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Trade Secrets & Employees

By November 20, 2012October 25th, 2018Business Blog, James Wakefield

Part One: Lawfully “On-Boarding” a Competitor’s Employee
I recently attended a symposium focused on trade secrets and litigation trends surrounding the loss of key personnel to competitors.  In California, it is well established that an employee has a right to leave an employer at any time. Non-compete clauses are not enforceable against employees in California. But you can limit the employee by contract from soliciting customers, suppliers, and employees in certain limited circumstances to protect your trade secrets. Likewise, it is not unlawful for an employer to offer an employee from a competing company higher pay or benefits in order to attract high-quality personnel.
In California, trade secret litigation is governed by the Uniform Trade Secrets Act (UTSA).  A trade secret is defined as information that has independent economic value and is not readily ascertainable to others.  Also, reasonable steps need to have been taken to guard the information.  Trade secrets can range from client lists to the formula for Coca-Cola.  In contrast, a patented item can’t be a trade secret because the patent process makes the information public.

Unfortunately, the broad definition of trade secrets can lead to litigation, and this includes the hiring of an employee from a competitor.  With that in mind, we have prepared a two part-series designed to help companies avoid the legal pitfalls inherent in the hiring a competitor’s high-value employee, as well as strategies for the employer losing the staff member in order to protect the company against the transfer of trade secrets.

Strategies for Hiring a Competitor’s Employee
Hiring a key employee from a competitor can be a risky move.  In order to protect the company and avoid litigation, employers should follow best practices when hiring a competitor’s employee.  Preparing and following a check list of action items is key, and should include:

  • Conducting a cost-benefit analysis.  Determine if a forensic investigation would be appropriate and cost-effective.  Under the UTSA, the measure of damages includes lost profits, unjust enrichment, injunctive relief, and an award of attorney fees, which could easily be in the millions of dollars.  A new employer must take all reasonable steps, even some extraordinary steps, to protect against the transfer of trade secrets, or the company runs the risk of incurring substantial damages.
  • Vetting the employee.  Once the new employee meets the criteria of a “high-value employee,” human resources staff members and counsel should meet with the new hire to begin the vetting process.  Counsel must be involved in the initial meeting to ensure that no information that might contain trade secrets is transferred to the company.  Also, any agreements from the prior employment, such as non-compete, non-solicitation, or confidentiality agreements should be collected and reviewed.
  • Identifying all locations where confidential information may be stored in hard copy or electronic format, including electronic storage devices.  Potential employers must be aware of spoliation.  If litigation is reasonably anticipated, the new employer may not destroy information.  If the employee has confidential information, tell them to go home and not return until all information is returned to the prior employer or destroyed, but keep in mind spoliation.  Finally, retain a reputable forensic expert to remediate the information.

Worth the Investment
The information above is just a brief summary of the steps human resources and counsel should employ in order to insulate a company from any allegations that it utilized confidential information from a competitor’s former employee.  A more detailed list is available here.

It is important to note that the system is not failsafe.  We can never be sure that an employee did, in fact, retain some information that was not disclosed.  However, in the event that a trade secret misappropriation action is threatened or filed, our goal is to ensure that the company took all reasonable steps, possibly with the assistance of the former employer, to identify and segregate any questionable information.  This should provide a formidable defense that the company did not have access to nor did it utilize the confidential information alleged.

Next Up—What Happens When an Employee Jumps to the Other Team?
Employers faced with the loss of key personnel also are concerned about the potential transfer of trade secrets.  Advice about how to handle this situation will be offered in the second part of this series: Strategies for Employers Losing Key Personnel to a Competitor.