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Reducing the odds of losing trade secrets to a competitor

Published in the Rochester Business Journal

Every individual has the right to advance his or her career, including sometimes leaving what may be an attractive position in order to take a chance on a new opportunity. Problems arise, however, when a highly placed employee resigns from a company to join a competitor or, worse, to set up a rival venture.

Key employees or employee groups, by virtue of their rank in an organization and the trust that management has placed in them, possess vital information about strategies, finances, pricing, customers, prospects, research, products and designs. Should those individuals leave a company, it’s likely that they will use at least some of that information to give their new employer or venture a competitive edge.

The mere prospect of this possibility troubles every employer. While non-compete and non-disclosure agreements are prudent and essential, they do not always provide full legal protection for the former employer. Nor do they mitigate all of the disruption and sense of betrayal that flourish in the wake of a defection.

Crossing the line

Every business loses key employees from time to time. While many employees depart in a professional manner, others do not. What is an employer to do when key employees take trade secrets or proprietary information and use them to create or work for a competitive venture?

Joel DiMarco, executive vice president of the DiMarco Group LLC, says that a line is crossed when the departing employee tries to harm the previous employer by:

  • Sharing confidential strategies or trade secrets with anyone, particularly a competitor.
  • Approaching the employer’s clients and trying to direct business away.
  • Speaking negatively of the employer to clients, prospects or vendors.
  • Encouraging fellow employees also to jump ship.
  • Devoting time to the new venture while still on the clock with the current employer.
  • Using the employer’s property, such as computers, databases and marketing strategies, for any purpose not authorized by that employer.
Identifying trade secrets and proprietary information

An employer who has lost a talented, high-producing employee to a competing venture may look for legal recourse as he or she scrambles to contain the damage and replace the departed employee. But, unfortunately for employers who have suffered such defections, behavior that is considered unprofessional, disloyal or unethical may in fact be protected by the law.

Anytime an employee leaves a company to compete against that former employer, contradictory legal principles come in to play, according to a July 2006 article in Workforce Management Online.

On one hand, the law protects an individual’s right to pursue the job of his or her choice and to use the knowledge gained from previous positions for the benefit of subsequent employers and ventures. At the same time, the law also prohibits employees from stealing company assets and using them for their own gain, and protects their former employers from acts of unfair competition.

Only some of the information that a well-placed employee might take with him or her to a competitor is entitled to protection under the law, says Michael Houseknecht, partner at Nixon Peabody LLP. Further, in order to succeed legally, the ex-employer must prove that ex-employee actually has used, or has manifested the intention to use, the protected information.

To meet the judicially recognized definition of a trade secret, information must be something that gives its holder an advantage because rivals do not possess the secret. While the recipe for Coca-Cola is truly confidential, a retail pricing strategy might be an “open secret” – available to all who would visit a series of grocery stores or conduct Internet research to determine the average price of a six-pack of Coke.

Should a legal challenge arise over an employee’s alleged theft of confidential information, it will be important for the employer to show – among other things – that it treated certain information as a secret, Houseknecht says. He advises employers to keep close control over confidential or proprietary information, for example by labeling it confidential and sharing it only with the few employees who need to know.

Minimizing the risks

In addition to treating secrets as secrets, Houseknecht also suggests the following proactive measures:

  • Requiring employees to sign agreements containing reasonable restrictive covenants. Such covenants typically prohibit the employee from stealing proprietary information and from working for or setting up a competitive venture in certain geographic areas while employed by the company or during a specified, reasonable period following departure.
  • Establishing policies forbidding employees’ use of company resources to aid themselves or a competitor.
  • Clarifying that employees are not to expect privacy regarding their use of the company software, server or Internet service, and stressing that the employer can and will monitor email at will.
  • Committing to monitor email. While many employers feel uncomfortable taking this step, Houseknecht says, reviewing emails often can provide valuable information and legal proof about employees’ plans to set up or join competing ventures.
  • Installing software that monitors employees’ use of company computer programs, especially those accessed from home, to pinpoint any unauthorized usage.

Regarding files stored on computers, Houseknecht points out that a federal statute – the Computer Fraud and Abuse Act – provides broader protection for employers whose employees obtain unauthorized access to company material, whether that material is deemed proprietary or non-proprietary.

Other experts advise:

  • Avoiding allowing one employee or department to hoard control of customer and vendor relationships and contact information. When a company owner or branch manager also regularly interacts with customers, the company gains some protection from a defection and, importantly, strengthens the relationship with those vital outside people.
  • Identifying and cataloging any information that could be considered proprietary or secret, typically information that provides the company with an advantage over competitors that do not possess it.
  • Adopting industry best practices for maintaining confidentiality of key information, perhaps using password-protected networks and databases, locked cabinets, “confidential” stamps and confidentiality training programs.
  • Communicating with remaining employees about the defection and rooting out those who are likely to breed more disloyalty.
Damage control

Sometimes, no amount of effort by an employer will prevent a key employee or employee group from exiting in a less-than-ethical manner. Once this occurs, Workforce Management Online advises that the employer, as quickly as possible, take the following steps:

  • Locate and secure computers used by the defecting employees and ensure that no one accesses them.
  • Ensure that IT does not overwrite any backup tapes, which may contain vital evidence.
  • Search offices and workspaces of defecting employees for missing or incriminating documents.
  • Use security-camera tapes, if available.
  • Involve the company’s legal counsel.
  • Interview remaining employees who knew of the defecting employees’ plans.
  • Ask any employees who have given notice but who remain on the premises to write detailed exit memos on the status of pending projects. Any information they provide will be valuable in training their replacements. Any refusal to cooperate, however, may provide the employer with evidence that the employee intended to harm the company.
  • Document expenses and damage related to the defection, such as lost customers and lost orders.


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