To Sue or Not to Sue: That Is the Trade Secret Question

17 December 2014 Manufacturing Industry Advisor Blog

You have just learned that a senior member of the company research and development team has resigned. The employee had access to important confidential information about your company’s product development, manufacturing process improvement, business strategy and other proprietary information. The departing employee did not identify his new destination, but you have no doubt that he is joining a key competitor. The company followed its standard protocol for departing key employees including to examine the employee’s electronic activity over the last 30 days. Unfortunately, the IT group discovered that the employee emailed several important reports, meeting minutes and strategy documents to his personal email account just before his departure.

After gathering this information, you scheduled a meeting of the company senior management team, including the general counsel, to review options and strategy. It is not yet clear whether the employee gave company confidential information or trade secrets to his new employer. Even though you suspect the worst, it is also too early to assess whether your company will lose market share or will suffer other harm and, if so, how much. Your team has many questions, including whether you should sue.

Whether to sue is a very complicated question, the answer to which involves many factors, legal issues and strategic business considerations. Litigation is not without risk. At a minimum, you should consider the following issues.

  1. What are your business objectives?
    Before filing a lawsuit, you should consider carefully whether there is a legitimate business objective that litigation will achieve. There are many goals that will justify the expense of litigation including recovering damages, obtaining injunctive relief to stop any misuse of key company information, and showing current employees and competitors that the company will enforce employment restrictions and act decisively to protect trade secrets.
  2. Will litigation result in MORE disclosure?
    If the company alleges that confidential information or trade secrets have been misappropriated, the court will require that you disclose the information that you claim was taken. You will have to evaluate whether that disclosure could cause more harm than has already occurred. The court is likely to enter a protective order to guard against inappropriate disclosure in the litigation, but that order might not provide as much protection as you really want. The order can also be violated. Thus, litigation may result in even more disclosure
  3. What if the court determines that your confidential information is not a protectable trade secret?
    If you assert a trade secret claim, a significant part of the case will focus on whether you have taken sufficient steps to protect trade secrets from being disclosed. The defendant will examine employment agreements and policies, your company business practices, and contracts with third parties. If your company’s practices are not very strong, that may hurt your chances of obtaining relief. Losing the case is one thing. Having a court decide that your company does not have a protectable trade secret could have much longer term adverse impact on your business.
  4. Will the litigation impact your company’s key customers or business partners?
    If your company claims damages for lost business or asks the court for an injunction to prevent significant harm from misuse of your company’s trade secrets, you will have to prove the harm. The defendant will very likely ask in discovery that you produce information about sales, the identity of customers and key business partners, among other sensitive information. There is a significant potential downside from having to disclose this, including that customers and business partners may not want to become involved in your litigation and to have information about their commercial relationships be disclosed. The defendant also may issue subpoenas directly to your customers and business partners. Is that a risk worth taking?
  5. Are your own hands clean?
    Has your company ever hired employees away from a competitor?  If so, you should expect the defendant to examine your conduct in those circumstances. Are there any skeletons in that closet?
  6. Will the defendant assert counterclaims?
    When you initiate litigation, you cannot limit the scope of that litigation to the claims that you bring. You may intend a narrow, surgical strike lawsuit. Your opponent may have other ideas and could assert counterclaims that will open up other issues.

There likely will be many other considerations depending upon the nature of the information you suspect may be misused, your company’s relationship, if any, with the competitor, how competitive your company’s market is and so forth. Hopefully, you can resolve the dispute quickly. You may need to act swiftly, though, to reduce or to repair any harm that may be caused by the departure of a key employee who appears to have absconded with important information. Your immediate reaction might be to run to the courthouse to stop any further actual or threatened misuse of that information. That may still be the path that your company chooses. Be sure, before making that choice, that your company considers all of the potential effects of filing suit and appreciates the potential collateral consequences of doing so.

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