.

I Forgot About My Noncompete!

Recently, I was retained by a client with an all-too-common story: one of its former employees, who signed a noncompete agreement, was working for a competitor and soliciting the client’s customers. I sent the former employee and his new employer a cease-and-desist letter, attaching the signed noncompete.

The next day, I got a call from the former employee. He said that he had forgotten that he had signed the noncompete years before. And he told me that he had quit his job with the competitor (which I had him and the competitor confirm in writing), and that he would no longer do work in my client’s field.

I have no idea whether the former employee really forgot about the noncompete, though I doubt it. More likely, he knew he had signed a noncompete, but he just hoped that my client wouldn’t enforce it. Regardless, this situation shows how important it is to address a departing employee’s noncompete obligations before he leaves the company.

The most efficient, effective way to handle this is through an exit interview. During the interview, the departing employee should be given a copy of his noncompete agreement and asked to sign an acknowledgement of his noncompete obligations. This sends the message that the company is serious about enforcing the agreement, hopefully deterring the departing employee from otherwise disregarding his obligations.

The exit interview also gives a company an opportunity to gather intelligence about whether there is a risk that the departing employee may violate his noncompete. If a departing employee refuses to sign the acknowledgement, or is evasive when asked about his next job, it may be worth consulting with an attorney to figure out how to proceed.

In my client’s case, there’s a good chance that had they conducted an exit interview, the former employee never would have accepted a job with their competitor.

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