Best practices to protect your trade secrets when your employees with knowledge of them leave

Unfortunately, there are too examples in recent years of current employees misappropriating and existing employees leaving with the employer’s trade secrets. In May 2007, two former Coca Cola employees were sentenced to prison for conspiring to steal and sell trade secrets to rival Pepsi. (http://www.nytimes.com/2007/05/24/business/24coke.html).

On February 3, 2009, DuPont filed a lawsuit against Kolon Industries, a South Korean-based company, for misappropriation of trade secrets and confidential information relating to its product, Heracron. The suit alleged that Michael Mitchell, a Kolon employee who formerly worked at DuPont, had retained highly confidential information on his home computer that he illegally passed to his new employer. Mitchell later pleaded guilty to trade secret theft. In September 2011, a jury awarded damages to DuPont in the amount of $919.9 million. In April 2015, following a reversal on appeal, the parties settled and Kolon agreed to pay $275 million in damages to DuPont. (https://www.reuters.com/article/dupont-kolon-lawsuit/update-2-kolon-industries-pleads-guilty-in-dupont-kevlar-trade-secrets-case-idUSL1N0XR2GW20150430).

And, on May 15, 2017, Judge William Alsup of the Northern District of California issued a narrowly tailored preliminary injunction in favor of Waymo LLC in the trade secret misappropriation lawsuit filed by Waymo against Uber Technologies, Inc. Waymo, the self-driving car business which is a subsidiary of Google’s parent company, accused Uber of conspiring with Anthony Levandowski, a former Google engineer, to steal trade secrets from Google regarding self-driving car designs. As alleged, Levandowski stole the trade secrets to use in his own newly formed startups, Ottomotto LLC and Otto Trucking LLC, which Uber would acquire months later. (https://www.nytimes.com/2017/05/15/technology/uber-self-driving-lawsuit-waymo.html).

This is not to say that trade secret misappropriation is common. But, it is a common occurrence that employees with trade secret knowledge switch employers, especially in San Jose, California. Employees are required to obtain knowledge of their employer’s trade secrets to do their job. But, your employee then leaves to go to another company, even a competitor. California has strict laws preventing employers from restricting an employee’s right to move to another company. This all leads to the inevitable problem: As an employer, how do you protect trade secrets when an employee leaves? This article addresses the best practices of a company to prevent misuse of their trade secrets if their employees leave.

A. Noncompetition agreements

Employers most often use noncompetition agreements to protect their trade secrets beyond the term of an employee’s employment. However, noncompetition agreements are generally invalid in California. Section 16600 of the Business and Professions Code provides, “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The purpose of this section is to ensure that people have free mobility in changing employment.

There is an exception to this rule to protect trade secrets. Assuming that the exiting employee signed a noncompetition agreement or some similar agreement to protect trade secrets, the employer may prevent the exiting employee from working for a competitor or otherwise competing provided that it is necessary to protect the former employer’s trade secrets. The agreement must be narrowly tailored solely to protect the trade secret. Employers should avoid writing overly broad noncompetition agreements that include items that a court likely would not find to constitute trade secrets. There is case law stating that the courts will not redraft an overbroad noncompetition agreement. Thus, if it prevents an employee from competing to protect nontrade secrets, then the entire contract will be void.

A common example is the use of the former employer’s customer lists. Depending on the circumstance, an employer’s customer list can constitute a trade secret. Assuming that the customer list is a trade secret, an agreement not to solicit the former employer’s customers is enforceable if the employee obtained the knowledge of the customers through the former employer’s trade secret customers list. This would include not only the names of the customers but any customer preferences provided that they too are trade secrets.

B. What if the employee’s next job inevitably requires use of the prior employer’s trade secrets?

Now, assume that the exiting employee did not sign a noncompetition agreement, but his next employment inevitably requires the use of his former employer’s trade secrets. Under the inevitable disclosure doctrine, an employee can be prevented from working for an employer if the employment will inevitably lead the employee to reply upon the former employer’s trade secrets. The purpose of the rule is that the employee will inevitably rely upon the former employer’s trade secret (whether consciously or not) in working for his new employer. The inevitable disclosure doctrine, however, does not apply in California.

In Whyte v. Schlage Lock Co. (2002) 101 Cal. App.4th 1443, the Court of Appeal soundly rejected this doctrine. As the court in Whyte explained:

"Decisions rejecting the inevitable disclosure doctrine correctly balance competing public policies of employee mobility and protection of trade secrets. The inevitable disclosure doctrine permits an employer to enjoin the former employee without proof of the employee's actual or threatened use of trade secrets based upon an inference (based in turn upon circumstantial evidence) that the employee inevitably will use his or her knowledge of those trade secrets in the new employment. The result is not merely an injunction against the use of trade secrets, but an injunction restricting employment."

Id. at 1461-1462. The Court determined that the inevitable disclosure doctrine is contrary to California law and policy since it creates an after-the-fact covenant not to compete that restricts the employee’s mobility.

Therefore, preemptive trade secret misappropriation is not the rule in California. Absent a valid noncompetition agreement, an employer in California cannot prevent an employee from obtaining employment even though the employment will inevitably require use of the former employer’s trade secret. The former employer must wait until the former employee actually misappropriates the trade secret to seek redress.

C. What if the employee threatens to misappropriate the trade secret?

While the inevitable disclosure doctrine does not apply in California, an employer can take action against a former employee who threatens to misuse the former employer’s trade secrets. A “threatened misappropriation” means a threat by a person (including a current or past employee) to misuse trade secrets, as shown by words or conduct, where the evidence indicates imminent misuse. Put differently, an employer makes out a claim for threatened misappropriation if three elements are met: (1) the employer’s trade secret is (2) in the possession of an employee (present or past) who (3) either has “misused or disclosed some of those trade secrets in the past” or “intends to improperly use or disclose some of those trade secrets.” Central Valley General Hospital v. Smith (2008) 162 Cal. App.4th 501, 527-28.

While it may appear that there is a fine line between the inevitable disclosure doctrine and a “threat,” the difference rests in the intent. There is no intent to misappropriate a trade secret under the inevitable disclosure doctrine.

The Court in Central Valley implied that a claim for threatened misappropriation might be established where an employee concedes to having possession of a trade secret and wrongfully refuses to return the information to the employer. As stated by the Court, “Counsel argued that a claim for threatened misappropriation is established when a defendant possesses trade secrets and wrongly refuses to return the trade secrets after a demand for their return has been made. We will assume for purposes of argument that these facts would establish a claim for threatened misappropriation.” Id. at 528.

But, the employer’s goal is likely to seek an injunction preventing misuse of the trade secret. While mere possession of trade secrets may be sufficient for monetary damages, it is not sufficient for an injunction against the employee provided the employee did not use improper means in acquiring the trade secret. As held by the Court, “the issuance of an injunction based on a claim of threatened misappropriation requires a greater showing than mere possession by a defendant of trade secrets where the defendant acquired the trade secrets by proper means.” Id. Therefore, the trade secret will not be protected by the extraordinary remedy of an injunction on mere suspicion that the former employee may do something improper. There must be a substantial threat of impending injury before an injunction will issue.

D. Contact the former employee’s future employment

If the former employer should consider sending a letter to the former employee’s future employer identifying the trade secrets and stating that the former employee has a duty not to misappropriate the trade secrets. The former employer should be careful not to disparage the former employee. Otherwise, this may spark a defamation lawsuit.

The attorneys at Gates Eisenhart Dawson are ready to assist you whether you are an employer or an employee confronting these issues.  

Categories: Employment Law

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