This article was originally published in Law360 on December 20, 2022 and is republished here with permission.
Federal and state laws are becoming increasingly unfriendly to employers' efforts to impose post-employment restrictions on workers via nonsolicit and noncompete agreements.
However, even in states that have historically frowned upon any perceived post-employment restrictions on departing workers, employees are prohibited from stealing employers' proprietary information and trade secrets. It is therefore imperative that employers protect such information.
California courts are typically unfriendly to post-employment restrictions. In November, in Genasys Inc. v. Vector Acoustics LLC, the U.S. District Court for the Southern District of California recently dismissed a breach of contract claim asserted by Genasys Inc., a provider of communications systems and solutions, against two former employees who left and allegedly started a competing business.
At issue in this case was an invention assignment provision encompassed within a proprietary information and inventions agreement. This provision required employees to disclose inventions developed during the period of their employment by Genasys, up to and including a period of one year after termination, relating to Genasys, or to Genasys' research or development, or resulting from any work performed for Genasys.
In its Nov. 1, decision dismissing Genasys' breach of contract claim without prejudice1, the court found the invention assignment language to be unnecessarily broad and thus in violation of California Business and Professions Code, Section 16600, which provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."2
The court reasoned that by including a continuing obligation to assign to Genasys any inventions relating to the employees' work at Genasys for one year after termination of the employment relationship, the agreement constituted an unlawful post-employment restraint.
Citing to policy considerations from a previous federal court decision, the court noted that "broad employment agreements, such as the ones at issue here, 'encompass not only the dishonest employee with whom plaintiff is concerned, but also the honest employee who legitimately conceives an idea or improvement following his termination.'"3
The court's decision in the Genasys case serves as a reminder that most perceived post-employment obligations imposed on departing employees — even when the obligation does not arise specifically from a noncompete or nonsolicitation provision — risk running afoul of Section 16600 and similar statutes in other states.
But all is not lost. There are many measures employers can take to protect their confidential and proprietary information, including the below best practices that may well pay dividends in litigation involving unfair competition by former employees, no matter the jurisdiction.
Take steps to demonstrate reasonable efforts to protect trade secrets and proprietary information.
In this day and age where remote work has become an acceptable norm for many employers, it is more important than ever to ensure that employers enforce — and employees review and understand — policies and procedures regarding access to proprietary information outside of the office.
Indeed, the steps that employers take to protect their proprietary information often is outcome determinative in litigation involving claims for trade secret misappropriation or breach of a confidentiality agreement or provision.
The California Uniform Trade Secrets Act, which is largely identical to the federal Uniform Trade Secrets Act, defines a trade secret as
[I]nformation, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.4
In litigating a claim for misappropriation of a trade secret, one of the first orders of business is defining the trade secret. To that end, establishing strict policies and procedures regarding access to the trade secret on a need-to-know basis is critical.
Examples include password locking every electronic device that contains the trade secret in digital format and locking any physical locations where the trade secret is in physical format. Employers should also conduct regular training on maintaining the secrecy of, and limiting access to, trade secret.
Plenty of jurisdictions, including California, recognize that customer lists can constitute protectable trade secrets under certain circumstances, including where the customer list was procured by substantial time, effort and expense by the employer. This is true in California even though customer contact information may be generally known to the public under the California Uniform Trade Secrets Act's definition of trade secret.5
The same logic applies to proprietary information that may not necessarily rise to the level of a trade secret under applicable laws. The more steps that an employer takes to demonstrate to a fact finder that the proprietary information was safeguarded by the company, the easier it will be to demonstrate that the former employee's misuse of the information damaged the company in a quantifiable manner.
Ensure employees execute confidentiality agreements with appropriately defined confidential information.
In jurisdictions like California where noncompete provisions contained in employment agreements are prohibited absent limited exceptions, a confidentiality agreement is a useful, legally enforceable tool for a company to protect its proprietary information in situations where the company has reason to believe that the former employee is using the company's proprietary information to compete.
Note, however, that in 2020 in Brown v. TGS Management Co. LLC, the California Court of Appeal held that an employer's confidentiality agreement was overbroad and essentially amounted to a voidable noncompete agreement where it defined "confidential information" to include "all information that is 'usable in' or that 'relates to' the [applicable] industry", which the court found in effect barred the employee in perpetuity from doing any work in his field.6
Ensure employees both review and acknowledge receipt and understanding of the employee handbook.
In addition to requiring that employees execute standard confidentiality agreements, employers should maintain an up-to-date employee handbook that includes language regarding protection of proprietary information and require that employees acknowledge that they have read and understand the terms of the handbook.
This is an additional layer of protection that demonstrates reasonable efforts taken to protect the company's trade secrets and proprietary information. It is a good practice for employers to periodically update their employee handbooks to ensure compliance with new statutory or case laws.
When this occurs, employees should be asked to review and acknowledge any updated employee handbooks as a condition of their continued employment with the company.
Perform an exit interview and conduct a forensic analysis of company-issued electronics if there is reason to believe a departing employee absconded with proprietary information.
When employees terminate their employment, whether voluntary or not, employers should make it a regular practice to conduct an exit interview and have the departing employee sign a statement in which they acknowledge that they have not taken any proprietary information belonging to the company.
Key topics to include in any exit interview are: (1) where the employee is going; (2) why they are leaving; (3) what duties they will be performing at their new employer; and (4) who they spoke to about their departure prior to leaving.
Employers should also undertake a forensic examination of the departing employee's company-issued electronics to ensure that they have not taken any of the company's proprietary information. There are plenty of third-party companies that routinely perform forensic analysis of electronics for this very reason, and the costs to do so are well worth the potential benefits of performing such an analysis early on.
If there is reason to believe an employee is misusing proprietary information, conduct an investigation and perform a backup of the employee's company-issued electronics before terminating the employee.
When an employer discovers that a current employee may be misusing proprietary information, the employer's gut reaction may be to immediately address the employer's concerns with the employee or terminate the employee.
While there may be valid reasons to do so when the evidence is damning, the employer should first conduct an internal investigation regarding the employee's alleged misconduct and work with information technology personnel to perform a backup of the employee's company-issued electronics.
If the employee discovers that the company is onto them, they will likely attempt to delete any incriminating information, including emails, text messages, website and search histories, and file transfers. While some information may be recoverable upon hiring forensic analysis services, the recovery process can be both time-consuming and expensive, and there is no guarantee that deleted information may be recovered.
1 Genasys Inc. v. Vector Acoustics, LLC et al , No. 3:2022cv00152 - Document 21 (S.D. Cal. 2022); https://law.justia.com/cases/federal/district-courts/california/casdce/3:2022cv00152/726106/21/.
5 See Morlife, Inc. v. Perry , 56 Cal. App. 4th 1514 (1997); https://law.justia.com/cases/california/court-of-appeal/4th/56/1514.html.
6 See Brown v. TGS Mgmt. Co., LLC , 57 Cal. App. 5th 303 (2020); https://casetext.com/case/brown-v-tgs-mgmt-co-1.