“The Wall” of Your Trade Secret Vault is Made of Paper

By Steve McDaniel, JD, PhD, Technology Litigators | November 30, -0001

A “protective wall of paper”—a series of documents including agreements and restrictive covenants to protect your trade secrets—is your first line of defense against the techno-thief (“The Wall”). Kinda like a lock on your house, The Wall will help you to avoid theft by relatively honest people. If litigation is inevitable against the not-so-honest sorts, then your Wall will serve as concrete evidence in court showing you took reasonable and proper steps to protect your trade secrets.

Your Wall has two main goals, the first being to thwart the misappropriation and disclosure of your trade secrets. Just as importantly though, and sometimes not as obvious, it serves to strongly discourage employees from sharing unwanted trade secrets from their previous employment, an inadvertent act for which you may get sued. Non-disclosure agreements (NDAs), non-competition agreements, or a form of restrictive covenant, and exit interview documents, among others, will bolster your credibility in the workplace and in court. We will focus on these workhorse documents, but there are a ton of others that deserve and should get proper attention in a professional trade secret audit.

A nondisclosure agreement is an agreement of confidentiality. An employee who signs an NDA is required to do his best to preserve and protect your, or others, say strategic partners’, valuable information both during and after the employment. An employee is legally obligated to still protect and preserve the secrecy of trade secrets even if he no longer works for the company to whom the trade secrets belong.

Non-competition agreements, the most commonly encountered type of restrictive covenant, are way trickier than NDAs. Some states flat out do not allow non-competition agreements to be enforced. After all they are, in many regards, an illegal restraint on trade in a market that prides itself on openness and employee mobility. If a state does allow non-competition agreements, to be enforceable an employer must have a good reason, such as a clear business purpose, to justify using the restrictive covenant.

There are a few criteria involved in a non-competition agreement that merit closer examination. First is duration. How long can you restrict a former employee from seeking work at a competitor’s business or from starting his own competing business? The courts have recognized a reasonable window of one to two years as a standard. Next is geography. Whether you are a multinational corporation or just a midsize business will determine the geographical limits where a departed employee can seek future work. Usually you can only restrict a departed employee to seek work in a geographical area where your company conducts business. Finally, there is subject. It is only reasonable to restrict an employee to seek work in a subject area in which he actually worked. It is unreasonable, for example, to restrict a research biochemist from joining another company as a chief financial officer. Keep in mind that you may be required to pay a departed and restricted employee if you wish to keep him out of the work force.

Let’s look at a “pretend case” of highly specialized employees coming from two competitors’ businesses looking to work for you and watch The Wall in action. We will call them Bonnie and Clyde. Both maintain a duty of confidence to their old bosses not to disclose the trade secrets they learned on their former jobs. On top of this, Clyde comes to you having signed a non-competition agreement at his old job. In the course of employment, your concern with non-disclosure agreements and non-competition agreements should begin before formally hiring any new employees. Depending on their understanding of the law, Bonnie and Clyde might be unaware of the implied duty of confidence not to disclose confidential information regardless of whether they signed non-disclosure agreements at their old jobs. It would be prudent to remind them that any confidential information gained during their previous employment should not be used while at your company. Bringing confidential or proprietary information to your company from their previous jobs can get you in trouble. You need to conduct a little background screening on your potential new employees; screening for limitations due to contractual obligations is always a good policy. If Clyde is restricted by agreement not to work for you—you are a competitor of his previous company—then you will have to wait to hire him when the non-competition agreement no longer applies, or place him in a position at which he is not reasonably restricted. If Clyde is not restricted, you are free to hire him. In this case, let’s say that your background screening found Clyde did sign a non-competition agreement but it no longer applies.

Once you’ve decided to hire Bonnie and Clyde, they need to sign non-disclosure agreements stating something to the effect of protecting and preserving your trade secrets—that is, not to disclose them, during or after their employment. Assuming they will perform highly specialized work and will have access to numerous trade secrets, specific language tailored to the nature of their work should be added to a basic NDA. On top of just obtaining Bonnie’s and Clyde’s signatures, make sure they understand the language of the agreement, allow them to and recommend they pass it by their own lawyer, and address any questions they may have. Even though Bonnie and Clyde are bound by an implicit duty of confidence not to disclose any proprietary information, a written, express agreement is always the best policy. This way the two parties know what is expected during the employment; it also provides concrete evidence should you have to go to court.

If the jurisdiction in which your business operates allows for non-competition agreements, you may wish to have them sign one. Because non-competition agreements are very contentious, evidenced by their outright prohibition in some states, they should only be reserved for employees with whom trade secret misappropriation or disclosure is a serious threat. Many companies have decided that due to the likelihood of a court-challenge to a non-competition agreement, and due to the very limited restrictions they provide, they are rarely worth the trouble.
The same non-disclosure procedures should be applied to all employees at your business, top to bottom. This includes temporary or part-time employees. These types of employees, it turns out, make the risk of disclosure that much greater—they owe little to no loyalty to your company and frequently are on the move seeking new employment. The short-term clerical worker or part-time service worker should at least sign a basic NDA acknowledging that the nature of the work may involve access to confidential information. Chances are it is unnecessary for these types of employees to sign non-competition agreements.

Eventually the day will come when Bonnie’s and Clyde’s services are no longer necessary and it is time to terminate them as employees. As a savvy business practice, and a part of your program to protect your trade secrets, you should conduct exit interviews with departing employees, usually through the human resources department or an outside firm. These interviews are much more than a simple “goodbye, wish you luck” kind of encounter. Protocols need to be followed to ensure the departing employee is not leaving your company with trade secrets. An exit interview checklist should be used to document the termination.

Whereas in the beginning you were concerned about them bringing unwanted trade secrets to your company, you are now concerned about the reverse situation—Bonnie and Clyde leaving your company, seeking new employment, and stealing or disclosing the trade secrets they learned while on the job. Bonnie and Clyde, as departing employees, should be asked to sign a new document during the exit interview. A trade secret acknowledgement and termination agreement is just another way to remind them of their duty not to disclose your trade secrets. The termination and exit interviews should review the provisions of the agreements they signed. Any issues about future employment or trade secrets should be sorted out before they formally leave the company.

The first and most logical thing to discuss in the interview is the reason for leaving. Talk about why the employment came to an end; this can be a result of termination or a voluntary decision to leave the company. If you decide to terminate Bonnie or Clyde, explain your reasoning for doing so. If Bonnie or Clyde are voluntarily leaving their position, ask why that is the case—probe for specifics and note any discontent or dissatisfaction. Talk about the work or assignments in which they were involved. From there, discuss future plans, especially relating to future employment. Identify the new employer and position and ensure that the Bonnie and Clyde understand their duty of confidence regarding disclosure and use of a trade secret. Finally, make sure Bonnie and Clyde aren’t about to walk out the door and steal valuable company materials. Ask them to turn over their badges and keys; supervise them cleaning out their offices or workspaces. For any further questions concerning confidentiality or other obligations, let them know they can call your company any time.

A well-run and properly documented exit interview will minimize the pains associated with employee termination. It is also just one more way you can prove you took reasonable steps to protect yourself from trade secret misappropriation. Armed with non-disclosure agreements, non-competition agreements, and documented exit interviews, you have established a strong “protective wall of paper” to help guard you from misappropriation or unwanted disclosure of trade secrets.

But what if Bonnie and Clyde turn out to be a couple of dirty rotten thieves, like their historical namesakes, and have misappropriated your trade secrets? You will likely file a lawsuit against them and you better! Furthermore, you will likely want to seek injunctive relief to stop them from continuing to use or disclose your trade secrets. A judge will need to see some kind of evidence proving that Bonnie and Clyde were not allowed to use or disclose the information. And that’s where the NDAs, non-competition agreements, and exit interview documents come in to play. After viewing these documents, a judge will be much more likely to see that Bonnie and Clyde have not kept in confidence your trade secrets and broke a contractual agreement. Injunctive relief may even be awarded to help prevent any further harm.

In a professional-strength trade secret audit, you will scour each and every one of the NDA’s, non-competition agreements and your entire exit interview process. But, that’s really just the beginning. Other documents that will serve as bricks in your “wall” may include this partial list: insurance documents, SEC filings, partnership documents, grants and contracts with the federal government, Patriot Act compliance documents, import and export compliance documents, patent application filings, publications, slide presentations, toll manufacturer’s agreements, vendor agreements, work-for-hire and other consulting agreements, software licenses, court proceedings, etc. And, the litigators toy-box where we routinely and joyously find almost ALL of the evidence against your bullet-proof wall-of-paper: e-mails and texts. Employees say the stupidest damned things in e-mails and texts (“Naw, that’s not a trade secret, don’t worry about it!”; “Yeah, that’s a big company trade secret supposedly, so don’t tell anyone else, OK?”; If you promise not to tell anyone else, I will tell you that we are just about to launch a big [……..]). I have seen it all, and I continue to be amazed!

So, when you conduct a professional-strength trade secret audit, get ready to feel a little irritated at, and maybe even a little violated by, your professional auditors. Ultimately though, the goal is to feel a whole lot more secure. If it’s done right, you should feel like you have been attacked by someone trying to prove you DON’T have any protectable trade secrets. But, when it happens for real—Powers That Be Please Forbid—you’ll be locked, loaded and the thief will be staring down both barrels of a sawed-off 12-gauge shotgun poking out from behind a wall of paper. Like Pink Floyd said, “All in all it was all just bricks in the wall.”

Note: The author would like to thank his clerk, Josh Fuller, for his significant contributions to the legal research and writing that produced this column.