It’s an all too familiar story.
A company spends substantial time and money training employees to run and manage a specific business division. The employees receive access to the company’s confidential information—customer contacts, pricing information, marketing plans and strategy, etc.—as well as tools for performing job functions—expense accounts, computers, cellphones, and tablets. But the employees steadily become dissatisfied with their compensation, senior management, or any other host of issues and decide, “We have the relationships; this is our business; we should go out on our own.” From there, the employees form a competing entity, secure financing, convert customers, and hire away employees/talent. Before you know it, a substantial part of the company’s revenues are at risk—and possibly the company’s most valuable trade secrets.
No company wants to face this scenario—competing against former employees who had access to trade secrets and constant contact with the company’s customers. But it’s not enough simply to hope it won’t happen. Companies must prepare, in advance, to prevent unfair competition and employee theft. These same actions will also be necessary to give companies the necessary ammunition in litigation if employees have successfully misappropriated company information to compete unfairly (employee defection/litigation tips will be addressed later in this series).
This initial post will offer five tips to help companies guard against unfair competition and trade secret theft from within.
1. Non-Compete and Non-Disclosure Agreements. A Non-Compete is the easiest and most efficient way to prohibit employees from becoming a competitor—at least for a reasonable time period that allows companies to prepare for this unexpected competition. The enforceability of these Non-Competes varies from state to state, so companies must consider which state law will likely apply and draft the Non-Competes accordingly. For example, if you have employees in Louisiana, Mississippi, Alabama, and Florida, you likely will want to have different language in each respective Non-Compete to ensure it complies with the corresponding state’s law. Companies should utilize these agreements (if allowed by the applicable state’s law) for senior managers, sales employees, and anyone that is provided access to the company’s trade secrets, and the Non-Competes should contain strong non-disclosure restrictions. But even if Non-Competes are not used, you should require all employees to at least sign a Non-Disclosure Agreement that prevents the employee from using and disclosing the company’s confidential information.
2. Strong Company Policies. Other easy yet powerful tools are company policies concerning computer/media use and confidential information. These policies should clarify that all company-issued computers, cellphones, software, email, etc. are owned by the company (and cannot be used to support any competing interest), and that any information created or residing on these devices are owned by the company. These policies will also allow the company to access and monitor its employee’s devices and emails to ensure trade secret theft has not occurred and also clarify who owns the information. They are also likely prerequisites for law enforcement to review evidence from employees’ emails and devices, if companies want law enforcement involved. Additionally, every company should have a strong confidentiality policy that clearly defines the company’s confidential information and its employees’ obligations to keep this information confidential. Finally, companies should require all employees to sign acknowledgements that they understand the companies’ policies and agree to comply with them. These acknowledgments can be invaluable if an unfair competition and trade secret dispute arises.
3. Limited Access to Trade Secrets. Not all employees need access to all company information. Companies should only give employees access to information needed for performing their job duties. For example, if salespersons are responsible for different geographical areas, they should only have access to information relevant to their respective territory. Similarly, employees in the accounting department don’t need access to detailed sales information. But a company’s management and IT personnel must communicate to make this work. At a minimum, employee access should be assigned unique usernames and passwords so that the company can track and monitor what each employee has viewed and when the information was viewed. They should also develop a plan for where information will reside on company databases, who will have access to the database, and permission procedures for how employees without access can obtain the information. Ultimately, limiting access makes it more difficult for a single employee or groups of employees to misappropriate information needed to create a competing business. These steps also provide evidence in litigation that the company has taken actions to maintain the confidentiality of its information, which is required for trade secret theft claims.
4. Training and Protocols. Having policies and agreements are not enough. It’s the simple things that can make the biggest differences. For instance, ensuring that all confidential information contains a “Confidential Information” stamp or making certain files password-protected will help employees (and third parties) know that information is confidential on the front-end. But employee training could have the most profound impact. If employees are routinely trained on policies regarding confidential information, the company will be creating a culture where everyone knows how valuable that information is to the company’s success.
5. Audits. A yearly audit with outside counsel can also provide assurances for protecting against employee espionage and trade secret theft. Audits consist of identifying potential trade secrets and reviewing policies, protocols, agreements, and information access to help companies understand how their protections can be strengthened and where they are most vulnerable. These audits can pay large dividends if an unfair competition and trade secret theft dispute arises and help ensure that companies are well-positioned to prevent unfair competition and trade secret theft.
Part Two of this three-part series will provide tips for handling suspected misconduct and employee defections.