Coatings World - September 2012

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

By Steve McDaniel, JD PhD
Technology Litigators

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.