Every day businesses across the country merge and consolidate their operations.  If your business acquires or merges with  another business, consider these issues when drafting the agreements to make sure that you will get the benefit of your bargain.

 1. Require a non-compete agreement: First and foremost, you’ll want to prevent the owners of the acquired business from competing with you by requiring restrictive covenants.  Without a restrictive covenant, the former owners can simply set up shop and compete with you immediately after selling you their company.  In drafting the restrictive covenants, consider not only what type of restrictions will protect you, but also what the courts will find enforceable.  In general, the prevailing test for enforceability in the sale of business context is reasonableness.  For example, if the business operated nationwide, then courts will be more likely to find that a nationwide provision prohibiting competition is reasonable.  However, if the company operated in a more limited area, then it may be unreasonable to demand a nationwide restriction and you may want to be more circumspect in the extent of the restriction.  Either way, it is advisable to include language in the agreement indicating that the company operated in a certain geographic area and that the seller acknowledges that a restriction covering that area is reasonable and necessary.

2. Be specific: When drafting the noncompete portion of the deal you should carefully define the prohibited activity.  Consider how the seller could hurt your business in the future and make sure that you draft the noncompete agreement to prevent activities that would enable the seller to resume activities that would harm the company.  This is normally done by delineating prohibited activities, which should include the seller not only acting as an employee in a competing business but also being affiliated with, controlling or having an interest in any competing business. 

3. Address key employees:  Are any of the principals of the business you’re buying going to continue on as employees?  If so then you will want to have two different agreements: one for the sale of the business and an employment agreement for key individuals.  Make sure that the provisions in these agreements begin to run from the right dates.  The purchase agreement should include restrictive covenants that begin to run from the closing date and the restrictions in the employment agreement should begin to run from the date that the employee’s employment terminates.  This will ensure that you are protected even if the noncompete associated with the sale of the business has long expired when the key employee resigns.  (See Non-competes in Fixed Term Agreements: Special Care Required).

4. Indetify value:  Don’t forget where the value of the deal lies.  While you will likely want the sellers and upper management to sign restrictive covenants, consider whether the company would lose a lot of its value if other employees left after the sale.  It may be that the real value of the company is in its sales force or research and development employees.  If so, consider having those employees sign restrictive covenants in connection with the purchase of the company.  In some cases, it might even make sense to offer those employees incentives to sign the restrictive covenants instead of jumping ship.

5. Include an agreement not to recruit employees:  Do the principals of the prior business have relationships with other employees?  If so, you may want to also include provisions in their employment agreements providing that they will not solicit, recruit or even hire other employees for a period of time after their employment ends.   If the benefit of the deal includes the employees, you don’t want the seller to act as a pied pier and lead these valuable employees away.

6. Address assignability:  Who will have the right to enforce the restrictive covenants in the future?  You may think that this should not matter to you but the restrictive covenants are important assets of your business, and you need to make sure that you will obtain the value of those assets if you decide to sell your business someday.  Therefore, any successor companies must be able to enforce the covenants and protect the business.  Add language indicating that the agreement is automatically assigned to a successor upon merger or acquisition to increase the likelihood that it will be enforceable.  (See Employee Retention & Attrition in Mergers/Acquisitions)

7. Don’t undermine your protectable interests:  Make sure that other aspects of your deal do not undermine the enforceability of your restrictive covenants.  For example, restrictive covenants in the sale of a business context are generally enforceable to protect good will.  It would undercut the claim that you needed protection of goodwill if your term sheet indicated that the value of the goodwill being purchased was zero. 

8. Make sure agreements are between the appropriate parties: What is the structure of the deal?  You will want to consider the structure because this can affect how the agreements are constructed.  For example, if the company being purchased will be merged into the buyer, then make sure that the employment agreements are between the individuals and the purchaser.  However, if the company will remain a separately existing entity, then those agreements should be with that company. 

9. Protect confidential information:  Don’t forget to protect confidential information and trade secrets.  In many sales, the information being purchased is a key element, but how to protect that information is not carefully considered.  This is surprising given that the misuse or disclosure of that information can do a lot of damage.  Make sure that the sale agreement provides that confidential information and trade secrets will not be “used or disclosed” after the sale.  Also make sure that you broadly define the confidential information that adds value to the business, but do not be gratuitously overbroad.

10. Draft agreements with teeth:  Finally, make sure that your agreements have teeth.  If the seller violates the restrictive covenants and you have to take steps to enforce his or her obligations, make sure that you have included an attorney’s fees provision so that the seller will have to pay the fees and costs that you had to incur in bringing litigation to stop competitive activities.  Also include terms providing that the seller agrees to injunctive relief – essentially a court order requiring that the competitive activity cease – if the provisions of the agreements are violated or there is a reasonable belief that they have been or will be violated.  This will help ensure that you do not have to pay more money to get the benefit of your deal.

Purchasing another business can be a great way to increase your market share, consolidate resources or buy out the competition.  However, you should consider these issues when crafting your deal so that you obtain all of the benefits of your new purchase.  For additional issues to keep in mind when drafting restrictive covenants, see Top Ten Things to Consider When Drafting a Non-compete Agreement.

Susan Guerette is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips.  Susan has litigated departing broker matters for nearly fifteen years.  To follow Ms. Guerette on LinkedIn, click here.

A case pending in New York federal court, BLT Restaurant Group LLC v. Laurent Tourondel, Michael Cinque and LT Burger, Inc., provides a reminder of important lessons for professionals in the food services and restaurant industry regarding employee defection and trade secrets issues.  The case arose out of a dispute between BLT Restaurant Group and its accomplished executive chef, Laurent Tourondel.  BLT was formed in 2004 and operated eighteen restaurants across in the United States and internationally.  BLT hired Tourondel as its Executive Chef.  As part of the agreement between BLT and Tourondel, BLT incorporated Tourondel’s name and initials into the branding of the BLT restaurants, hence the acronym: Bistro Lourent Tourondel.  One of the restaurants in the BLT family was BLT Burger.    

After Tourondel left BLT, he opened a new restaurant named “LT Burger”.  BLT sued Tourondel, a colleague who left with him, and LT Burger, and alleged that the LT Burger menu copied the BLT menu “almost exactly” and was based on BLT’s confidential and proprietary information.   BLT also claimed that LT Burger and Tourondel used the same proprietary recipes at LT Burger as were used at BLT Burger.  BLT further alleged that LT Burger misappropriated elements of BLT’s marketing strategy by promoting Tourondel through similar media as were used by BLT.  In addition to violating Tourondel’s contractual confidentiality and non-disclosure obligations, BLT alleged that LT Burger and Tourondel breached Tourondel’s duty of loyalty to BLT and that Tourondel and LT Burger engaged in unfair competition. 
 
In support of its claims that Tourondel breached his contract by using and disclosing confidential information, BLT alleged that this information consisted of its proprietary business models, financial and contractual information, “know-how,” the development of the BLT Burger Menu, the use of BLT Burger’s proprietary recipes, and the promotion of Tourondel and LT Burger through a magazine used by BLT Burger to promote itself.  Tourondel argued that these claims should be dismissed because all of the information – except for the recipes – cannot be a trade secret as a matter of law.  Notably, Tourondel conceded that the proprietary recipes could serve as the basis of a breach of contract claim. 

There are some important lessons to note from this dispute for restaurateurs and those investing in or launching restaurants:

• Make sure that agreements address confidentiality and non-disclosure obligations of key talent in the kitchen.  These individuals can constitute a competitive threat if they leave, which makes it important that they agree at the outset to not disclose the restaurant’s confidential and proprietary information.  Such agreements can also help to support claims for special or emergency injunctive relief, such as a temporary restraining order, in the event a case requires some speedier action by a Court.   

• Use employee policies that also define confidential and proprietary information and  the ethical and permissible uses of such information.  While the Court in Tourondel did not discuss the existence of an employee manual, it can be an important tool to establish an employee’s knowledge and understanding of what types of information are confidential and proprietary.  This, in turn, can support claims for breach of contract and fiduciary duty.  

• Ensure the proper protection of confidential information by limiting access to that information and securing it on the premises.  To the extent a restaurant has confidential or proprietary recipes or unique business methods and strategies, it should be sure to disclose them only on a “need to know” basis, and it should implement and enforce policies that strictly prohibit employees from copying or distributing the information or physically or electronically removing it from the restaurant for any reason.

In the realm of examining whether non-compete provisions should be used in particular professions, this article by Clay Travis asks an interesting question: why don’t college football coaches have non-competes?  It is a timely question in January as every sports media outlet is full of headlines about coaches unexpectedly moving between schools, a recent example being the abrupt move of Todd Graham from Pitt to Arizona State.  It’s difficult to answer Travis’s question, but here are a few potential explanations: 

1.  Non-compete restrictions have to be limited.  Generally speaking, a non-compete provision has to be limited to protecting an employer’s legitimate interests.  The most common legitimate interests are exposure to confidential information, customer relationships, and goodwill.  It is possible to see these interests show up in college football.  For instance, the contents of a playbook or a team-specific game plan could be confidential information.  Contacts with recruits could function as protectable relationships.  An advertising campaign built around a certain coach could be evidence of goodwill. 

The problem in terms of enforcing a restriction would be the geographic scope.  Take the example of Graham.  Pitt would have a hard time establishing that Graham coaching Arizona State poses a competitive threat because: (a) the teams do not play one another, so Graham would not have the opportunity to use his knowledge of Pitt’s schemes against them (plus, those schemes would change under a new coach, so the shelf life of that confidential information is limited); (b) it is unlikely that Pitt and Arizona State compete for specific players because they have different recruiting bases; and (c) Pitt and Arizona State do not compete for fans, i.e. there is no hypothetical consumer who will decide to buy season tickets for Arizona State instead of Pitt based on a hypothetical advertising campaign by Pitt featuring Graham.

In fact, a notable example of a college coach who does indeed have a non-compete restriction  - Arkansas’ Bobby Petrino – establishes the limits of the approach.  The non-compete provision in Petrino’s original contract with Arkansas prevented him from leaving Arkansas to coach another team in the Razorbacks’ division: the SEC West.  When Petrino signed a new agreement with Arkansas in January 2010, the scope of the non-compete expanded to cover every team in Arkansas’ conference, i.e. from a five-competitor non-compete to an eleven-competitor restriction.  It would be very difficult to fashion a non-compete restriction to prevent coaches from making most coaching moves because the universe of competitors is limited by geography and conference affiliation. 

2.  In a word, leverage.  When addressing the usage of non-compete restrictions, it’s always important to consider the industry at issue.  College football coaches ply their trade in a very unique set of circumstances.  College football generates a tremendous amount of revenue for the schools with major programs.  However, those schools are forbidden by NCAA rules from paying the players who generate that revenue (except through the form of athletic scholarships).  Without being able to direct revenue to the players who make the biggest difference between winning and losing (and thus being in the red or black, financially speaking), schools have to direct that money to other sources.  Thus, successful college football coaches become a more valuable commodity and have significant bargaining power.  They can use that bargaining power to avoid restrictive covenants.

Again, consider the example of Pitt and Todd Graham.  There is a small pool of potential head coaches who could be the difference between Pitt going 6-6 while drawing 50,000 per game and going 9-3 while selling out Heinz Field every week.  The members of that pool, knowing that they are rare, might have leverage to prevent the institution of a non-compete restriction.  Moreover, Pitt might think twice about seeking to enforce a non-compete restriction in court because of the deterrent effect that the suit would have on potential replacements.  In short, college football is a unique industry where enforcement of restrictive covenants might face hurdles.

3.  The contracts at issue already contain remedies.  Most college football coaches have significant buy-out clauses in their agreements.  In one notable example, Michigan and Rich Rodriguez had to pay $4,000,000 to West Virginia when Rodriguez left Morgantown before the expiration of his contract.  It could be hard to pair buy-out provisions with non-compete restrictions because the former could be construed as an estimate of the potential damage that a coach would cause by leaving before the end of the contractual term.  Thus, a college football program seeking to enforce a non-compete restriction by obtaining an injunction would face an argument from its former coach that the agreement specifies the remedy.  The program would have to meet its obligation of showing irreparable injury – a showing that is required to obtain an injunction – because the buy-out clause can be argued to address the injury.  To speculate for a moment, schools with major college football programs may have decided that they would rather get money from buy-out clauses than attempt to use a non-compete restriction that can only cover the program’s conference rivals.

Michael Elkon is Of Counsel to Fisher & Phillips in its Atlanta office and a member of the Firm's Employee Defection & Trade Secrets Practice Group.  To receive notice of future blog posts, follow Michael Elkon on LinkedIn.

For any company seeking to protect its trade secrets, it is important to take reasonable measures designed to maintain the secrecy of the information at issue.  Following is a list of question companies ought to consider:
 
1. Do your employees execute a confidentiality agreement?
2. Do your employees with significant customer relationship responsibilities have agreements not to solicit your customers after termination?
3. Do your employees with access to your key business strategies and/or with significant customer relationship responsibilities have limited agreements not to compete, in states where permissible?
4. Do you have agreements preventing departed employees from raiding your current workforce?
5. Have you recently reviewed any of the above-mentioned agreements to make sure they comply with current law in the states in which you operate?
6. Have you made sure that your severance/release agreements do not supersede any of the above-mentioned agreements?
7. Do you implement policies, signed by all of your current employees and new hires, addressing the use of computers, emails, voice mail and the internet?
8. Do you implement policies, signed by all of your current employees and new hires, addressing physical access to trade secrets and/or confidential information?
9. Do you implement policies, signed by all of your current employees and new hires, addressing vendors and third party access to trade secrets and/or confidential information?
10. Do you periodically audit your personnel files to make sure that critical employees executed the above-mentioned agreements and acknowledgments regarding the above-mentioned policies?
11. Do you mark important documents containing your trade secrets and/or confidential information as “Confidential”?
12. Do you limit access to your trade secrets and/or confidential information to only those employees with a legitimate need to access such information?
13. Do you lock file cabinets and offices that store trade secrets and/or confidential information?
14. Do you cross-shred all paper documents containing your trade secrets and/or confidential information?
15. Do you secure all dumpsters and post “NO TRESPASSING” signs in appropriate locations?
16. Do you train your employees not to discuss your trade secrets and/or confidential information around third parties?
17. Do you instruct your employees to report any repair people that show up without being called, and to not grant access to equipment until their identities are established?
18. Do you require all visitors to wear visitor tags and be escorted at all times?
19. Do you utilize confidentiality provisions in standard contracts with subcontractors, vendors and suppliers?
20. Do you utilize contract and licensing agreements that expressly state the parameters for using certain information, and that include restrictions on “reverse engineering” or disclosing that information during activities such as a contract bidding process?
21. Do you meet with subcontractors, vendors and suppliers to stress the need for confidentiality for certain projects or other situations?
22. For your sales force (if applicable), do you limit each employee’s access to the customer database to only those customers for which the employee is responsible?
23. In states where appropriate, do you update employee agreements when employees change job duties?
24. Do you limit access to your trade secrets and/or confidential information on your computers to only those employees with a legitimate need to know?
25. When an employee is terminated, do you immediately delete the employee’s access to computers, phone systems, and private property areas?
26. When an employee is terminated, do you conduct an exit interview wherein you remind the employee of his or her continuing duty not to use or disclose your trade secrets and/or confidential information?
27. When an employee is terminated, do you request that the employee return your property, including your trade secrets and/or confidential information?

When is it okay for an employee to steal trade secrets?  According to the New Jersey Supreme Court, the answer is when an employee is trying to preserve evidence of discrimination. 

In Joyce Quinlan v. Curtiss-Wright Corporation, the New Jersey Supreme Court addressed the question of whether an employee may take confidential documents from his or her employer for the purpose of helping in the prosecution of a discrimination claim. (Click here to read the opinion.)  The Court emphasized that it had to strike a careful balance between an employer’s right to conduct its business while safeguarding its confidential information and an employee’s right to be free from discrimination and retaliation for speaking up about perceived discrimination.  The Court observed that neither right is absolute, and achieving the appropriate balance requires an intensive analysis.

Factual Background

Quinlan worked for Curtiss-Wright for approximately twenty years when she was passed over for a promotion by a male employee whom she believed to be less qualified.  In her role as the Executive Director of Human Resources, Quinlan had access to many employee files.  She began to review these files looking for evidence to support her claim that Curtiss-Wright engaged in a pattern of widespread gender discrimination.  She collected 1,800 pages of documents, some of which contained employees’ confidential personal information, including Social Security numbers and salary information.  Some time later, Quinlan was given another document concerning the job performance of the male employee whom she believed had been wrongfully promoted.  She gave all of these documents to her lawyers, and needless to say, the parties had widely different opinions on whether she should be permitted to use them in litigation against the company.  After learning that her pilfering of documents was an ongoing affair, Curtiss-Wright terminated her, and she amended her complaint to assert a claim for retaliation.

"Totality of the Circumstances" Test

After a tortured procedural history, the case found its way to the New Jersey Supreme Court.  In deciding the issue, the Court adopted what it termed a “flexible, totality of the circumstances approach that rests on consideration of a wide variety of factors.”  These factors are as follows:

First, courts should evaluate the manner in which the employee obtained the documents.  Were they stumbled upon innocently in the course of the employee’s ordinary duties?  Or did the employee rummage through files or snoop around someone’s office?

Second, courts should consider what the employee did with the documents.  Did the employee simply give the documents to his or her attorney for the purpose of obtaining legal advice?  Or did the employee leak the documents to third parties not entitled to see them?

Third, courts should evaluate the content of the documents to assess the strength of the employer’s interest in maintaining confidentiality.  Does the document contained privileged or proprietary information?

Fourth, did the employer have a clearly defined confidentiality policy?  Has the employer routinely enforced that policy in the past?  Did the employee act in violation of the duty of loyalty to safeguard confidential information obtained during employment? 

Fifth, was the document disclosed in a manner that was unduly disruptive to the employer’s business?  This factor should be assessed in conjunction with the degree of relevance of the document.  In other words, was the document taken merely for the purpose of casting aspersions, distracting from the issues, or to sensationalize a claim?  Or was the document central to the discrimination claim?

Sixth, why did the employee take the document instead of merely describing it to counsel so that it could be sought in discovery? 

Seventh, all of the above factors must be considered in the context of the strong competing interests – the employee’s interest in being free from discrimination and retaliation, and the employer’s interest to operate it business within the bounds of the law with an expectation that its employees will behave with loyalty.

A "Hair-Splitting Distinction?"

Applying these factors, the Supreme Court upheld the jury verdict and punitive damages awarded in favor of Quinlan.  In doing so the Court observed a fine line.  Curtiss-Wright could terminate Quinlan for the act of taking documents, but it could not terminate for her for using them in her claim against the company.

In a scathing dissent, Justice Albin criticized what he saw as a “hair-splitting distinction made by the majority…that defies ordinary understanding.”  According the Justice Albin, the majority’s holding “sends a disturbing signal to both the business community and the bar that employee theft may actually pay.” 

The majority opinion was reached after a painstaking review of analogous federal decisions.  It underscores the lesson that employers should not assume that they can terminate an employee for taking documents in support of a discrimination claim.  Employers may feel uncertain about their authority under these circumstances, but the New Jersey Supreme Court believes employees are on equally uncertain ground because they “run the significant risk” that their conduct will be found unprotected by the courts.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Opening arguments began yesterday in the trial of Sergey Aleynikov, a former Goldman Sachs computer programmer accused of stealing the computer code underlying Goldman’s high-frequency trading programs.  When Aleynikov was taken into custody by the FBI, he reportedly said he did not intend to take any proprietary code.  Rather, he intended to take only open source code. 

What’s the difference?  Open source code is computer code that is publicly available on the internet for use by anyone.  Overlooked initially by most analysts, this “open source” defense featured prominently in opening arguments by Aleynikov’s attorneys.  Depending upon how much of what he took was open source code, Aleynikov’s defense is a little like saying that although he took the Coke formula, he only intended to take sugar and water.  Whether his defense will fly is likely dependant upon how much of what he took was open source code, and how much was not.  It will also likely matter how the open source code was used by Goldman Sachs, and what restrictions were placed on the use of this code by the parties who made it available on the internet. 

Typically, in order to copy open source code from the internet, a party must agree to the terms of a “click” or similar pop-up license.  Although there are hundreds of different open source code licenses, many require that the user of the code must make publicly available any subsequent use of the code.  In other words, if Goldman’s high-frequency trading programs were built on the back of open source code, it will be more difficult for Goldman to claim trade secrecy for such programs.  

Indispensible Lesson

Whether Aleynikov’s defense prevails, this case presents an unmistakable and imperative lesson for companies that derive appreciable revenue from computer programs.  Such companies should immediately assemble key personnel from management, business, information technology and inside and outside counsel with one agenda item:

• identify the top five most productive computer-based, proprietary assets and determine whether any of these assets have open source code embedded in their digital architecture.  If the answer is yes, then the company needs to identify the different types of open source code that are involved, analyze the licensing requirements associated with each such code, assess the use and application of the code, and determine the exposure based on these factors.

To the extent there is a risk that the proprietary status and trade secret protections are diluted or compromised, then companies need to work with counsel to identify a cure.  Otherwise, companies could find themselves answering what might come to be known as the Aleynikov defense.

Brent Cossrow is a member of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group.  Mr. Cossrow's practice focuses on e-discovery and other electronically stored information issues.  As always, please feel free to share your thoughts and questions in the comment space below.  Mr. Cossrow’s recent interviews with the media regarding the Goldman Sachs trial can be found here and here.

In the business world, protection of trade secrets can make the difference between success and failure, or profit and loss.  This post seeks to show you how to protect your company’s trade secrets so that in the event one of your employees steals a trade secret, you will be in the best possible position to succeed in litigation stemming from this theft. 

How to Implement a Trade Secrets Protection Program

First, you need to identify your trade secrets (or perhaps more pointedly, the information for which you seek trade secret protection).  The next step is to identify the specific physical, information technology and other security protocols your company can take to protect such information.  The first line of defense against any form of corporate espionage is to implement a trade secrets protection program.  This consists of a three-pronged approach: (i) addressing employment relationships; (ii) controlling access to your company’s trade secrets; and (iii) knowing your company’s employees.

A.        Address Employment Relationships

i.          Require Your Employees to Sign Confidentiality Agreements, Non-Solicitation Agreements, Covenants not to Compete, and Assignment of Invention Agreements

As a basic first step, to the extent permitted by applicable law, you should have your company’s employees sign confidentiality agreements, non-solicitation agreements, covenants not to compete, and assignment of invention agreements.

A confidentiality agreement accomplishes four primary purposes: (i) it acknowledges that the employee has been or will be exposed to certain company trade secrets and other confidential and proprietary information; (ii) it identifies this information with at least some degree of particularity; (iii) it prohibits unauthorized use or disclosure of this information; and (iv) it requires the return of all trade secrets and other confidential and proprietary information on separation from employment and requires employees to sign a termination certificate declaring that all trade secrets have been returned.

A non-solicitation agreement prohibits a departing employee from soliciting, directly or indirectly, the company’s customers or clients, regardless of where they are located, to do business with the employee.   The primary requirement for a non-solicitation agreement is to identify the customers or clients that an employee cannot solicit.  As a general rule, courts do not require that a specific geographical territory be included in the agreement, although various states do differ on this issue.  In addition, when determining whether a non-solicitation agreement is reasonable, courts will often consider the extent to which the employee had actual contact with the customers or clients.  Some states, like Louisiana, are more restrictive and require that, in order to be enforceable, a non-solicitation agreement must contain certain language required by statute. 

A covenant not to compete – also known as a “non-competition agreement” or “non-compete agreement” – protects two aspects of corporate life: (i) customers or potential customers, and business interests that a company has spent considerable effort developing and which are vital to its financial health; and (ii) confidential information, which, if possessed, used or disclosed to unauthorized third parties could result in significant financial harm to the company.  Most courts will enforce covenants not compete, as long as they are drafted in accordance with state law.   As a general rule, covenants not to compete are enforceable only to the extent that they protect the legitimate business interests of companies (such as protecting trade secrets) and they contain reasonable time and territory restrictions.    To be reasonable as to territory, a covenant not to compete should at most only address that territory which the company actively conducts business (although it is safer to restrict the territory to that in which the employee was actively engaged).  To be reasonable as to time, a good rule of thumb is that most courts will enforce restrictions up to two years; three to four years will be closely scrutinized and held to a more rigorous standard; and five years or more will be virtually unenforceable (except perhaps in a sale of business context). 

An assignment of invention agreement is a provision or separate document that “assigns” to the company any inventions or new discoveries made by an employee or independent contractor during the course and scope of his or her employment or work for hire.    Some states, such as California, regulate the use of assignment of inventions agreements by requiring certain notice to employees (Lab. Code § 2870).

            ii.         Implement Appropriate Security Policies

Second, implement policies, to be signed by all of your company’s current employees and new-hires, addressing the following areas: (i) the use of computers, e-mails, voice mail and the internet; (ii) physical access to trade secrets; (iii) telecommuting; (iv) employee privacy concerns; and (v) vendors and third party access to confidential information. 

            iii.        Train Your Company’s Employees

Third, train your company’s employees and new-hires annually in basic security awareness, the company’s security policies and procedures, their security responsibilities, and the proper procedures for reporting and dealing with theft of trade secrets.

Furthermore, consider including in the employees’ personnel files documents that show the steps taken to inform him or her about the confidentiality obligations – such as a copy of the signed confidentiality agreement, receipt of the employee handbook and other key policies, a review of the trade secrets protection program, and a record of attendance at training meetings that address the need to protect trade secrets.

iv.        Protect Your Company’s Trade Secrets Upon an Employee’s Termination

Employee terminations create a particularly likely window for loss of trade secrets.  Failure to take reasonable steps in the event of a termination can result in loss of critical information, or loss of trade secrets protection.  In order to preserve your company’s trade secrets, the termination or resignation of an employee with access to this highly sensitive information should trigger related security precautions.

You should immediately disable the accounts and access privileges of the terminated employee, and change all passwords, remote access codes, and, in appropriate instances, even VPN and dial-in numbers immediately at the time of termination.  Also, you should “unplug” terminated employee’s computer systems and remove dial-up modems from the terminated employee’s workstation.  Such actions will prevent the employee from accessing files after leaving.  Examine the employee’s computer/laptop before he or she leaves to determine if the employee has accessed  and/or copied sensitive information in recent months.  Conduct an exit interview and remind the employees during the exit interview of his or her continuing duty not to disclose trade secrets, and reference any documents to the effect.  At the exit interview, request that the employee return all company property.  Consider using a checklist for returning company equipment, keys and confidential information.  You might also consider obtaining from the departing employee information about his or her new employer, which could help you determine the potential risk of any unauthorized disclosure or use of trade secrets.  

B.        Control Access to Your Company’s Trade Secrets

Controlling access to your company’s trade secrets means keeping the trade secrets confidential and providing access only to those having a legitimate need for it.   This is especially important in protecting trade secrets because one or more critical elements of proof under most state laws is showing that steps were taken to protect the secrecy of the information.

i.          Secure the Physical Environment

Examples of how you can secure the company’s physical environment include:

·        Restricting access to servers, routers, and other network technology to those whose job responsibilities require access;

·        Installing surveillance equipment to monitor access to servers and other critical systems;

·        Keeping wire closets, server rooms, phone closets, and other locations containing sensitive equipment locked at all times;

·        Keeping an inventory of the equipment and periodically check for missing equipment;

·        Placing locks on computer cases to prevent hardware tampering;

·        Locking file cabinets and offices that store sensitive information;

·        Designating all documents containing trade secrets or confidential information as “confidential” and implementing procedures to help ensure that all documents deserving the “confidential” designation are appropriately marked when initially created;

·        Cross-shredding all paper documents containing confidential information before trashing them;

·        Securing all dumpsters and posting “NO TRESPASSING” signs; and

·        Making sure all discarded magnetic media is erased;

While it is not necessary for your company to utilize every one of the above-mentioned protocols in order for information to qualify as a trade secret, your company’s failure to take routine physical precautions may lead a court to deny trade secret protection.

ii.         Manage Access to the Company’s Computer System Resources

Examples of how you can manage access to the company’s computer system resources include:

·        Implementing passwords for all employees for access to all critical system resources;

·        Making sure passwords are set up with multiple characters (including numbers and letters);

·        Requiring employees to change their passwords at least every 60 days and preventing them from reusing old passwords;

·        Periodically training employees in password selection and protection and training them not to tell their passwords to others;

·        Implementing controls on employees’ use of the internet, the sites they can visit, and the software they can download; and

·        Monitoring and logging employees’ internet actions.

iii.        Secure the Company’s Computer System and Network

Examples of how you can secure the company’s computer system and network include:

·        Keeping audit logs of all access requests to critical systems and sensitive information;

·        Encrypting sensitive information;

·        If the company’s network is on the internet, using a firewall and auditing the servers for security holes on a regular basis;

·        Making sure the system has all of the latest security patches and fixes installed;

·        Making sure all floppy disks brought into the company are scanned for viruses before use;

·        Backing up all workstations and servers at least weekly and storing backups offsite;

·        Keeping a log of all backups, including backup date, backup locations, and the employee performing the backup;

·        Periodically testing the backup system to ensure the ability to restore date if necessary;

iv.        Protect Against Third Party Disclosure

Examples of how you can protect the company against disclosure of its trade secrets to third parties (such as independent contractors, vendors and suppliers) include:

·        Training your company’s employees not to discuss the company’s trade secrets or confidential information around third parties;

·        Instructing employees to report any repair people that show up without being called, and to not grant access to equipment until their identities are established;

·        Requiring all visitors to wear visitor tags and be escorted at all times;

·        Utilizing contract and licensing agreements that expressly state the parameters for using certain information, and that include restrictions on “reverse engineering” or disclosing that information during activities such as a contract bidding process;

·        Utilizing confidentiality provisions in standard contracts with any subcontractors or suppliers; and

·        Meeting with third parties to stress the need for confidentiality for certain projects or other situations.

C.        Knowing Your Company’s Employees

One of the best ways to protect your company’s trade secrets is not to hire a thief in the first place. When hiring employees in sensitive areas, or who will have access to confidential information, you should do a thorough pre-employment screening of those individuals.    You might also consider performing background checks on current employees, as long as those checks are done in accordance with applicable laws (such as the Fair Credit Reporting Act and analogous state laws).

In the broadest sense, the term “pre-employment screening” is shorthand for the process of assessing applicants for a company’s particular job or category of job.  The assessment is performed according to company policies, based upon the nature of the job category and applicable laws (such as the Fair Credit Reporting Act and analogous state laws), which are designed not only to reveal fully qualified applicants, but also to potentially weed out those employees who may end up stealing your company’s trade secrets.  The elements of a pre-employment screening may include the following: education and credentials verification; past employment references; criminal history; motor vehicle report; social security number trace; credit report; workers’ compensation records; civil lawsuits; judgments, liens and bankruptcies; security clearances; and merchant databases.

Conclusion

The day is past when trade secrets can be adequately protected merely by requiring employees to execute confidentiality agreements, non-solicitation agreements and covenants not to compete.  Such traditional contractual protections can be of critical importance as a deterrent and in increasing the success in trade secrets litigation, but now companies must deploy an arsenal of modern electronic weapons and physical barriers to protect their trade secrets and retain their competitiveness.  In today’s increasingly complex electronic world, effective protection against hi-tech theft must include proactive and reactive weapons.  Without them, companies may have little chance of protecting the information upon which their business depends.

Given the state of the economy, employers are more conscious than ever of the need to protect trade secrets and customer relationships when an employee leaves, especially when the departing employee is opening a competitive company or joining a competitive firm.  Employers often neglect, however, to take advantage of a very simple, but extremely important, tool in dealing with departing employees: the exit interview.

The exit interview provides employers with a chance to gather valuable information relating to the departing employee’s future employment plans, including any risk associated with the employee’s possible plans to compete in the future.  The exit interview also presents an opportunity for an employer to remind departing employees of any confidentiality or post-employment restrictive covenants in place, to provide departing employees with copies of any and all agreements they executed during their employment, and to advise departing employees of the company’s expectations regarding post-employment conduct.

The exit interview is the perfect time for an employer to determine what confidential or proprietary information belonging to the company the departing employee has in his or her possession, and to demand the return of all company property.  Indeed, it may be in an employer’s best interests to have a departing employee sign a certification during the exit interview acknowledging that he or she received copies of previously executed post-employment restrictive covenants and certifying that all confidential or proprietary company information and property has been returned.

Despite the many benefits associated with conducting exit interviews, the exit interview process is not utilized, or under-utilized, in many companies.  Employers should consider having an exit interview process in place so that they are prepared to interact with departing employees.  It is important to educate management and the human resources department regarding the importance of exit interviews, and the procedure for conducting successful exit interviews.

Preparation for Conducting Exit Interviews

Before the need to conduct an exit interview arises, employers should ensure that they have a process in place to effectively and quickly interview departing employees.  It is not uncommon for employees to resign without providing advance notice.  Consequently, employers must be prepared in advance of an employee’s surprise resignation in order to take advantage of the benefits of the exit interview process.

It is prudent for employers to develop an exit interview form or checklist for use during interviews of departing employees.  Important topics to address during exit interviews may include:

·        Future Employment Plans.  Employers should attempt to determine the name of any new employer, the departing employee’s position and job responsibilities at the new employer, and the location and/or sales territory where the departing employee will work on behalf of the new employer.  Employers may also want to request the employee’s permission to provide the new employer with a copy of the departing employee’s employment agreement or any other agreement containing restrictive covenants.

·        Employment Agreements and/or Confidentiality Policies.  When possible, employers should provide and review with departing employees any applicable employment agreement, restrictive covenant agreement and/or confidentiality policy.  If a resignation comes as a surprise and the employer is unable to retain the departing employee’s agreements prior to conducting the exit interview, the employer should be sure to advise the departing employee of the company’s general policy on post-employment competition and use of confidential information.  The employer should advise the employee that the company demands compliance with all post-employment restrictions on the departing employee’s ability to compete and that the company will take action to enforce its contractual and common law rights if necessary.  A copy of applicable agreements and policies can be sent by mail if they are not available at the time of the exit interview.

·        Possession of Confidential Information.  Employers should determine what company information, if any, the departing employee has in his or her possession.  If possible, employers should inspect the departing employee’s office for visibly missing information.  Employers should also question departing employees as to whether they have any information relating to what the company considers to be confidential information (including possibly customer or pricing information) in electronic form, on personal computers, stored on cellular phones, in hard copy in home offices, etc.  It is important for employers to collect all company-issued computers, telephones, and other property during the exit interview.  It is also wise for employers to disconnect a departing employee’s remote access to the company’s computer system and to consider whether to set aside the departing employee’s computer for possible forensic imaging. 

·        Pre-Resignation Conduct.  An important topic to address during exit interviews is the departing employee’s conduct within the weeks or months leading up to his or her resignation.  Employers should inquire as to whether the departing employee has engaged in efforts to remove or retain confidential information.  Employers should also question whether the departing employee has shared any company information with a third party – such as a new employer.  Depending on the departing employee’s position, it likely makes sense to question whether the employee has advised any customers or colleagues of his or her intent to resign.  Gathering this information at the time of the exit interview will assist in evaluating the risk of loss of company information, customers and employees.

Preparation of Employee Acknowledgement Forms

Employers should also develop and have available employee acknowledgement forms for use during the exit interview process.  Such forms may include the following acknowledgements: (1) that the exit interview occurred; (2) that the employer provided and/or advised the departing employee regarding contractual agreements containing post-employment restrictive covenants or confidentiality obligations; (3) that the employer advised the departing employee of its intention to enforce all contractual and common law rights against the departing employee, if necessary; (4) that the departing employee received and had access to the employer’s confidential information during his or her employment, and that the employee will not use or disclose the employer’s confidential information for his or her own benefit or the benefit of others; (5) that the employer advised the departing employee of the need to return all company information and property; and (6) the employee’s certification that he or she has returned all company property and has not retained any confidential information.  The acknowledgement form should provide an area for the departing employee to sign and note the date.

Although the exit interview consists of a simple conversation with a departing employee, the conversation can provide valuable information to assist the employer in protecting its confidential information, customer relationships and relationships with remaining employees.  The exit interview provides a fleeting opportunity to gather information that may become inaccessible or difficult to determine once an employee is gone.  When conducted properly, the exit interview constitutes an extremely useful tool for employers in the departing employee context.