SAFEGUARD YOUR SECRETS TO PROTECT YOUR COMPANY’S FUTURE
What is the secret to the success of your company? What have you worked hard to create, improve, perfect, and maintain? What would cause you grave concern if a competitor got ahold of your hard-earned information? Do your employees know what information to protect – and do they know they can use it only for your company and not for themselves or anyone else?
There are several ways to protect your company’s confidential information. While there is no “one size fits all” solution, the measures undertaken must be reasonable for the size and sophistication of your company in order to be enforceable by law. An evaluation of the type of information you need to protect will help answer at least the minimal security measures your company should employ. While patents and trademarks are well-known intellectual property items, this article focuses on the lesser-known but powerful protections available for trade secrets so long as companies have policies and practices that protect those secrets. If you prevail in an action to enforce protection of your trade secrets, among other remedies your company can obtain injunctive relief to stop the use, disclosure, and theft of your secrets, as well as a monetary judgment for losses suffered, punitive damages, and reimbursement of your attorney’s fees.
Under Indiana law, as well as most other states and a recently-enacted federal law, a “trade secret” is any information of any kind that: (1) derives independent economic value because it is not generally known or readily ascertainable through proper means by those who would benefit from its use or disclosure and (2) is subject to reasonable measures to maintain its secrecy. Put simply: information that your competitors would find valuable (but cannot replicate without stealing it) enjoys protection by law as a trade secret so long as your company has used “reasonable measures” to keep it secret.
So, what are your secrets – and does each one meet both parts of the trade secret definition? If not, the good news is that competent counsel can help you refine your practices in order to obtain that protection. Examples of information that may qualify as trade secrets include customer lists and related customer information, pricing and discount levels, research and development projects and results, marketing plans, product formulas, supply sources, and manufacturing methods or processes. Most business owners know what it is they deem proprietary; the harder part is meeting the “reasonable measures to keep secret” test.
The most basic level of protection is a written policy or agreement that identifies the company’s confidential information and requires that all employees keep that information confidential and within the company. Such policy should be in writing and signed by all employees. While that sounds simple enough, the policy should explain why the confidentiality obligation extends beyond the last date of employment with the company and also advise the consequences of unauthorized use or disclosure. For companies whose employees access confidential information via computer, an addendum or separate security policy respecting computer usage and restrictions on transmitting, printing, or downloading confidential information should be signed by all employees who have that access.
A signed confidentiality policy, in and of itself, is not enough to protect confidential business information. The company needs to continually demonstrate its protection of confidential information. Ways of doing so include:
- limiting distribution of the confidential information to those employees who need to use it in order to perform their jobs
- only giving excerpts or certain aspects rather than the whole
- marking the materials as confidential
- numbering the copies that are distributed
- tracking circulation and return of confidential information that may be “checked out” from a controlled location
- password-protected computer access that restricts the information released according to need
- deletion and destruction policies
- informative training sessions reminding employees of the policies
- exit interviews and/or post-employment correspondence
- prohibitive language in contracts with vendors who have access to any of your business secrets.
While this list is not exhaustive, and not all of these measures need to be employed, if litigation should be necessary a judge or jury will ultimately determine if the company took “reasonable” measures to protect the information that it deemed confidential in order to be afforded trade secret protection under applicable law. The law is clear that what is reasonable for a small “mom-and-pop” business is not adequate to protect the confidential information of large companies. This necessarily means that as your business succeeds, you will have to consider more protective measures along its growth path.
Another way to protect your company’s confidential information is to impose a non-competition and/or non-solicitation agreement upon employees who have access to confidential information. This area of the law is specialized – you really need to hire counsel with years of experience in it to avoid drafting traps for the unwary. These agreements cannot be cut-and-paste from forms because the language must be tailored identification of your secrets, the “life cycle” of those secrets, and the scope of activity you need to prohibit to reasonably protect your secrets. Depending on the type of information you need to protect and the level of employee whose post-employment activities you are trying to restrict, your company may only need non-solicitation restrictions.
Non-solicitation agreements are a low-level non-compete restriction. Like the name suggests, they prohibit employees from soliciting a specifically-identified group of persons (typically customers) for specified purposes (such as providing services or selling products that the company provides or sells). Much broader, non-compete agreements often contain non-solicitation provisions in the midst of other restrictions on post-employment activities. Non-compete restrictions typically prohibit an employee from working in the same capacity in a new job that competes with the company’s business. To be enforceable, the restrictive covenants must not exceed the company’s protectable interest and must comply with legal precedent in avoiding overbroad language.
The enforceability of a non-compete agreement is tested by the reasonableness of the restrictions as to time, scope, and geography. While volumes can be written about these frequently-litigated issues, your trusted counsel with experience in this area will conduct due diligence as to the identity and “life cycle” of your business secrets to determine the most reasonable time restriction, the applicable employee’s scope of duties to define the prohibited scope of post-employment activities, and the geographical reach of your company’s goodwill to frame the geographic parameters of the non-compete. After such a thorough exercise, your company’s non-solicitation and/or non-compete agreements should be enforceable if you ever need to pursue a thieving employee. Like any good contract, however, it is recommended that you consult with your counsel at least every five years to confirm that your trade secrets are still valid and to ensure that no legal developments affect enforceability.
Again, depending on the size and sophistication level of your business, you may not require non-compete agreements to reasonably protect your company secrets. However, if you do decide that level is needed, you will also need your counsel to evaluate which of your employees must sign them because they need to be uniformly applied. Companies can lose the benefit of an enforceable non-compete if they don’t require each employee who has access to their trade secrets to sign the non-compete, as they are selectively deciding who can have unlimited use of the secrets while restricting others. It is not a reasonable protective measure to let some employees walk out with your company’s secrets while prohibiting others. Thus, the company is waiving its protectable interests when it chooses to only have its top salespersons (for example) sign the non-compete agreement because it doesn’t deem the other employees a threat. Those least effective salespersons still have access and can decide, perhaps without legal penalty, that they want to take your secrets to start their own business. You are now forewarned to be fore-armed.
Author Kathleen Hart
Kathleen Hart concentrates her practice in civil and commercial litigation, frequently pursuing or defending cases that involve injunctive relief, such as breach of non-competition agreements, trade secret misappropriation, and unfair competition claims; contract and property disputes; shareholder and corporate control battles; failed business transactions; and RICO, fraud, embezzlement and business tort claims. She helps clients evaluate the strengths and weaknesses of their claims and defenses in order to position themselves to resolve disputes.
In addition, Kathleen serves as outside general counsel for various privately-held businesses and strategist to high net-worth individuals, using her combined employment law and litigation experience to help them evaluate or negotiate employment, non-competition, confidentiality/non-disclosure, employment, change-in-control, and severance agreements. For most of her career, Kathleen has also assisted women and minority clients obtain MBE/WBE/DBE certification with governmental or other certifying agencies.
© Riley Bennett Egloff LLP
Disclaimer: Article is made available for educational purposes only and is not intended as legal advice. If you have questions about any matters in this article, please contact the author directly.
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Posted on Jan. 05, 2017, by Kathleen Hart