How to protect trade secrets

Real Estate Weekly, March 1, 2000 by C. Jaye Berger

The rapid increase in technology and the explosion of sites on the Internet have made the protection of trade secrets and employee loyalty more important than ever.

Most architectural drawings are now done on computers. Pages of documents can easily be transported on a computer disc. Consultants may be receiving confidential information to create software or web sites. Many companies have their own web sites. Employees with programming skills are very much in demand and can easily be lured away by competitors. There may also be confidential information given by your firm to consultants or by clients to your firm.

If an employee leaves and your company has no signed, written agreements in place, that employee may well take your secrets and join up with a competitor. The best method for protecting this information is through a "Confidentiality and Non-Compete Agreement."

Sometimes your firm will be giving the agreement to an employee to sign, other times a client may be giving your firm such an agreement.

What Is a Trade Secret?

A trade secret is "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." The information must be secret and not something of general knowledge.

The way an office treats the information may also be an indicia of its status as a "trade secret." For example, only certain employees may be allowed to use software. There may be a list of clients and their unlisted telephone numbers that only certain employees have access to. Certain documents may be marked "confidential" and be kept in locked cabinets. So, if everyone in the office and every secretary has a copy of the client list, it may not be a trade secret.

This is an interesting topic to litigate because the nature of litigation is such that in order to present the case, an employer may have to reveal its trade secrets. This can make a company think twice about pursuing litigation. This is also one reason why arbitration should be considered. If nothing else, it is private. However, there must be an arbitration clause in an agreement signed by both parties.

We can all appreciate the significance of positive information. "Positive" information is what is discovered through research and used for development. However, "negative" information may be just as important. If it takes years of research to find "blind alleys" or "dead ends," this may be a protectable trade secret because it gives a competitor a head start if he knows what not to do or what not to waste time on.

There are several important aspects of timing in this area of the law. First, you must have employees or consultants sign these agreements when they join the company. If an employer presents such an agreement two years into the relationship or as the employee is walking out the door, you may have a signed agreement, but there may be a claim of duress later on when you try to enforce it.

Timing Is Everything

The second aspect is that an employer must take legal action quickly if he or she believes the signed agreement has been breached. An injunction is used to stop harm from occurring or to stop further harm. If you hope to get an injunction, you must be able to show that the information is not already being used. If the harm has been done, there is nothing to enjoin. There are only money damages.

Finally, you may limit an employee or a consultant from working for a competitor or in or near the area where the office is located, but it must be "reasonable." You cannot prevent someone from being gainfully employed. Thus, you may restrict someone from working for a competitor for let's say one year, but you cannot restrict them for 10 years. They have the right to earn a living. In addition, you may be able to restrict someone from working in your locale for a reasonable period of time, but you cannot prevent someone from working anywhere on the east coast of the United States.

Employees Are Fiduciaries

Not everyone realizes it, but employees have a fiduciary relationship with their employers. This is true even though there is no written agreement between the parties. The practical effect is that employees are not supposed to be setting up their own businesses or engaging in their own businesses on the employer's time. So there are certain activities an employee may be sued for before he leaves the employer, and certain activities he may be sued for after he leaves.

The Long Goodbye

The worst thing an employer can do is wait too long to end an employment arrangement. While the employer is dillydallying and biting his nails about an employee who is not working out or is planning to open his or her own business, the employee is staying late and copying computer discs and xeroxing documents. By the time the employer wakes up, the employee may have wooed away several of your biggest clients.

I always counsel my clients to contact me as soon as possible to discuss how to handle the situation. Don't leave important documents sitting on desktops in the office. Only principals should nave access to contracts. If you know that the employee has received certain confidential documents, you may want him to return them and sign an acknowledgement.