NEW YORK-Protecting trade secrets may seem impossible in a marketplace characterized by the simultaneous increase in the amount of privileged information and the frequency of employees with access to it changing jobs.
Although state statutes and the way they are enforced widely vary, public policy overall tends to favor fostering the ability of workers to change jobs. Nowhere is the pro-employee stance in this regard stronger than in California.
However, this general predilection does not preclude an employer from guarding itself against the theft of valuable information, said Steven Cooper, a partner in the New York law firm of Anderson Kill & Olick P.C.
Cooper gave a presentation, “Trade Secrets and Non-Competition Agreements” at a recent meeting sponsored by Strang Hayes Consulting Inc., a New York-based investigative management company.
Beyond state statutes, federal law allows criminal prosecution for theft of trade secrets. There also is common law, which comprises the body of court precedent. Under this aegis, “a formula, pattern, device or compilation of information you have that a competitor doesn’t that gives you an opportunity to obtain advantage in the market” can be protected as a trade secret under nondisclosure agreements with employees, Cooper said.
In evaluating the validity of a claim that something is a trade secret, added Cooper, courts consider a range of criteria, including the extent to which it is known by those outside the company and by employees in the company; the measures, including advice from outside consultants, taken to safeguard the information; the value of the information both to the company that has it and to the new employer of that former employee; the amount of money, time and energy spent developing the expertise or information; and the ease or difficulty with which the secret information can be acquired, ascertained or duplicated by others.
“A hot area is strategic and marketing plans, which are highly price-sensitive. Another is customer lists,” Cooper said.
“Under the misappropriation doctrine of common law, an employee in possession of trade secrets has a duty of loyalty. Even without a noncompetition agreement and even if the information is not a trade secret, pilfering is against the law.”
By itself, determination and definition of a trade secret will prove indefensible unless accompanied by a noncompetition agreement that is reached while the employee is on the way in, not out, the door.
“There must also be `consideration’, which is often overlooked. This is something of substance you give in exchange, generally (in a noncompetition agreement) signed at or close to the time of hire,” Cooper said.
This can be severance, a cash bonus, a promotion or even, as a court ruled earlier this year, a stock option plan linked to such a nondisclosure agreement. In one case, a company paid a former employee severance for the entire period of the noncompetition agreement he signed as a condition of his nondisclosure of its privileged information to his new employer.
“I represented a telecommunications company that hired a high-level guy and, after six months, had him sign a noncompete agreement,” Cooper said.
“The courts wouldn’t uphold it because (the company) gave him no consideration.”
Texas courts are particularly strict in their adherence to the principle that requiring a noncompetition agreement simply as a condition of employment is insufficient, he added.
Noncompetition agreements also must be limited as to the time period and the scope of work activities and geographic areas they cover.
“Three to five years is problematic. In general, you can accomplish a lot of what you want in six to 18 months,” Cooper said.
“I see a lot of cases in the Internet/high-technology field. One court ruled recently the information age develops so rapidly that a one-year hiatus would equal several generations, if not eternity, in the work force and (therefore) put the (employee) at a disadvantage in the marketplace.”
California, a high-tech mecca, will not permit companies to require people to sign noncompetition agreements as a condition of employment, he added.
However, by invoking the very important but little known “doctrine of inevitable disclosure,” a company can prevent some former employees from competing with it even if no noncompetition agreement is in place.
“If a person is at such a high level, the courts have held it is inevitable he will rely on confidential information obtained from his former employer,” Cooper said.
Furthermore, a person’s new employer has a legal obligation to be proactive in ascertaining from a new hire if he has signed a noncompetition agreement with his former company. A policy of `don’t ask, don’t tell’ will not protect the new employer from the long arms of the law under the doctrine of “tortious interference with a contractual relationship,” Cooper said.
Win, lose or draw, legal challenges to theft of privileged information can have a salutary deterrent effect on the actions of other employees, particularly if the company publicizes its efforts, he said.
