In many companies, getting a new hire to sign the standard nondisclosure or confidentiality agreement is just a check-off item for Human Resources. Once signed, the agreement is placed in a personnel file for safe-keeping. These agreements give some employers a false sense of security that they have done everything necessary to protect their secrets and provide an enforcement mechanism in the event of an employee’s later misappropriation. Unless the employer takes additional, reasonable steps to maintain the confidentiality of the information however, these agreements are not very useful. This article discusses how courts and legislatures have defined trade secrets and the steps employers can take to protect their confidential information and therefore enforce their confidentiality agreements.
Employers must take reasonable steps to protect trade secrets. A trade secret is generally defined as information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (a) has economic value because it is not generally known and not readily ascertainable by proper means by others who can exploit the information, and (b) is subject to reasonable efforts to maintain its secrecy. Most employers readily understand the first part of this definition. The information to be protected gives the employer a competitive advantage in the market and if the information were widely known and used by competitors it would harm the employer’s business.
Many employers, however, ignore or forget the second part of the definition, at their peril. Disputes most often arise over whether or not the employer took reasonable steps to protect the secrecy of the information taken by a former employee. An employer does not have to take heroic steps to protect its trade secrets, but it must not fail to take reasonable steps. The steps taken must demonstrate the employer’s clear intent to maintain the confidential nature of the trade secret.
What is reasonable depends on the nature of the information being protected. Courts generally focus on procedures designed to educate employees on what the employer considers to be confidential, provide physical or technical restrictions to secure and protect the information, limit the dissemination of the information to third parties and retrieve the confidential information at termination of employment.
Employers must educate their employees about confidential information and trade secrets. Requiring employees to sign nondisclosure agreements is not enough. Short of including an exhaustive list of every trade secret, the agreement itself does not put the employee on specific notice of what, if anything, the employer considers confidential. Employment manuals can be used to describe what is considered to be confidential and the restrictions and limitations on access and use of the information. Documents with sensitive or confidential information, such as blueprints, drawings, customer lists, pricing data and financial spreadsheets should be watermarked, stamped or labeled “confidential” or “secret” or provide some other disclosure to alert any employee reading them of their protected nature. Proprietary notices are not by themselves sufficient, however they provide useful evidence of the employer’s intent to maintain the information as a secret and assist in educating employees of the nature of the information. The educational efforts must be persistent and frequent. Periodic memoranda to all employees reminding them of the confidential nature of their work, and the information considered confidential, should be disseminated and documented in personnel files.
Employers should restrict trade secrets within the workplace. Confidential information should be restricted and access to work areas, files or data bases containing trade secrets and confidential information should be limited and protected. Such reasonable efforts can include, for example, using and enforcing computer passwords, releasing information on a "need to know" basis, locking information in file cabinets or file rooms with limited keys and shredding confidential information when disposing it. Printing and copying of sensitive and confidential information should also be limited. Where appropriate, visitors to the workplace should be required to sign a form on arrival obligating them to keep information they observe confidential and should be restricted from areas containing trade secrets and be escorted at all times.
Employers must protect information from outsiders, too. If the information an employer is trying to protect has already been disclosed or placed in the public domain, it will be difficult to argue its confidential nature. Courts will consider what steps were taken to protect trade secrets from disclosure to or by third parties. Employers should require vendors or customers with access to trade secrets or confidential information such as customer lists, source code, recipes, ingredient lists, specifications or pricing information to sign appropriate non-disclosure agreements. Access to information by third parties should always be limited and the ability of the third party to further disseminate such information should be tightly controlled. Information in advertising, marketing literature and websites should be screened to insure nothing considered private is published. Courts have held that if confidential information is disseminated by the company to its vendors, buyers, customers, suppliers, consultants or other third parties, without protection or restriction, all the internal effort to maintain its secrecy in the workplace will be useless.
Reasonable efforts should continue even after the employee leaves the company. Post-termination procedures should be used to remind departing employees of their obligations to maintain the confidential nature of the information acquired during their employment. All confidential information must be retrieved and the employee should verify that all information, electronic or otherwise, has been returned and no copies have been kept by the employee. Departing employees should be asked to re-affirm, in writing, their understanding of the confidential nature of the information and consideration should be given to alerting their new employers of the existence of non-disclosure agreements signed by the employee.
Ultimately, confidentiality agreements cannot make information that has not been kept confidential secret again, and the intention to keep things secret, however sincere, is not enough. Signed agreements sitting in personnel files are not enough. An employer must take reasonable and repeated steps to protect the competitive advantage provided by its trade secrets.