Employees and Trade Secrets: Effective Strategies For

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EMPLOYEES AND TRADE SECRETS: EFFECTIVE STRATEGIES FOR

PROTECTING TWO OF YOUR COMPANY'S MOST VALUABLE ASSETS

Jill Scoby

Senior Corporate Counsel

Advanced Micro Devices, Inc.

Sunnyvale, California

Presented to

Institute for Corporate Counsel

Seventeenth Annual Seminar

Los Angeles, California

March 12, 1998

Employees and Trade Secrets:

Effective Strategies for Protecting Two of Your

Company's Most Valuable Assets

It would be an unusual day in the life of atypical high technology company if it did not include either the hiring or the departure of an employee who possessed critical, trade secret information. And although high technology companies get much of the press coverage regarding trade secret theft, they hardly have a lock on concerns about dissemination of trade secrets by former employees.' Indeed, given the definition of a trade secret set forth in the Uniform Trade Secrets Act, 2 virtually every company has important trade secrets that often reside in the heads of their employees. Whether you are hiring an employee who possesses such knowledge from his or her former employer, or whether you are losing an employee with such knowledge to a competitor, you need to be concerned about how employees intend to and in fact will use the trade secret knowledge they possess.

Protecting against employee dissemination of your company's trade secrets is a continuous process. It should begin on the day an employee starts work, and will not end even after that employee has left your company. Of course, no employer can or should make concerns about dissemination of trade secret information the primary focus of interactions with employees. The proper balance of trust and employee autonomy must be struck with your legal obligation to take reasonable efforts to protect your company's intellectual property, or lose the protection the Uniform Trade Secrets Act provides for it. Practical suggestions on how to strike that balance are the focus of this paper.

I.Fundamentals of Trade Secrets Law

A.UTSA Definition of Trade Secret

The Uniform Trade Secrets Act defines a trade secret as:

[I]nformation, including a formula, pattern, compilation, program, device, method, technique, or process that:

(1) Drives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; AND

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 3

Thus, the UTSA sets forth a threepart test for determining whether a particular piece of information is a trade secret. The information must be:

1) Secret; 2) Valuable; and 3) Subject to reasonable efforts to maintain its secrecy.

If these three factors exist, then information is likely to be protected from disclosure under the Act.

1.Element 1: The Information is Secret

Obviously, in order to be a trade secret, information must be secret. Therefore, only employees and third parties who "need to know" should have access to the information. Third parties who do need to know trade secrets should be bound by a nondisclosure agreement to use the information in a limited and strictly prescribed fashion, without disclosing it further.

In evaluating whether a piece of information meets the threshold requirement of secrecy, some courts have held that the mere fact a claimed trade secret could be discovered is not sufficient to defeat the element of secrecy.` However, other courts have held that a claimed trade secret should not be easily discoverable through public sources and should be difficult for competitors to acquires

2.Element 2: The Information is Valuable

Not all secret information is valuable, either to your company or to a competitor. Therefore, the second requirement for trade secret protection is that the claimed trade secret is valuable to you precisely because it is not known by your competitors or by the public. Courts tend to look to objective measures of value, such as how much time and money a company expended to develop a particular secret.6 Generally, the more time and money spent, the easier it will be to establish trade secret status.

It is important to note that courts have held "negative" trade secret information to be as valuable as traditional trade secret information. In other words, the fact that a company spent significant amounts of time and money only to learn that a particular effort was not worthwhile will be protected under the UTSA, so long as the other elements are me

3.Element 3: Reasonable Efforts to Maintain Secrecy

If a company makes no effort to maintain the secrecy of its trade secrets, then their ultimate disclosure will not be protected. On the other hand, the Legislative Committee Comment to the UTSA states that employers do not have to engage in

“extreme and unduly expensive procedures" to protect their trade secrets. Specific steps employers should take to meet this element are discussed more fully in Section III, below. However, the Legislative Committee Comment states, generally, that such things as 1) nondisclosure agreements; 2) procedures to ensure that employees return all confidential information upon departure; 3) training to enlighten employees on the types of information the company considers to be confidential; 4) "needtoknow" access to information; and S) procedures designed to avoid public disclosure through display, publication or advertising will go far to meeting this element of the Act.

B.Actual vs. Threatened Misappropriation

Misappropriation is defined under the UTSA in a number of ways. However, in the context of employeeacquired trade secrets, the Act defines it as follows:

`Misappropri ation' means:

Disclosure or use of a trade secret of another, without

express or implied consent, by a person who:

. . .

At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was:

. . .

Acquired under circumstances giving rise to a

duty to maintain its secrecy or limit its use; or

Derived from or through a person who owed a duty

to the person seeking relief to maintain its secrecy

or limit its use . . . .8

Two different types of misappropriation are encompassed in this definition. First, a former employee's may not "misappropriate" his or her former employer's trade secrets by disclosing confidential information to a new employer or other third party, because the former employee "acquired [the trade secrets] under circumstances giving rise to a duty to maintain its secrecy." Second, the new employer or other third party may not "misappropriate" the former employer's trade secrets by using information received froma former employee. "[A]t the time of disclosure," it is likely the new employer "knew" or "had reason to know" that the new employee "acquired [the trade secrets] under circumstances giving rise to a duty to maintain its secrecy or limit its use." In short, both the disclosure by the former employee and the use by the new employer may be enjoined.

Significantly, the UTSA does not require a company to sit and wait until its trade secrets have actually been stolen to take appropriate action. The statute specifically states: "Actual or threatened misappropriation may be enjoined."9 Thus, threat of misappropriation, whether supported by a direct, articulated threat or merely by

circumstantial evidence of the threat, is as actionable as misappropriation that has already occurred.

1.Inevitable Misappropriation

Because the UTSA permits enjoining threatened misappropriation, a number of courts have held that a former employer can bring an action to enjoin the "inevitable" misappropriation of trade secrets by a former employee who goes to work for a competitor.' Under the test set out in the seminal Seventh Circuit case of PepsiCo, Inc. v. Redmond,11 to prove inevitable misappropriation, the former employer must establish three elements:

The former employee has knowledge of its trade secrets;

The former employee has accepted a position in which his

or her new responsibilities are so similar to the ones held

at the former employer that it would be extremely difficult

not to use the former employer's trade secrets;

The former employee and/or the new employer have

engaged in behavior which indicates they cannot be

relied upon to protect the trade secrets possessed by the

former employee.

If an employer is successful in meeting this test, the remedy is typically an injunction that goes beyond the more standard "do not use or disclose" injunction, to preclude the former employee from engaging in certain job responsibilities for a specified period of time.

Not surprisingly, the doctrine of inevitable misappropriation has generated an entire body of law and commentary beyond the scope of this paper. The controversy over the doctrine is especially pronounced in jurisdictions such as California, which have a strong public policy disfavoring attempts to inhibit employee mobility.12 Despite the controversy, concerns about inevitable misappropriation are very real for virtually any employer whose employee is leaving for a competitor. Special concerns raised by this type of litigation are discussed more fully in Section III, below.

II.Protecting Trade Secrets Throughout the Employee's

Term of Employment and Beyond

At each stage of the employment process, from the hiring phase through termination, there are specific steps an employer can and should take to inhibit the disclosure, whether intentional or inadvertent, of trade secret information. Of course, in the event disclosure occurs, having taken some or all of the following steps will go far in establishing the third element required for protection of trade secrets under the UTSA:

that the company engaged in reasonable efforts to maintain the secrecy of the trade secret.

Not all steps will make sense for all employees. Obviously, the nature of the information held by an employee and its significance to the company's operation will dictate which steps are appropriate in a particular case. The more critical the information is to the company's overall business operations or competitive position, the more critical it is to engage in as many of the following steps as possible.

A. Protection of Trade Secrets During the Hiring Process

Often, a company must provide applicants with confidential information about the open position and the work they would perform in it before either can determine whether the right "fit" for the position exists. Similarly, applicants may wish to divulge detailed information about skills and knowledge they have developed as a result of working at the current employer. In either case, affirmative steps arerequired to ensure that trade secrets are not exchanged during the interview process.

1.Train the Hiring Manager

Hiring managers and others involved in recruiting key employees are obvious candidates for training about trade secret disclosure. The risk that they will inadvertently describe a critical (and confidential) process, product, or approach in an effort to convince a highly desirable candidate to accept the challenging new position is significant.

Training in this context need not be formal. It can include simple items such as a form that requires the manager to articulate trade secret information he or she wishes to discuss during the interviewing process. That form will serve several purposes. It will focus the manager (and any others in the recruiting process) on they type of confidential information that is likely to be discussed with applicants, so that such discussions can be sanitized and minimized. And it will provide the staffing department or the legal department with a list of trade secrets that should be set forth in the nondisclosure agreement to be entered into with the applicant (see section 2, below).

Training employees who will participate in the interview process should also focus on the importance of protecting the trade secrets of the company for which the applicant currently works. Interviewers should be instructed to inform applicants, especially applicants from competitors, that the company has no desire to receive or use any trade secrets they may possess, either during the interviewing process or in the event they are hired. If applicants are unsure of whether they can discuss particular projects on which they are working, interviewers should be trained to steer the applicant toward discussions of general skills and knowledge, as opposed to particular job responsibilities on confidential projects.

2.Require a NonDisclosure .Agreement

Before they are hired as employees and sign a Confidentiality Agreement, applicants for positions at your company are no different than any other third party when it comes to receipt of confidential information. Absent an agreement that specifically sets forth their obligation to keep trade secrets received during the interviewing process confidential, they are under no obligation to do so. Make sure that your company's staffing department includes an appropriate NDA in the hiring package of any applicant who will receive confidential information. A form NDA for this purpose is attached as Appendix A.

B. Protection of Trade Secrets During Employment

There are several steps the employer can take at the onset of the employment relationship to highlight the importance of protecting trade secrets and the need for the new employee to be sensitive to trade secret issues.

1.Confidentiality Agreement

All employees are obligated to keep their employers' trade secrets confidential, both during employment and after termination, even in the absence of a written confidentiality agreement. However, it is useful to have such an agreement in place with every employee for a number of reasons. First, it serves an important educational purpose. The confidentiality agreement sets forth in writing the employee's obligation with respect to trade secrets, and requires that they sign off on that obligation, acknowledging their understanding of its ramifications. Second, it can be used to deter departing employees from using or disclosing trade secrets they have learned during the course of their employment even after they leave. And third, it constitutes an example of the efforts you, the employer, have undertaken to protect your confidential information element three under the UTSA. A form Confidentiality Agreement is attached as Appendix B. The form includes a nonsolicitation provision, which will be discussed in further detail in section II. D. 2, below.

2.Entrance Interview with Legal Counsel

If the new employee has previously worked for a competitor, they will have to live up to obligations to their former employer with respect to trade secrets. One way to address this responsibility with the employee is to require that the new employee, his or her manager and legal counsel meet to discuss trade secret issues that may arise as the new employee enters into his or her new work routine. During the meeting, legal counsel can discuss scenarios which pose opportunities for inappropriate use or disclosure; they can reiterate the company's commitment to protecting the former employer's trade secrets; and they can review the procedures that are in place to assist employees who are unsure whether a particular decision will implicate the former employer's confidential information. An entrance interview checklist is attached as

Appendix C.

3.Employee Training: The Basics

As noted above, training on the basics of trade secrets: what they are, what the company expects employees to do to protect them., and how they can be inadvertently disclosed, is essential if a company expects to effectively protect its trade secrets. It is also essential if a company expects to take advantage of the protection afforded by the UTSA in the event misappropriation is threatened or actually occurs. A certain level of employee education and activity is required to meet the minimum standard of "reasonable efforts" set forth under element three of the Act.

a.Trade secret definition: Employee education begins with the definition of a trade secret. In addition to understanding the three basic elements of a trade secret, generally, employees should understand that not all trade secrets are set out in documents and that not all information they come across is a trade secret.

b.Needtoknow loops: Employees should be told to reveal confidential information to others inside the company only if those other employees need to know that information to do their jobs.

c.Document control procedures: Confidential documents, such as engineering notebooks, operational logs, research summaries, etc., should be subject to a check in and check out procedure, so that their location can be ascertained and controlled. Special procedures should be set up in the event employees need to take such documents off the premises.

Employees should be educated on the advantages and disadvantages of marking documents confidential. They should be informed of the company standards with respect to such markings. Finally, since no company can ensure that every confidential document bears a confidential stamp, employees should be informed that much of the company's confidential and trade secret information will not bear a stamp but will be entitled to the same protection as if it did.