A. Confidential Information and Trade Secrets

Employees often resign from a job or are lured away to a rival company to compete directly against their former employers. Sometimes, companies learn they are powerless to recover valuable customer lists, trade secrets and confidential information including prices and requirements of key customers. Such problems can be significantly reduced if management takes preventive steps that begin immediately after an employee is hired. The following strategies may decrease the chances that such problems will occur and increase the odds of a successful verdict for your company if litigation becomes necessary.

Definition Of A Trade Secret

A trade secret may consist of any formula, pattern, device or compilation of information used in business that gives a company an opportunity to obtain an advantage over competitors that do not use or know it. Although an exact definition is impossible, trade secrets are usually involved when:

• Your company takes precautions to guard the secrecy of the information (i.e., documents are kept under lock and key and only authorized personnel have access to them);

• Your company has expended significant money and effort in developing information;

• The information is difficult to acquire outside of the company (that is, it isn't generally known to outsiders);

• Employees are warned that trade secrets are involved, that they are obligated to act in a confidential manner and are tied to restrictive covenants which bar or limit them from working for competitors for a reasonable length of time after leaving the company, or have signed agreements not to disclose confidential information to prospective or new employers.

Company managers and executives frequently inquire whether their particular procedures and operating processes are considered trade secrets. Unfortunately, the answer is not always clear-cut. All of the preceding four elements may have to be present to establish that a given process or procedure is a trade secret and to determine whether it has been illegally conveyed when an employee is discharged or departs. Recognize, however, that lawsuits and injunctions brought in this area are often quite complicated and costly, even for victorious companies, because each case must be decided and analyzed on its own particular facts and circumstances. Additionally, courts generally do not like to punish smart workers who learn on the job and try to better themselves thereafter using this acquired knowledge on a new job. Only when an employer will clearly be damaged and lose its competitive advantage will it likely be victorious in a lawsuit. And, this is only after it demonstrates that a trade secret or confidential information has been or will be conveyed.

TIP: Even though a trade secret can be learned by outsiders through legitimate channels such as trade publica- tions and scientific reports, this does not mean it loses its character as a secret. If the idea is taken by an outsider or appropriated by an ex-employee, a company may be able to bar its use. The defense that the secret could have been obtained legitimately may not matter; if the employee got it improperly, he/she may not be able to use it. For example, an ex-employee's failure to show any independent research or experimentation may make it difficult to prove he did not resort to stealing the secrets he learned on-the-job.

Can a company claim that an employee's expertise is a trade secret? An employee who leaves one job for another has a right to take with him all the skill and knowledge he has acquired, as long as nothing he takes is the property of the employer. Courts distinguish between the skills acquired by an employee in his/her work and the trade secrets, if any, of the employer. The former may be used by the employee in subsequent jobs, the latter may not. An employee's experience in executing a number of steps to produce a desired end is often not a trade secret. However, some cases in this area have been decided in the company's favor. When salespeople become friendly with customers in the course of their employment, they are allowed to call on these customers for new employers. But in some instances, they may be prohibited from using their knowledge of customer buying habits, requirements, or other special information when soliciting their former employer's accounts. For example, if a salesperson knows that a particular customer will be in short supply of a specific product at a certain time, he may not be able to use that confidential information acquired while working for the former employer.

Customer Lists

Perhaps the most frequently disputed issue concerning trade secrets involves customer lists. A "secret" list is not a list of companies or individuals that can be compiled from a telephone directory or other readily available source. A list becomes confidential when the names of customers can be learned by someone only through his/her employ- ment for example, when the salesperson secretly copies a list of customers that the company spent considerable time, effort, and money compiling and kept under lock and key.

Counsel Comment #62: You must carefully consider all of the aspects of your case, both positive and negative, before bringing a lawsuit. First you must prove that trade secrets are involved; the next hurdle in any lawsuit often is proving that such trade secrets were stolen. When bringing a lawsuit based on misappropriation of trade secrets consisting of manufacturing methods or processes, most companies will face claims that the information is common public knowledge obtained by going through directories, trade journals, books and catalogs. Many times the question before a court is not how the ex-employees could have obtained the knowledge, but how did they?

Practical Strategies To Protect The Employer

Many companies include a comprehensive trade secrets and confi- dential information policy in a handbook or manual. All employers are advised to include such a statement in their manuals.

To convey to employees their obligation to protect the company's trade secrets when they are hired, many companies prominently display posters reminding workers of this obligation and publish such reminders on a continuing basis in company journals, work rules and policy manuals.

It is also wise to distribute memos, usually on an annual basis, reminding key employees of their continuing obligation to protect company trade secrets and requesting their written acknowledgment. The signed document should then be saved in their personnel files. A signed statement serves several purposes; it defines what constitutes a trade secret from the company's point of view and creates a climate of confidentiality when people are hired. Furthermore, it advises employees of the seriousness of the problem, warns employees that the company may take strong legal action if trade secrets or confidential information are conveyed to others during or after the employment relationship, and documents the employee's consent.

TIP: Some states have passed laws making theft of trade secrets a criminal offense. Legislation was enacted in New Jersey, for example, making it a high misdemeanor to steal company property, including written material. Other states such as Arkansas, California, Colorado, Maine, Michigan, Minnesota, Nebraska, New Hampshire, New Mexico, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas and Wisconsin have similar laws. New York has gone even further in addressing this problem by declaring it a felony for anyone to steal company property consisting of secret scientific material.

Counsel Comment #63: When valuable written material is stolen and transported to another state, the Federal Bureau of Investigation and Justice Department can also assist you in apprehending the individual, because it is a federal crime to sell or receive stolen property worth more than $5,000 that has been transported across state lines. Thus, review the law in your state and inform new employees of the company's policy to prosecute criminal acts. Doing so both orally and in writing may play a significant role in reducing or eliminating potential problems.

What files can an employee take with him when leaving a company? Generally, nothing that was developed while working for the company, including business-generated reports, letters, diagrams, photographs and all copies of such valuable materials which are necessary for the company's continued operations. Personal informa- tion can be retrieved, but should be scrutinized by a company official before it departs from the premises.

Outside Employment

Employers can take an active role to regulate outside employment. Most employers do not look favorably on moonlighting, but the worker who holds down several jobs is becoming more common. Companies have the right to place restrictions on their employees regarding outside employment. To do this effectively, you may publish a series of guidelines in your company handbook, defining the problem and outlining how such employment may be accepted or rejected by the company.

Counsel Comment #64 If your company allows employees to hold a second job after hours in non-competing areas, be sure that all employees notify the company in advance of their second jobs for permission, and that such jobs do not interfere with your company's needs for overtime service availability where required.