Responding to the strong employees’ market, employers are modifying compensation packages and policies to attract and retain talent. These revisions create a time-sensitive opportunity to reduce hidden risks in your company’s agreements and policies reducing the value of your company’s intellectual property (IP) portfolio and increasing the risk of IP theft. The time is now — the risk is substantial as shown in several recent cases. Washington courts recently awarded more than $60,000 in attorney’s fees against employers for unsuccessful claims enforcing non-compete agreements or trade secret laws. And, in another case where the employer won, the fees awarded against the employer exceeded $182,000.
As Ben Franklin said: “By failing to prepare, you are preparing to fail.” The threat to small businesses may be greater than to larger businesses, as discussed below. But the same precautions apply if an IP officer, Privacy officer, Human Resources officer or versatile jacks- and janes-of-all-trades manage the risks.
Timely dot your i’s and cross those t’s:
- Inventory IP assets and implement a documentation strategy with a checklist;
- Identify employees whose positions have changed over time;
- Identify non-compete agreements not signed at the start of employment;
- Review if agreements and policies for confidential/trade secret subject matter are specific enough;
- Review and document measures for protecting confidential information;
- Document compliance with Defend Trade Secrets Act to preserve the federal option;
- Review your onboarding and exit interviews checklists and documents;
- Look for inconsistencies among templates;
- Review potentially copyrightable materials for registration to enhance your remedies and avoid delay when suit is filed; and
- Revisit your privacy and data security policies in view of the General Data Protection Regulation (GDPR).
Generally we counsel that unless you prepare now, you may not have the time to inventory, value your IP assets on your financial statements and tie up loose ends when dealing with an acquisition or exit from business. The same precautions about risks apply when you are considering a new partnership/teaming relationship and are sharing information and technology.
But there is another risk in waiting and another opportunity arising now. With increased employee mobility there is an increased risk that a bad apple employee may steal your IP or you may inadvertently onboard a bad apple. Compounding the injury, you may discover you failed to implement simple safeguards or missed some key evidence when facing the time crunch of sending a cease-and-desist letter or filing a lawsuit. Actions on the front end (onboarding), the back end (exit interviews) and the middle (retention/annual reviews) reduce those risks and increase the likelihood of success in the event you sue or are sued.
Avoid the it-will-never-happen-to-us trap. The exception makes the rule. Here are three quick tips for IP protections:
- Audit. At any time, a quick-look limited annual IP audit is worth the investment, but especially in the current employees’ market.
- Documentation of changes. Business managers should define and manage expectations. Increased compensation, changes in job titles and responsibilities (promotions) are an opportunity to document your mutual obligations including post-termination obligations and remedies, to cure past grievances, and to get your house in order. Sometimes the question is how a series of documents fit together. For example, does a recent document inadvertently void earlier agreements? One case raised questions about whether a confidentiality agreement without an alternative dispute resolution (ADR) provision superseded and eliminated an ADR provision in another earlier agreement. Other cases raise questions about if a non-compete agreement is assignable and assigned through an earlier merger. Or you may want to anticipate changes in law and have precautionary remedies in arbitration — if for example, the legislature were to pass one of those frequently proposed bills prohibiting non-compete agreements. Yet, the nuts and bolts will not change.
- Confidentiality agreements listing secrets and avoiding ambiguities can be critical. Empirical studies indicate confidentiality agreements with employees and third parties statistically predicted that the court would find the trade secret owner satisfied the legal requirement to protect its purported secrets. The absence of a confidentiality agreement alone may be basis for court denying a misappropriation claim.
Some Questions Initial Questions to Ask. In a recent case where the employer prevailed, the employee handbooks identified as confidential information customer lists and preferences, financial information from customers, computer codes and programs, computer processes, and compensation. Although the list alone did not determine the outcome, listing secrets is favorable evidence, since some decisions have ruled particular customer lists were not trade secrets. Does your handbook or another document give employees notice of specific kinds of confidential information/trade secrets? Or, is your policy generic? Was it borrowed from another business or from a website and is not tailored to fit your business?
In the same case, the employees raised questions about the exception in a policy prohibiting sharing customer information except “in accordance with industry practices.” Does your policy have a similar ambiguity or has employee training provided concrete examples of similar exceptions?
Does your policy address personally generated customer contact information, pre-existing contact information and saving information on personal devices?
Your employees and business partners may hurt you. Empirical studies published in the Gonzaga Law Review confirm trade secret litigation has been on the rise. Supporters of the Defend Trade Secret Act of 2016 successfully made the political and economic case for federal trade secret law in view of the $5 trillion dollars in assets and billions stolen every year. Key factors were the importance of IP in a company’s value and competitive position, the interaction with patent law, a changing working environment and technological development.
Some contend misappropriation threatens small businesses more than large businesses from the standpoint risk spreading and reliance on key employees or business partners. And, smaller businesses may rely more on handshakes and trust — less on records that are get-and-grab reminders when an employee departs or key evidence when a dispute arises. And, the even lower unemployment rate now causes the prospect for greater employee turnover and potential theft.
Although third party threats are real, the vast majority of the suits were against someone the trade secret owners knew: a former employee or business partner according to one published study.
Employers were reported to be more likely to win a preliminary injunction but lose a dismissal motion in federal court according to one study published in the Gonzaga Law Review. The early victories may be attributable to pre-filing investigation where a prepared employer may determine what the employee took and may have documented the secrets and reasonable efforts to maintain secrecy.
Documentation matters. Sometimes even locating the operative agreement is a challenge when the rogue is a long-time business partner or employee. Sometimes a business fails to document critical meetings with vital records — like the business that recently said it could not remember what secrets it disclosed in a key meeting with a potential business partner that it later sued. You don’t want to be in that position. Having an adequate list of trade secrets on the shelf is the best way to manage the “recurring” issue of what extent a business may adjust its initial list of trade secrets asserted in a lawsuit after obtaining access to the files of the other side. Annual documenting of time and effort, the process for compiling data, and the independent economic value from disclosure or use is worth the effort. Those efforts may avoid a court finding “it’s a close call” or ruling there is no trade secret at all.
A quick-look, limited annual IP audit is worth the investment. And, updating your records and agreements are essential to avoid missing opportunities in the current employees’ market. Separately, with the rollout of the European privacy law, your privacy policies should be reviewed for adhering to the GDPR or other privacy programs. In some instances, your inability to protect your IP may pale in comparison to larger privacy risks. Yet, it may be as simple as documenting what you are already doing. IP and GDRP documentation are on your company’s critical path now.
An ounce of prevention is worth a pound of cure, as Franklin said.