Seyfarth Synopsis: Protecting trade secrets from employee theft requires more than using an NDA when onboarding employees. If businesses want to protect confidential information, they need a cradle-to-grave approach, reiterating employee obligations regularly, including during exit interviews. (Yes, you need to do exit interviews!)
Headline stories in intellectual property theft tend to involve foreign hackers engaged in high-tech attacks to pilfer vast troves of data stored by big businesses or government entities, such as those involving Russian government hackers or the Chinese military. The losses are staggering. In 2009, McAfee estimated that cybercrime cost worldwide economies $1 Trillion. That number was cited by (a then-youthful) President Obama in his first speech on cybersecurity. Since that time, attacks by professionals and nation states have remained at the forefront of both news reports and the public perception. Since then, hack attacks have remained at the forefront of both news reports and the public perception.
But despite the disproportionate attention given to high value, high-tech attacks by outsiders, many U.S. businesses recognize that threats from the inside are just as costly as revealed by a 2014 PricewaterhouseCoopers survey. Nevertheless, “only 49%” of organizations surveyed had “a plan for responding to insider threats.”
Trade secrets are particularly susceptible to theft because they, by definition, consist of secret information with economic value. Company insiders often find that information too tempting to be leave behind when changing employers, or when seeking new employment. Therein lies the problem.
Trade secret theft by employees may not grab as many headlines as neo-Cold War espionage, but the data suggest that employees, not outsiders, pose the greatest threat of loss from trade secret theft. The good news is that a little proactivity by employers will go a long way toward keeping them out of the 49% who lack a plan to prevent leaks.
Of course, in California, obtaining protection is not all that simple. Non-compete agreements are, with very limited exceptions, a non-starter under Business and Professions Code § 16600, so you need special steps to keep your trade secret house in order. And because a California trade secret plaintiff (e.g., a former employer suing its former employee) likely must identify its trade secrets with reasonable particularity before commencing discovery, it pays to invest time on the front end to identify and inventory your trade secret information before litigation arises.
So, what can employers do?
Update Non-Disclosure Agreements to Comply With the DTSA, and See That Employees Know Why NDAs Are Important
Almost all employers (we hope) have confidential/non-disclosure and trade secret protection provisions in their employment agreements. But have these agreements been updated to comply with the recently enacted Defend Trade Secrets Act (“DTSA”) and its important employee/whistleblower notification provisions? And what are employers doing to help ensure compliance with their agreements? Rolling out new agreements is relatively easy. Making sure they are effective takes some doing.
Remember, your organization will not even have trade secrets to protect unless it has made “efforts reasonable under the circumstances” (under the California Uniform Trade Secrets Act) or has taken “reasonable measures” (under the DTSA) to maintain the secrecy of the information it claims to be a trade secret. Cal. Civ. Code § 3426.1(d); 18 U.S.C. § 1839(3)(A).
Implement Computer Use and Social Media Agreements and Policies
Most trade secret theft occurs via electronic device. Make sure your company has computer use and access policies and agreements that:
- Set forth that company computers, network, related devices, and information stored therein belong to the company;
- Indicate that access to company computers and networks are password-protected, with access authorized only for work-related purposes;
- Make use of data storage/access hierarchies, with the most valuable information being accessible on only a need-to-know basis, with security access redundancies (housed in a highly secure database that requires unique user credentials distinct from the log-in credentials the employee uses to access a computer workstation);
- Identify which devices are allowed in the workplace—BYOD practices have become popular, but also present challenges in regulating information flow and return. If employees use their own devices to perform work for the company, make clear that the company data on those devices belong to the company;
- Notify employees that the company reserves the right to inspect devices used for work to ensure that no company data exist on the devices upon termination of employment;
- Define whether cloud storage may be used by employees, under what terms, and what happens when employment ends;
- Define whether external storage devices (e.g., thumb drives) are allowed and under what terms; and
- Identify whether and how employees may use social media associated with their work—trade secrets must never be publicly disclosed, but beware of any overreach that would suppress employee communications protected by the National Labor Relations Act.
Build a Culture of Confidentiality—Make Sure Employees Know What The Company Regards as Confidential and Then Remind Them Routinely
Employees need to understand what information your company considers confidential. Educating employees on this subject should start at the beginning of employment, continue throughout employment, and recur at the end of employment. Tools that can help in this regard include:
- Onboarding procedures to emphasize the importance of company confidential information;
- Including in NDAs an express representation that the employee does not possess and will not use while in your employ confidential information belonging to any former employer or other third party;
- Using yearly (or more frequent) brief interactive e-modules emphasizing the importance of maintaining the confidentiality of company information;
- Requiring that the employee sit for an exit interview; and
- Requiring that the employee certify in writing, during exit interviews, that they have returned all company information and property (the employee may provide property on the spot or make statements about what will be returned—you should inventory all such indicated property and information).
Properly Exiting Employees—Particularly for High Risk Employees—Matters!
Not all employees present the same risk of loss. Generally, the loftier an employee is in the corporate hierarchy the greater the threat that that employee will expose company confidential information. The following recommendations are for mid-to-high risk departing employees:
- The person conducting the exit interview must be prepared—use a checklist;
- “Preparedness” for higher-risk employees will include (1) identifying, before the exit interview, the trade secret and confidential information the employee routinely accessed and used during employment, (2) reviewing for unusual activity the departing employee’s computer and work activities (including card key facility access data, where available) in the days and weeks leading up to their exit, (3) using an exit certification as noted above, and (4) inquiring where the employee is going and what position the employee will hold;
- Where initial investigation warrants, discreetly interview company-friendly co-workers of the departing employee to identify potentially suspicious conduct;
- Immediately shut down the departing employee’s access to company computers, networks, and other data repositories (e.g., cloud or other off-site storage). Cutting off access to company computer and data may be warranted before exiting the employee, depending on the perceived risk of data theft;
- Send a reminder-of-obligations letter to the now former employee, reciting ongoing obligations to the company and attaching, where useful, a copy of the NDA the employee has signed;
- Consider notifying the new employer, but tread carefully here to avoid overstepping or providing a basis to be accused of interfering with the employment relationship between your former employee and the new employer; and
- Depending on the threat level you perceive, consider having a departing employees’ emails preserved and their electronic devices forensically imaged.
With best practices in place, protecting your company’s trade secrets should be more like routine, but vigilant maintenance, than preparing to do cyber battle with foreign states. Organizations understandably focus on creating the next “big thing,” increasing sales, and building investor value, but slowing down enough to be purposeful in protecting intellectual property is a must.
Edited by Michael A. Wahlander.