?Nondisclosure agreements are one way to prevent the misappropriation of trade secrets. Employers can still use them after the Federal Trade Commission’s (FTC’s) Jan. 5 proposed rule to prohibit noncompetes, but only if nondisclosure agreements aren’t worded too broadly.
Simply put, a trade secret is information used in a company’s business that is not known or readily accessible by competitors, that is protected from disclosure through reasonable efforts to maintain its secrecy, and that either provides a competitive advantage in the marketplace or has commercial value, said Steve Blonder, an attorney with Much in Chicago.
The Society for Human Resource Management (SHRM) believes the FTC should make sure its proposal differentiates between agreements designed to limit labor market mobility and those designed to protect confidential trade secrets or strategic planning.
“The broadly drafted regulation would jeopardize the ability of HR practitioners to require the repayment of education or training benefits; it would also endanger the use of nondisclosure and nonsolicitation clauses,” SHRM said in a statement.
Misappropriation Can Cause Different Types of Harm
The misappropriation of trade secrets can result in a loss of competitive advantage that can be difficult to measure financially, said Andrew C. Crane, an attorney with Fisher Phillips in Irvine, Calif.
For example, if a unique design for a product that a company has been working on for several years is misappropriated and becomes available to competitors, a company loses not only the amount of time and money spent on development, but also the potential market share it would have had as the only business with the unique design.
“This can be catastrophic to some businesses, especially those in cutting-edge industries that rely on being the first to market with a particular model or design,” Crane said.
Other harm, he noted, can include:
- Reputational harm—investors or customers don’t want to work with a company that has a reputation for failing to protect its trade secrets.
- Damage to the workforce—loss of clients or customers associated with the misappropriation of trade secrets can lead to employees leaving to work for competitors where business is not suffering.
- Costs associated with fighting the misappropriation of trade secrets, such as legal fees.
Recognize Signs of Misappropriation
High employee turnover can lead to the misappropriation of trade secrets. A classic example is when a sales employee leaves a company, takes a highly protected client list with him and then uses that client list when working for a new employer, Crane said.
“We often see other employees following that first employee in order to go where the business is going,” he added. “So, the bad actions of one employee can begin to snowball into loss of both customers and valued employees.”
High customer turnover and strange computer usage or access by employees are other signs of misappropriation, he added.
Review Nondisclosure Agreements Carefully
The FTC’s proposed rule would not prohibit most nondisclosure agreements, said Carsten Reichel, an attorney with Norton Rose Fulbright in Washington, D.C.
But employers should take a good look at their current nondisclosure agreements. In its proposed rule, the FTC provided an example of contractual terms that may be de facto noncompete clauses. One example was a nondisclosure agreement between an employer and a worker that was written so broadly that it effectively precluded the employee from working in the same field after the worker left the employer, said Robert Milligan, an attorney with Seyfarth in Los Angeles.
When drafting new nondisclosure agreements, companies would be wise to make sure that the agreements are not so broad in scope that they are viewed as noncompetes under the FTC’s proposed rule, Milligan said. Employees who have access to a company’s trade secrets should be required to sign nondisclosure agreements, Blonder said.
The categories of information subject to the nondisclosure agreement should be tailored to the company’s business and specific enough so that the employee understands what needs to be kept secret, Milligan said. The information the company is seeking to protect should not be publicly available information.
In the agreement, there should be exclusions for information already known to the employee—such as generalized knowledge and skills—and information the employee has a legal right to disclose under state or federal law, Milligan noted. For example, California and Washington have laws prohibiting employers from using agreements that don’t allow the disclosure of conduct the employee believes is unlawful, such as illegal harassment or discrimination.
The agreement also should specify that the employer will be irreparably harmed if there is a breach, and it should provide recourse in court or arbitration for breaches.
Take Other Preventive Steps
To prevent misappropriation, limit access to trade secrets to those with a need to know and keep any trade secrets material stored and handled in a secure manner, recommended Alex Lee, an attorney with Einhorn, Barbarito, Frost & Botwinick in Denville, N.J.
Physical areas of the workplace where employees are working with trade secrets should have limited access, said Leonard Samuels, an attorney with Berger Singerman in Fort Lauderdale, Fla.
Crane said other prevention steps include:
- Regularly auditing company computer usage.
- Requiring regular password changes.
- Distributing encrypted thumb drives that can be used only on internal systems and blocking any thumb drives not provided by the company.
Educate Workers
“It is not uncommon to see circumstances where employees are under the honest mistaken impression that if they personally created or worked on a project or document, that it belongs to them and can be taken or used without the consent of the employer,” Lee said.
Misappropriation sometimes can be avoided by making sure employees are educated about the employer’s policies.
Employers should make it clear, particularly at exit interviews, “that any work product by an employee on behalf of the employer belongs to the business rather than the employee,” Lee said.