When building a business, it is common for owners to focus much of their attention on physical assets like real property, equipment, and inventory, and for good reason—these are important items for virtually every business, no matter its size. However, there is another asset that business owners oftentimes overlook in the development stage: information. Whether in the form of customer relationships and data, pricing and sales strategies, manufacturing processes, proprietary software and algorithms, business plans, marketing data, and other confidential know-how, these assets are essential components for successful businesses. Consequently, their protection from public disclosure and misappropriation is paramount. Unfortunately, many business owners do not take sufficient steps on the front-end to ensure that their information is afforded the maximum protection under the law.
As business lawyers, we frequently see disputes involving former employees, competitors, vendors, and business partners accused of misappropriating a business’s confidential information. While every situation is unique, several common themes appear repeatedly in these disputes. Here are five practical steps that business owners should take to protect trade secrets before a dispute arises.
1. Know what Qualifies as a “Trade Secret.”
When people hear the term “trade secret,” they typically envision highly secretive manufacturing processes and specifications, undisclosed food and beverage recipes, and classified scientific data. While those items may indeed qualify as “trade secrets,” the term is actually much broader in its scope. In Kentucky, “trade secret” is statutorily defined as “information, including a formula, pattern, compilation, program, device, method, technique, or process” that derives value from not being generally known to a business’s competitors or the public, and which the business has taken reasonable efforts to keep confidential. See KRS 365.880(4). Thus, information afforded trade secret protections often includes things like customer lists and data, private pricing information, marketing strategies, sales data, vendor and supplier information, and internal business methods and procedures.
Before a business can take the requisite steps to protect its trade secrets, it must identify what those trade secrets are. Thus, business owners should consistently be asking themselves, “what information gives my business a competitive edge in the marketplace?” This is the best place to start.
2. The Business’s Confidential Information should not be Treated Casually.
In our day-to-day work as attorneys, an issue we see regularly is a business that possesses information that arguably qualifies as a trade secret, but which the business has been treating casually for an extended period of time.
For example, suppose Company A is in the business of wealth management and advising, and over the course of many years it has developed client relationship lists and historical data. This information could qualify for trade-secret protection—and oftentimes does. However, Company A did not restrict access to this information: employees across multiple departments can freely access it, the information is routinely discussed with third-party vendors and other professionals, and Company A has never implemented any sort of confidentiality or non-disclosure agreements with the individuals who have obtained access to the information. In this circumstance, Company A will have a more difficult time arguing to a court that this particular information qualifies for trade secret protections if, say, Employee A left Company A for another advisory firm, Company B, and began utilizing the information.
On the other hand, suppose Company A possesses the same client relationship lists and historical data, but that it strictly limits personnel access to those employees with a legitimate business need, it stores associated documentation in a secured manner, and it consistently requires those with access to the information to sign confidentiality agreements. In this instance, if Company B still managed to obtain information regarding Company A’s client relationship lists and historical data, and began using that information, Company A would have a much stronger argument that Company B unlawfully misappropriated Company A’s trade secrets.
3. Where Appropriate, Utilize Confidentiality or Non-Disclosure Agreements.
When fighting to protect information, documentary evidence is incredibly important. Frequently, that evidence takes the form of a confidentiality or non-disclosure agreement setting forth with specificity the information to be kept confidential and what the parties to the contract may and may not do with that information. Setting clear boundaries and memorializing them in writing can go a long way toward strengthening a business’s position if litigation occurs.
Businesses seeking to provide these types of protections for their confidential information can place confidentiality provisions in certain employment contracts, they can set them out in a standalone non-disclosure agreement, and even in vendor or other third-party contracts, where appropriate. The key is to clearly and narrowly define the information that is to be kept confidential. Obviously, it can be tempting to define “confidential information” as everything under the sun, encompassing virtually everything a company does day-to-day. Business owners should avoid this. Defining “confidential information” in an overly broad fashion like this could cut against the business in litigation and negatively affect the credibility of its protestations of confidentiality—not everything a business does is confidential, and not every piece of information is entitled to trade secret protections.
Ultimately, the most effective confidentiality provisions and non-disclosure agreements expressly identify specific categories of protected and confidential information and clearly communicate expectations regarding use and disclosure of same. Narrowly tailoring these provisions and agreements to suit a business’s needs is crucial.
4. Pay Special Attention to Departing Employees and Co-Owners.
One of the most common scenarios resulting in trade secret litigation involves a departing employee or co-owner who takes confidential information with them to a new business, and then begins using that confidential information to their new employer’s benefit.
For example, suppose Employee A had access to Company A’s confidential information, having signed a non-disclosure agreement. Employee A has resigned his position from Company A and taken a job at Company B. Before resigning, Employee A reviewed Company A’s trading algorithm, taking notes and committing to memory various aspects of same. Now, employed with Company B, Employee A is assisting it in implementing a similar algorithm for the benefit of its clients.
Obviously, whether that conduct is lawful may ultimately depend on the facts, the contracts in place, and the nature of the information involved. Nevertheless, this scenario illustrates why transition planning is critical—it is much easier (and cheaper) to handle these issues on the front-end rather than after the misappropriation occurs.
When employees or co-owners are leaving, business owners should consider, among other things, the following: (a) recovering all company-issued devices; (b) reminding the departing employee in writing of their confidentiality obligations, retaining a copy of the writing for the company’s records; (c) conducting an exit interview in which the company affirmatively addresses confidential information and company property; and (d) terminating unnecessary system access for the employee in the run-up to their departure.
One of the greatest risks involved in trade secret misappropriation comes in an employee’s or co-owner’s final days at a business and in the immediate wake of their departure. Thus, it is crucial for business owners to effectively manage these transitions and keep their eye on all pertinent confidential information. This will lessen the risk of misappropriation and also place the business in a much better position legally if misappropriation ultimately does occur.
5. Take Immediate Action if You Suspect Trade Secret Misappropriation.
When it comes to trade secrets, time is almost always of the essence. Trade secrets derive much of their value from being confidential and inaccessible to the public or to a business’s competitors. Accordingly, once an unauthorized disclosure is made, the clock begins to tick, and business owners should act to shut down these tortious activities without delay. Acting quickly allows business owners to better preserve evidence for litigation, but from a more practical perspective, the longer the trade secret is out there, the more difficult it will become to contain the damage.
For example, suppose Company A learns that Employee A forwarded private client relationship data to his personal email account before leaving to join Company B. If Company A waits too long to curtail Employee A’s activities, the private client relationship data may have spread too far and be impossible to contain, all to Company A’s material detriment.
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In a data-driven world, a company’s information is often one of its most valuable assets. Because of this, it is essential to safeguard against that information’s unauthorized release. Courts are more willing to protect a business’s confidential information if the business has taken steps on the front-end to protect itself. By taking the steps outlined herein, business owners can better preserve the competitive advantages they work every day to maintain, and they can avoid costly disputes down the road.
