A few days ago, I wrote about the top ten things a company should do when an employee resigns to join a competitor (click here to see that post). But what about the flip side of that coin?  What mistakes should be avoided by departing employees and the firms that hire them?  Here are ten things to keep in mind:

1. Avoid Taking Business Records
Taking business records and information may be a bad idea for many reasons. It may be a violation of a confidentiality or nondisclosure agreement, and depending upon the content of the records, it may also constitute misappropriation of trade secrets. It may also give rise to a claim for conversion of property. In addition to these possible legal reasons, taking  business records angers employers and augments their suspicions. When a company learns that a former employee has e-mailed information to a home e-mail account, or, that a previously full file cabinet is now empty, a number of questions arise. Why did the employee take it? What else did the employee take? What does the employee plan to do with it? Upon asking these questions, employers may begin to “re-think” a previous decision to permit the employee to accept a new job free from litigation. The employee may no longer seem trustworthy, and the company may feel it can no longer rely on assurances that the employee’s new job poses little or no competitive threat.

2. Sabotaging Records
Refraining from taking records is a good start, but respecting the integrity of records is a good follow-up.  Some employees mistakenly feel they can secure an undetectable advantage by altering company records on their way out the door. For example, departing employees can be tempted to alter a telephone number in a computer system by one digit simply to gain a head start by slowing down the company’s ability to contact clients, or to delete key information, assuming that no one will ever find out. In this time of technological advancements, however, employers are gaining more and more investigative resources that enable them to discover such misconduct, and computer sabotage easily begets claims for a violation of the Computer Fraud & Abuse Act. Departing employees should be reminded that the “gain,” if any, secured by sabotaging records is far outweighed by the “pain” that may follow when their misconduct is uncovered.

3. Soliciting or Telling Clients Prior To Resignation or Departure
Even if an employee lacks a non-solicitation agreement, it is wise to remind departing employees not to begin soliciting clients until after their departure. Soliciting clients or advising them of the employee’s plans prior to resigning can lead to problems. Although the law varies among states as to the propriety of an employee giving clients advance notice of his/her departure, solicitation prior to the employee’s departure generally is not permitted. Pre-resignation solicitation may give rise to claims for breach of duty of loyalty and may serve as an aggravating factor for a judge who later considers the equities when contemplating injunctive relief. Departing employees often feel that if they do not advise clients of their impending departure, the clients will hold it against them. Although this is possible, employees should be reminded of the possibility of being enjoined from doing business with clients who were improperly solicited prior to resignation.  Moreover, solicitation of clients prior to resignation may result in the employer finding out about the impending resignation from the client, and not from the employee, resulting in a heightened mistrust of the employee. The safest route is for an employee to continue to serve the interests of the employer until the very last moment of employment.

4. Soliciting/Telling Fellow Employees Prior To Resignation or Departure
Similar to solicitation of clients prior to resignation or departure, solicitation of fellow employees may also be a bad idea. Departing employees often misjudge whether they can trust their colleagues to keep their impending resignation a secret.  Moreover, even if their colleagues do keep the secret, they frequently become witnesses after the employee’s departure as the former employer will turn to its remaining employees when it conducts its investigation. Employers resent being the last to know about an employee’s departure for a competitor, and they may scrutinize the former employee’s actions with greater vigor if they believe the employee was trying to encourage others to join in the move to a new company.

5. Failing To Segregate Non-Public vs. Public Data
Departing employees sometimes take information for innocent reasons, unintentionally creating the appearance of an intentional misappropriation of trade secrets or conversion of property. A common example includes employees taking contact data that contains not only personal contact information, but also professional contact information. Other employees remove sales records with the intent of retaining information to enable them to substantiate their entitlement to commissions after they depart. Another common example includes employees taking articles or studies they wrote simply because the employees feel proud of their work product, not realizing that the employer views the work product as belonging to the company. It is wise to remind a departing employee that the removal of “personal” information and property should be carefully analyzed to ensure that unwanted and allegedly proprietary or non-public information is not inadvertently taken.

6. Granting An “Exit Interview”
In some instances, it may be advisable for an employee to resign without giving prior notice. Negotiations concerning the parameters of the employee’s subsequent employment with a competitor may well be more successful if conducted by counsel after the employee has resigned. The simple truth is that no matter how well you coach employees about how to resign, they rarely appreciate the legal consequences of their words. Moreover, savvy employers may use an exit interview effectively to create evidence that later shows up in support of a motion for a temporary restraining order. If delicate legal issues surround the departure of an employee from one competitor to another, the discussion with a former employer may well be left to counsel, and the employee should be advised to avoid granting an exit interview.

7. After-Hours Access
Employees planning to leave for a competitor often access their offices or computers during odd hours with the intention of preparing for their departure when no one is around.  After-hours access can be detected by security systems, or in some cases, it can be recorded by computer systems. If such access deviates from an employee’s normal course of conduct, it may tip off the employer of the impending resignation. Even if such access is not detected until after the employee’s resignation, it creates the appearance of impropriety. If coupled with other common mistakes discussed in this article (e.g., after-hours removal of business records), the appearance of impropriety grows stronger.

8. Badmouthing The Firm
Any time an employee leaves to join a competing firm, there is likely to be some hard feelings. Nothing compounds these hard feelings like an employee who badmouths the former employer on the way out the door or even after departure. Departing employees should be reminded that badmouthing the former employer to fellow employees accomplishes little -- other than providing motivation for the former employer to make the transition difficult. Moreover, badmouthing the former employer to customers can have the additional effect of backfiring, resulting in the loss of otherwise attainable business and perhaps leading to defamation claims. Employees should be advised to take the high road.

9. Failing to Work Until The Last Minute
Understandably, it is hard for a departing employee to be motivated when a new job is on the horizon. In some instances, after providing notice of resignation, employers may limit the departing employee’s access to information and customers. But a decrease in productivity in the weeks or months leading up to a resignation or departure may tip the employer off about the impending resignation, and worse yet, it may create the appearance that the departing employee was holding off on completing work with the intent to divert such work to their new employer.

10. Failing To Consult With Attorney Prior To Resignation
Many hiring managers make the mistake of waiting until after an employee has been hired to get counsel involved, by which time the departing employee may have made many of the mistakes outlined in this post. Counsel should be included early in the hiring process so that departing employees obtain the advice they need. If there are attorney-client privilege concerns, the employee should be advised to consult with an attorney of his/her choosing. No matter what, transitioning employees from one competitor to another is a process filled with tension. Foolish mistakes can increase that tension and may lead to litigation or strengthen a party’s desire to litigate. Careful planning and early advice can minimize this risk.

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.

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.