Inside Job: Protecting Trade Secrets

Imagine this commonplace scenario: a key employee of yours with access to your major customers, and who is intimately aware of your company’s trade secrets, resigns from your organization. Not only that, he or she is leaving your company to go work for a competitor.  This employee has knowledge of inside information about trade secrets, customer information, and financial information that you do not want given to your competitor.  The first course of action should be to review your employee’s Non-Compete Agreement to determine what protections you may have in place and whether they are enforceable.  Just in case you do not have a written covenant not to compete or solicit customers in place, do not fear, all is not lost.

Besides a specific written covenant in the form of a contract or agreement not to compete, a company may have other sources from which the non compete obligation can be derived which contain provisions that could be actionable under state contract law.  For instance, you can draw upon passages from alternative documentation pertaining to post-employment restrictions or information usage after employment terminates covered in sources such as: (1) internal policies and procedures including an employee handbook, employee manual or code of business ethics; (2) employment contracts such as a signed offer letter, bonus or stock option agreement. In any event, some information may still be protected from disclosure by some collateral confidentiality agreement or by principles of common law.

Generally, former employees may not even be aware of this, but they do face constraints when they defect to the competition for a new job.  In fact, baseline principles exist for protection such that work done by an employee for the former employer belongs to the former employer, and copies should not be taken by the departing employee.  A Fiduciary Duty and Duty of Loyalty owed to the current employer as long as he or she is working there that prevents the diversion or usurping of business opportunities or soliciting co-workers to “jump ship” with them.  Furthermore, certain jurisdictions also acknowledge protections such as the inevitable disclosure doctrine in which a constructive noncompetition agreement can be created by the court, a common law tort action for unfair competition, and have trade regulation statutes to avoid deceptive trade practices.

Nonetheless, as in the case of Nationwide Equipment Company v. Allen, 2005 WL 1228360 (M.D. Fla.), we are reminded and cautioned that a former employee can compete with a former employer, and in the absence of a non-compete agreement, the former employee cannot be precluded from utilizing contacts and expertise gained during former employment.  Without a non-compete agreement, the former employer can only sue to protect trade secrets.  And in litigation, a claim that information is a trade secret is a high bar to achieve in terms of proof to qualify for court protection.  Under Florida law, a trade secret consists of information that (1) derives economic value from not being readily ascertainable by others and (2) is the subject of reasonable efforts to maintain secrecy.  Basically, information that is generally known or readily accessible to third parties will not qualify for trade secret protection.

To provide protection, Florida courts look to a high degree of proof.  The employer must demonstrate that the trade secrets in question are secret, not available from public sources and that great effort and expense was put into their preparation and maintenance.  The goal is to be able to show proof of actions taken by you as an employer to preserve your trade secrets.  In terms of misappropriation of trade secret claims, Florida courts look to “uncontroverted” evidence of trade secrets, especially in regards to client lists, such as the investment of resources in the creation of customer lists, the value derived from maintaining the secrecy of the list and effort required to maintain the secrecy.  In Florida, trade secret protection, especially regarding client lists, can be destroyed by common work practices such as professional relationships, publicizing customers or bid wins in magazines or newspapers, and multiple source shopping.

To protect yourself and make your information more likely to be considered a trade secret, there are steps you can take.  It is important to identify trade secret information within your company and to communicate this regularly to employees.  As reinforcement, documentation showing the reasonable measures taken towards confidentiality and that employees are on notice by including confidentiality provisions in agreements with employees, independent contractors and even third parties (vendors, suppliers, licensees) as well as in manuals, handbooks, and policy and procedures can be beneficial to lay groundwork.  Establishing a system of internal electronic and physical security controls will assist in the review of materials or communications that are made public such as published articles or trade show presentations.  Internal procedures can require employees to maintain customer contacts and key information only in a media format supplied by the employer.

The bottom line is that it is important for employers to have in place and be able to demonstrate, some sort of ongoing, comprehensive trade secret and confidential information protection program to prevent the disclosure of confidential and proprietary information.  As a prudent business person, risk management is a part of any proactive business strategy, and the same should be employed in pursuing new key resources to achieve these goals.  That being said, a well-drafted Non-Compete Agreement is still the best way to help protect your business and to avoid unnecessary headaches and court time arguing over what is or is not a trade secret.