How Employers Can Better Protect Trade Secrets

Today, many employers continue to require their employees to sign non-compete agreements saying that these agreements are necessary to protect company trade secrets. With all of the developments in technology over the last few decades, trade secrets can now be easily passed through a cell phone, so it’s become more complicated than it was 30 years ago.

IPWatchdog recently sat down with Nitin Gambhir and Charles Thompson of Polsinelli, to discuss why it’s so important these days for employers to protect trade secrets.

Currently, non-compete agreements are generally not enforceable in the state of California unless they are aggressively limited in time, scope and geography. In addition, there must be consideration for the agreement at the onset of the employment relationship. Even under those circumstances they are difficult to enforce, according to Thomson.

“In other jurisdictions in the United States non-competes may be enforceable. Many employers use this tool in conjunction with trade secret agreements that limit employees or completely exclude them from sharing any trade secrets,” he explained. “Clearly, the employer wants to prevent its employees from taking their trade secrets walking across the street and getting a better job with the competition so will continue to use them hand in glove whenever possible.”

Today, the biggest reason to have a strict regime in place to protect trade secrets, according to Gambhir, is because technology has made misappropriation of trade secrets so much easier than ever before. Compare the days when trade secrets resided in physical forms (blue prints, coca cola formula etc.) and were stored in locked file cabinets, safes etc. with the trade secrets in the digital world. “In most situations, they may be stored in a computer file that has restricted access on a secure network,” he said. “Yet, even given all that, an unhappy employee can easily download that file on a USB drive and walk out of your building directly to your competitor’s office. Access to trade secrets has become so much easier. In turn, misappropriation has become so much easier.”

So, why is the threat real and why should it be a concern for businesses? The risk attached with these digital trade secrets is not limited to the disgruntled employee situation who walks out with them – domestic and foreign hackers can easily break into networks and access confidential information, including trade secrets.

“The proliferation of personal digital devices has also increased that risk manifold. As more devices are connected to the network, the more opportunities of misappropriation,” explained Gambhir. “Another real threat is the trend of storing digital information in the cloud.  So instead of keeping confidential company information on its local secure network, businesses are storing it on the cloud to allow for easier collaboration among the spread workforce.”

Thompson says that the real concern for business is the financial drain of losing talent and expertise to the competition. The human cost and costs to the company can be severe. So, why are employees the first inline in trade secret leakage for companies?

“I believe the main reason that employees are the first inline is because of the changes in work environment. Technology jobs have brought upon this culture (and ease) of moving around.  It is very rare to find a ‘lifer’ in a technology company,” Gambhir said. “The unfortunate side effect of easier job mobility has allowed for a greater opportunity to misappropriate a previous employer’s trade secret.  Indeed, the pressures and expectations of a start-up company to quickly raise funds and bring a successful product to market may lead to short-cuts in development which often involve use of previous employer’s trade secrets.”

These days, employers ask for non-compete clauses as a way to prevent the misappropriation of trade secrets. By their definition, trade secrets carry a competitive advantage and notwithstanding the legality and enforcement of non-compete clauses (because some states outlaw them), employers ask for non-compete clauses to prevent unfair competition when the employee switches jobs. In fact, per Gambhir, many business use non-compete clauses (in addition to non-disclosure agreements) to deter employees who possess trade secrets from opening competing businesses or working for a direct competitor in a similar role for a limited term after leaving the company.

He added, “This way (at least the hope is that) competitors will not have access to your trade secrets that you disclosed to your employee. And instead of filing a trade secret misappropriation lawsuit and go through expensive discovery to prevent or find out if misappropriation occurred, you could simply rely on enforcing a non-compete contract without having to prove trade misappropriation.”

Thompson thinks that employers would hope to restrict the movement of employees to the competition. California frowns on any effort to restrain trade. But, what about the employee especially those who specialize field? If the employee is not stealing trade secrets under a trade secret agreement that the likelihood in California is that they will not be restrain from taking a job with the competition. Often, the smart competition will put the employee in a position that does not directly compete with the former job.

There are many pros and cons of non-compete agreements that require a reasonable in duration or a restraint that only applies within the area where the employer located.

Thompson said, “Ideally an enforceable noncompete would be restricted both in time, scope and geography. The objective of a successful noncompete would be that it is limited efficiently record to enforce it and if necessary order injunctive relief if it is violated.”