Mitigating Trade Secret Risks in a New Workplace
The protection of trade secrets has always been vital to maintaining a successful business, particularly as companies innovate and use technology in creative ways to obtain a competitive edge in manufacturing and delivering goods and services.
At no time has the threat to trade secrets been greater, with the majority of a business’s information being accessible in a digital format that can be stolen in a data breach or via an employee’s USB drive.
The ubiquity of remote working during the pandemic has expanded this risk, as employees are more mobile, can access and store sensitive information more easily, and may have incentives to join with competitors or start competing businesses.
This risk is not going to go away and, in fact, will only increase as workers seek more flexibility and businesses struggle to find good talent. Fortunately, federal and state law recognizes these business challenges and there are some powerful tools for risk mitigation and defense.
First and foremost of these protections is the Defend Trade Secrets Act, which was passed by Congress in 2016.
The law defines trade secrets very broadly as "all forms and types of financial, business, scientific, technical, economic, or engineering information." It provides a cause of action against a former employee or competitor who "misappropriates" a trade secret and provides for damages and injunctive relief in the form of a court order preventing further misuse of the trade secret.
It also provides companies with an opportunity to recover attorney's fees.
There are two critical requirements that need to be met before filing a trade secrets claim.
First, the company is required to take reasonable measures to keep the information confidential. An easy initial step to meet this requirement is to have employees and contractors sign a non-disclosure agreement as part of the hiring process.
This agreement serves two purposes: it shows that protection is important to the company and it puts the employee or contractor on notice that the information they may have access to is confidential or a trade secret.
Putting an employee on notice can deter theft and prove that an employee knew they were stealing a trade secret if they take it to a competitor. Trade secrets should also be protected internally and only shared with employees on a need-to-know basis.
For example, access to manufacturing processes, formulas or techniques should not be generally available to administrative or sales staff who play no part in that process. Operating systems can further be configured to prevent or notify the company if an employee or contractor is downloading files.
The second requirement for a claim is to show that a trade secret has independent economic value for the company that exists because it is not generally known outside the company.
It's important that the company can demonstrate that its trade secret is unique and improves the bottom line by providing a competitive advantage. When a competitor makes unauthorized use of a trade secret, it is essentially stealing the economic benefits of that advantage.
In order to take advantage of federal law such as the Defend Trade Secrets Act, a company must show that it uses trade secret information in connection with interstate commerce. This should be easy to satisfy if the company has customers in more than one state.
The California Uniform Trade Secrets Act has provisions and remedies that are very similar to the Defend Trade Secrets Act but does not define trade secrets quite as broadly.
If a company does not have customers outside of California or if both parties are in California, there may be some benefit to keeping the lawsuit in state court rather than federal court. An experienced attorney can assist with that determination.
Finally, a company may also want to bring a cause of action under the California Unfair Competition Law, which protects companies from actions by competitors that engage in unlawful, unfair or fraudulent business practices. If a competitor is targeting employees to obtain trade secrets, then an unfair competition action can provide another way to get injunctive relief and damages.
No business wants to be in the position of filing a lawsuit to protect critical information, but it is important to know that, with some preparation, protection is available to mitigate risk in an uncertain world.
This article first appeared in The Press-Enterprise and other Southern California Newspaper Group publications online on November 12, 2021. Republished with permission.