Thieves Among Us? Protecting Trade Secrets From Employee Theft

13 July 2015 Labor & Employment Law Perspectives Blog

Employee trade secret theft is a serious problem, and getting worse. According to an analysis of federal court cases filed over a 58-year period, 85 percent of trade secret theft was committed by employees or business partners. In addition, the cases doubled from 1988 to 1995 and again from 1995 to 2004, with a trajectory to double once more by 2017. It was reported in 2013 that suits brought against former employees over restrictive covenant agreements increased 60 percent over the prior decade. Numerous studies, such as this one, peg the annual cost of trade secret theft at hundreds of billions of dollars.

Employee trade secret theft has become such a serious concern that it has caught the attention of federal lawmakers, with federal trade secret protection legislation being introduced in both houses of Congress last year. Although that legislation failed to go anywhere, there is speculation new federal trade secret protection legislation will resurface this session.

Frequently, harm is sustained by employers which could have been avoided. Here are our recommendations on what you can do to keep your company from unnecessarily being victimized by an employee trade secret thief:

  1. To protect trade secrets you need to know what they are. Everything is not a trade secret. Be sure you understand what a trade secret is and take inventory of what you have. Note also that the definition of a trade secret is state law specific.
  2. Limit trade secret access to those who have a need to know. Have these employees sign a confidentiality agreement in which they:
  • Acknowledge receipt of confidential material
  • Agree to keep the material confidential
  • Agree to return the material when employment ends
  • Agree to advise you of the identity of their new employer and to make the new employer aware of the agreement
  • Agree to allow you to provide a copy of their agreement to a new employer
  • Acknowledge that forensic analysis may be done on their devices, such as computers and phones, when their employment ends
  • Acknowledge that irreparable harm would be done if they violate it
  1. Enter into non-compete and non-solicitation agreements with those who are in a position to cause harm by taking trade secrets, customers or other employees with them when they leave. These should be customized to be reasonable given the employee’s role with the company to enhance the prospects of enforcement. Do not use a “one-size-fits-all” form or reach and have employees signing such agreements when there is no legitimate business reason.
  2. Regularly address the importance of keeping information confidential with all employees, or at least those who deal with confidential information. If you do not, they may not think you are serious about it and be more inclined to take valuable company information when they leave employment with the company.
  3. Conduct exit interviews with employees who had access to trade secrets and:
  • Confirm in writing the obligations the employee has by contract, or otherwise by law (e.g. the Uniform Trade Secrets Act in your state), to keep confidential information confidential and, if applicable, not to compete or solicit
  • Confirm that all confidential material has been returned
  • Inquire on where the employee will be employed
  1. Incorporate into any agreement which contemplates compensation being paid to the employee after their employment ends a provision that the compensation will be forfeited if they violate the other agreements, such as a confidentiality agreement like we recommend above. In some instances it may be appropriate to structure the payment of compensation over the period of non-competition and non-solicitation.
  2. Perform forensic analysis on computers and other devices of departed employees who had access to trade secrets to determine whether any thievery of trade secrets or other prohibited conduct occurred.

Taking these steps will not guarantee protection from employee trade secret theft but it will position your company well to keep it to a minimum and mitigate any harm which might result.

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