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.

Trade-Secrets Trial Post-Mortem

Several months ago, I tried a trade-secrets case in front of a jury and obtained a liability verdict in my client’s favor. This week, the case settled in advance of Monday’s scheduled damages trial. (Thus explaining the shortage of posts lately; I’ve been preparing for trial.) Now that it has settled, I’m going to write a series of posts about this case, since it illustrates how companies can better protect their proprietary information and the consequences of failing to do so.

My client provides services to hotels and is the largest company in its industry within its geographic market. After its sales director quit, my client found out that for at least the prior two years, he had been secretly setting up a competing company. Shortly thereafter, the sales director’s new company took my client’s largest and most important client. Since then, his company has become our largest competitor.

While we had a compelling story, we also had some problems. In particular, the sales director was not subject to a noncompete agreement. And we had limited direct evidence that his company was using my client’s proprietary information. But there was plenty of circumstantial evidence.

We sued for violations of Florida’s Trade Secrets Act, tortious interference with business relationships, and violations of the Florida Deceptive and Unfair Trade Practices Act. From the outset, we knew we would have difficulty proving misappropriation of trade secrets, though we certainly had a good-faith basis for bringing that claim.┬áSince there was no noncompete and we had limited hard evidence, we were hesitant to seek a temporary injunction. Instead, we proceeded with discovery. Because civil cases in Florida state court proceed slowly, it took four years between complaint and verdict.

At trial, the court directed a verdict against my client on the Trade Secrets Act claim, but allowed the tortious interference and deceptive-and-unfair-trade-practices claim to go to the jury. They took less than an hour to enter their verdict in our favor.

Had my client simply required its key employees to sign noncompete agreements, this case would have ended much earlier. We would have immediately moved for, and likely won, injunctive relief. In fact, with a noncompete, I believe the defendant never would have tried to open a competing company (he was being paid handsomely by my client). Instead, my client lost significant business, and had to suffer through and pay for years of litigation. While the ultimate result was very favorable for them, no company wants to endure this type of process.

So the critical lesson from this case, as has been repeated often in these pages, is that companies need to have their key employees sign restrictive covenants, including noncompte and nonsolicitation agreements.

In future posts, I’ll discuss some unique aspects of this case, including how we used a consumer-protection statute to get around the lack of a noncompete, and why we were unable to prove our misappropriation claim. I’ll also talk about how we were able to use a bifurcated liability and damages trial to our advantage.

Trade Secret Injunctions Are Not Automatic — Beware of Equitable Defenses

Companies bringing lawsuits based on a noncompete or misappropriation of trade secrets routinely seek an injunction. For example, a former employer seeking to enforce a noncompete will often ask the court to block the former employee from working for a competitor.

Because an injunction is an equitable remedy—as opposed to a legal remedy, such as seeking money damages—the defendant is permitted to raise certain equitable defenses not available when the plaintiff is solely seeking money damages. This includes the defense of unclean hands, under which a plaintiff is not entitled to equitable relief—like an injunction—if it has acted inequitably or in bad faith. (Important point: these defenses can vary from state to state.)

So if the former employee can convince the court that the former employer acted inequitably, the injunction motion is likely to be denied. As part of their equitable defenses, defendants often argue that they were coerced into signing a noncompete, or that the former employer did not mention the noncompete until after the former employee had quit his prior job.

While it’s impossible to prevent a defendant from lobbing unfounded accusations, employers can take steps as part of the hiring process to circumvent these equitable defenses.

If an employer is going to require a noncompete or other restrictive covenant, inform prospective employees early in the hiring process. If there is a job posting, consider including this requirement. Of course, the employer needs to balance the risk of deterring applicants with the risk of increased difficulty obtaining an injunction. Consider giving prospective employees a handout at the initial interview describing the position and disclosing that any job offer will be subject to signing restrictive covenants. Certainly, any offer letter should make clear that it is subject to the employee entering into all required restrictive covenants.

Too often, companies assume that their restrictive covenants will automatically protect them, without thinking proactively about making sure that they are putting themselves in the best position to enforce these agreements down the road. Taking these simple steps can make a big difference if it becomes necessary to litigate.

Five Trade Secrets Businesses Don’t Know They Have

When a business owner or executive asks what kind of law I practice, and I tell them about my trade-secrets work, I often get a response along the lines of “Interesting stuff, but we don’t have any trade secrets.” Most of the time, they are wrong. Almost all businesses have some kind of proprietary information that can qualify as a trade secret, as long as the business reasonably protects that information.

Here are five categories of common information that can qualify as trade secrets, under the right circumstances:

  1. Customer Information. Many companies spend significant time and money gathering information about their customers. Some maintain simple address and demographic information, while others compile detailed customer databases with order history and precise customer preferences. The more detailed the information, and the more time spent compiling it, the more likely it could be a trade secret.
  2. Pricing Information. In many industries, pricing information is not publicly known. Such pricing information can qualify as a trade secret, as long as the company reasonably protects it. At a minimum, customer contracts should include a confidentiality provision.
  3. Profit-Margin Information. Like pricing information, profit-margin information can also be a trade secret.
  4. Contracts. I’ve had clients who spend years developing proprietary contracts that help them better serve their customers. In these cases, the contract can become a trade secret. Again, a confidentiality provision would likely be required, along with other protections, before a court will recognize a contract as a trade secret.
  5. Business Plans. Business plans inevitably include some kind of proprietary information, whether it be pricing-related, or market forecasting. If this information is not outdated, and is properly protected, it can be a trade secret.

If your company has one or more of these types of information, it may have trade secrets. But to enjoy protection under the trade secrets act, you must take reasonable measures to protect your information. ┬áConsult with an attorney to make sure you’re in the best possible position to protect your proprietary information.

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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