How to Protect Trade Secrets and Confidential Information

Chances are that your company’s trade secrets—data compilations such as customer lists, supplier agreements, and internal operating practices—are among its most valuable assets. But many entrepreneurs miss the opportunity to protect them. It can seem like an impossible task to many, primarily because the greatest threat of misappropriation comes from your own trusted employees. But, here’s a simple five-step plan of action you can use to help avoid a trade secrets disaster from striking your business:

 

1.             Create a trade secrets policy

Start by identifying what trade secrets your company owns. Some trade secrets are easy to identify, like the formula for Coca-Cola, but recognizing the less obvious candidates can be just as important for a small business’s survival.

In legal terms, to qualify as a trade secret an item has to derive independent value from not being generally known to the public. That’s a pretty broad standard if you stop to think about it. I’m sure there are countless bits of data sitting on your hard drive right now that give your organization a competitive edge.  Perhaps you have a business plan, saved emails or deal memos with partners, letters to customers about plans for next year’s orders, or notes on an idea for a new product. All of these have strong potential to be classified as protectable trade secrets or confidential information.

The question of whether a customer list qualifies for this treatment has been heavily debated over the years. As far as the Florida courts are concerned, the answer depends on what type of information the list contains. If the list is limited to the names, addresses, and general contact information about a customer, it’s less likely to be protectable than one with specific information such as customer traits, buying history, anticipated needs, and payment history.

 Similarly, a list of carefully selected customers is more easily protected than a generic one. So too is a list that was paid for versus one that was free or assembled from publicly available sources. And, a list that contains the information for customers with whom the business has a long-standing relationship is more protectable than one comprised of occasional or short-term customers who probably have no particular loyalty to the company.

In most states, including Florida, the owner of the information has a duty to maintain its secrecy if it expects to enforce its rights to keep the information confidential. This is generally accomplished by having employees and contractors sign confidentiality agreements and restrictive covenants (see the next section).

So, once you’ve identified what trade secrets your company owns, implement a system that one would reasonably expect to ensure will maintain their secrecy. Be sure to include specific provisions about employees’ use of social networking websites, such as LinkedIn, Facebook and Twitter, too. And, make sure that company policy clearly forbids anyone from making your company’s confidential information public in any forum.

 

2.             Use Carefully Drafted Restrictive Covenant Agreements

Restrictive covenants are contracts that restrain trade and commerce. Non-compete agreements, non-solicitation agreements, and confidentiality or nondisclosure agreements are popular subtypes. There is a popular legal myth that says these are unenforceable. Not true.

Historically, the courts, following common law, viewed restrictive covenants as void and unenforceable. Federal and state antimonopoly statutes furthered that policy. As a result, employers and buyers of businesses had little recourse to protect valuable confidential business information.

But, today, Florida law favors and encourages the use of these agreements. Using contracts that restrict or prohibit competition is not prohibited if they support a legitimate business interest and are reasonable in time, area, and line of business. The term “legitimate business interest” includes, but is not limited to:

• Trade secrets, as defined by statute;
• Valuable confidential business or professional information that otherwise does not qualify as trade secrets;
• Substantial relationships with specific prospective or existing customers, patients, or clients;
• Customer, patient, or client goodwill associated with an ongoing business or professional practice, by way of trade name, trademark, service mark, or “trade dress”; a specific geographic location; or a specific marketing or trade area; and
• Extraordinary or specialized training.

Once the person seeking enforcement of the agreement establishes that the restraint is reasonably necessary to protect a legitimate business interest, the restricted party has the burden of proving that the restraint is unreasonable. If a court agrees, the judge is required by statute to reform the agreement wherever possible by setting reasonable restrictions as opposed to declaring the contract outright unenforceable. Therefore, even poorly drafted agreements can withstand challenges to enforcement.

 

3.             Make Employees and Contractors Aware of the Consequences of Wrongdoing

Having a thoughtful and thorough trade secrets policy does nothing if your employees and contractors don’t know it exists, understand what it means, and realize the consequences of breaking it. The best practice is to explain the agreement at the time the employee or contractor signs it and to dispel the myth that the agreements are unenforceable, and let them know that you have a policy of using the courts to enforce broken contracts. That will help reduce the chances of problems later.

 

4.             Prepare for Employee Defections

When an employee leaves to join a competitor, you must respond quickly.  The employee, especially a disgruntled one, has likely been planning an exit for weeks. The security of your trade secrets and your customer relationships may already be compromised.

Start by trying to get the employee to attend an exit interview. Revisit company policy on confidentiality and remind the employee about the agreements he or she signed. Have the employee confirm in writing if possible that they have not violated the policy or the agreements and will continue to honor them. Have the departing employee return all office keys, phones, computers, physical documents and electronically stored information that might be stored on their own devices. Lock out their remote access to voicemail and company computers. If your employee has been assigned a phone or notebook computer, make sure you have the ability to remotely lock it as well. This can go a long way to limiting the misappropriation of key information and allow you to intercept and appropriately handle calls from defecting customers.

Interview the defector’s co-workers. They often talk to them and they may even have made preliminary plans to join forces. At a minimum, the co-workers might be able to tell you what the defector’s post-employment intentions and plans are and let you know if they engaged in any misconduct prior to leaving.

Lastly, check for what isn’t there. Be sure that your former employee hasn’t sabotaged your business by deleting files or destroying key documents.

 

5.             Budget for and Control Litigation Expenses

Litigation budgets are difficult to estimate even under the simplest of circumstances. Much of the expense depends on the strategy and tactics used by the other side and whether they hire legal counsel to represent them in the case. Non-compete cases, especially where the employer seeks a preliminary injunction to stop the employee from competing while the case is pending, can get expensive early. Discuss with your attorneys what they would recommend you do to keep the budget under control, ask them to prepare a case budget, and have them periodically review it with you as the litigation progresses.