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In The Chaos Of Coronavirus Layoffs - Protect Your Trade Secrets

March 2020

Sadly, employees and executives may be leaving their jobs in waves over the next few months.  In the midst of the chaos, angst, and hard decisions to come, it would be easy for companies to forget that some of their most valuable assets – their trade secrets – are necessarily at risk of misappropriation when employees leave, especially in large numbers.

There is a critical window, before the departure wave crests, during which employers can take steps to prevent their trade secrets from walking out the door with their former employees.  The first step involves a protocol for carefully interviewing departing employees to ensure that they return all of the company’s sensitive information, no matter where it may be stored.  Second, companies need processes in place to act quickly if legitimate suspicion of trade secret misappropriation arises when an employee departs.  Third, perhaps less obviously, now is a uniquely opportune time to evaluate whether the secrecy of the company’s competitively sensitive information is safeguarded – as to third parties and its own employees – as required by any applicable trade secret statutes.  If not, some meaningful adjustments may still be possible before departures begin.

Step 1: Carefully interview departing employees. 

The failure to take sufficient steps to ensure that departing employees return, and no longer have access to, company confidential information is a common misstep.  Most problematically, employers often do not think carefully enough about – or ask pertinent and pointed questions regarding – all the places where the employee may have stored the company’s sensitive information.  Marketing strategies may have been saved on personal thumb drives for travel.  Notes taken in crucial and confidential strategy meetings regarding a change to a manufacturing process may exist in a personal Evernotes or Google Docs account, where they then back up to the cloud and can be later accessed by the employee even after she leaves.  A photograph of a distribution chain slide may be in the employee’s mobile phone camera roll, which is also backed up to the cloud.  Only a careful interview can tease all of this out.

Moreover, in times of stress, companies may fail to timely take even more obvious steps.  All company-issued computers and phones should be returned – and the employee’s access (remote or direct) to the employer’s servers should be blocked – before the employee departs.  Doing so after (even shortly after) the departure can be as prejudicial as not doing it at all.

The failure to carefully retrieve all company confidential information is crucial because it can be seen as an indicator that the company does not reasonably protect the secrecy of its purported trade secrets, potentially destroying the trade secret status of the information altogether.

Step 2: Take action quickly if there is reason to suspect misappropriation.

If there is a legitimate suspicion of misappropriation as the employee leaves or if the departing employee had especially robust access to the company’s most sensitive information, an immediate forensic investigation is imperative.  Returned electronic devices and the company’s servers should be preserved and analyzed to determine if the employee downloaded trade secret information before her departure.  And, if she has, legal action must be taken swiftly. 

Failure to take reasonable steps to timely detect a misappropriation by a departing employee can jeopardize the trade secret status of the stolen information. Even worse, an employer that files suit for a misappropriation that could have been detected months earlier may find itself powerless to seek an injunction that stops the further dissemination of the trade secret to competitors, and  instead, limited to an often difficult to prove and less satisfying damage claim.

Step 3: Ensure that secrecy is protected as required by applicable statutes.

By statute in Georgia (and in almost all other states), information does not even qualify as a trade secret – and thus relief for the information’s theft cannot be obtained – unless the information has been “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” O.C.G.A. § 10–1–761(4)(B) (emphasis supplied).  Unfortunately, the failure to satisfy this requirement is perhaps the most common reason that employers ultimately fail when pursuing claims for trade secret misappropriation.  And to make matters worse, if information does not qualify as a trade secret (because it has not been adequately protected), the broad preemption provisions in Georgia’s trade secret statute (as in many other states) may operate to deprive the employer of any non-contractual remedy whatsoever in the event the information is stolen and later used by a competitor.

Because what constitutes adequate protection depends on the circumstances – e.g., the nature of the company’s business and the types of trade secrets that it has – the best way to evaluate the adequacy of existing efforts to safeguard the secrecy is in consultation with counsel.  What follows below is a list of considerations.

  1. Have you identified the most important trade secrets and limited access within the company to them?  Companies often suffer from a form of paralysis that flows from their desire to protect almost all information about their operations as a trade secret and the difficulty of limiting access to all of that information within their company.  But, if their executives were each asked to take a moment to separately identify the five to ten types of information that are the most competitively sensitive and unique to their operations, the lists they created would inevitably overlap substantially.  This information must be protected with passwords and limited access and dissemination even within the company.  If every administrative assistant and clerk has access to this information (regardless of the job-related need to have this access), its trade secret status may be in jeopardy.  There should be a control group for each category of trade secret.
     
  2. Do you have confidentiality agreements that clearly identify the trade secrets?  Employees with access to the most valuable trade secrets should sign confidentiality agreements.  While this alone will not always ensure trade secret status, an agreement precisely identifying the trade secrets as such and demanding their confidentiality can provide an important layer of protection.  A line in an employee handbook or an agreement that generically protects unidentified “trade secrets” is far less valuable.  If confidentiality agreements are already in place, employees should be asked to re-acknowledge them in writing or to sign updated versions (e.g., if the list of specifically identified trade secrets is in need of revision).  An outdated confidentiality agreement from five years ago that the employee has no recollection of signing will not be as persuasive as an updated agreement as to which the employee has been specifically and recently counseled.  Lastly, wherever possible, documents reflecting the trade secrets, or the file structures in which they are housed, should be branded “confidential.”
     
  3. Did you conduct departing employee interviews?  If an employee is allowed to depart with trade secrets without reasonable efforts and policies to prevent exactly such an occurrence, this fact alone could go a long way in persuading a court that the company was not taking reasonable precautions to protect the secrecy of its purported trade secrets.  Trade secret status could thus be lost.    
  1. Are third parties shielded from the information?  If the company’s would-be trade secret appears in documents shared with customers or vendors who have not executed confidentiality agreements, all other efforts to protect the secrecy of this information will be undermined in the eyes of a court.

This list is by no means exhaustive, and the pertinent questions will vary by company and industry.  For some companies, exigencies may not allow a comprehensive reform of their secrecy safeguards in the near term.  But, even a few simple adjustments to procedures and confidentiality agreements could determine whether the courts will protect the company’s valuable information as a trade secret or whether, instead, the information (despite its competitive sensitivity and value) becomes freely available to competitors as employees depart. 

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Now is an excellent time, in consultation with counsel, to put in place a plan for protecting your trade secrets.  As time passes and world events continue to unfold in unpredictable ways, taking remedial measures to protect your trade secrets may become more difficult.

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Media Contact

Shelly P. Walters
Executive Director
Direct  404.420.4643
swalters@rh-law.com
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