Trade Secrets and Employee Mobility: California Law and Best Practices

TRADE SECRETS AND EMPLOYEE MOBILITY: CALIFORNIA LAW AND BEST PRACTICES5Jun, 22

Trade secrets are information that is not generally known to others that has actual or potential economic value, which a company takes reasonable efforts to keep confidential. Examples include a process, recipe, formula, framework, method, program, client list, or device. While trade secrets are confidential, not all confidential information constitutes a trade secret.

Protecting trade secrets from competitors or any type of public disclosure is an important business, legal, and financial priority for companies in many different industries. One of the most common ways that trade secret misappropriation occurs is through disclosure of trade secrets by a current or former employee with access to the information.

It is a central legal obligation of the owner of a trade secret to take reasonable efforts under the circumstances to protect the information, and a key piece of such efforts is creating and implementing employee agreements, policies, trainings, and procedures to safeguard the information from misappropriation when an employee moves to a new employer.

WHAT LAWS PROTECT TRADE SECRETS?

Trade secrets are a form of intellectual property that are protected by state and federal law. Most states, including California, have adopted the Uniform Trade Secrets Act (U.T.S.A.). In California, state law protects against the theft or “misappropriation” of a trade secret by someone who has reason to know that the trade secret was acquired by improper means or without consent of the trade secret owner.

The Defend Trade Secrets Act of 2016 is a federal law that provides federal subject matter jurisdiction and the ability for plaintiffs to bring an action for trade secret theft in federal court. Although the Act allows employers to potentially collect enhanced damages and attorney’s fees, it only allows the award of enhanced damages when the employee was informed of the Act’s “Safe Harbor” provision in a confidentiality or employment agreement.

This act also prohibits employers from using the “inevitable disclosure” doctrine to seek to stop former employees from performing similar work at a competing company. The inevitable disclosure doctrine assumes that employees who move to a new employer within the same industry will inevitably disclose the trade secrets of their former employer, and the new employer will rely on such knowledge in the employee’s performance of job duties. In some states, this doctrine allows an employer to seek an injunction (i.e., a court order) against a former employee preventing employment at a competitor; however, in the state of California and under federal law, this doctrine is not observed.

Protecting Trade Secrets Through Company Policies

Employers have a legal obligation to take reasonable measures to protect their trade secrets through prevention protocols that are appropriate under the circumstances. If the information is disclosed publicly, it can no longer be classified as a trade secret. Examples of prevention protocols include a confidentiality program, confidentiality agreement, non-disclosure agreements with third-parties provided access to the trade secrets, employee on-boarding trainings, and employee exit trainings. In California, non-competes and non-solicitation clauses in employment agreements are prohibited in most circumstances.  A non-compete clause is a provision in an employment agreement that the employee will not work for a competing company after leaving employment.  Similarly, a non-solicitation clause seeks an employee’s agreement not to solicit a company’s clients or customers after leaving the company  However, there are many other ways that California companies can and must protect their trade secrets besides non-compete and non-solicitation clauses.

Protecting Trade Secrets In The Context Of Remote Work

In the past, policies prohibiting the use of personal email in the office or the removal of computers or hard drives from the workplace were considered reasonable measures to reduce the risk of loss of a company’s trade secrets. However, as our workforce becomes increasingly remote and virtual in nature, solutions for protecting a business’s trade secrets must also evolve.

Requiring the use of secure systems and encrypted messages/emails to communicate confidential information is one prudent business policy. Employers may also want to implement a policy restricting or prohibiting the use of personal email or cloud software on work devices. It is also critical to ensure that company devices are accounted for and returned when an employee leaves the company.

Best Practices When Hiring A New Employee

An employer hiring a new employee who may be subject to confidentiality agreements with a former employer should state clearly in the offer letter that the new employer does not wish the employee to disclose any confidential information from their former employer.

New employees should also sign a confidentiality agreement that is enforceable under California law. While the state does not enforce non-compete agreements, it does enforce confidentiality agreements. New employees should also receive an onboarding training about company policies on accessing, safeguarding, and not disclosing trade secrets and other confidential information.

Best Practices When An Employee Leaves

Clear and thorough one-on-one meetings and training between HR and the employee when that employee leaves the company are critical to preventing the loss of trade secrets. During that process, companies should remind the departing employee of their contractual obligations to safeguard and not misappropriate any trade secrets they had knowledge of or access to during their time at the company.  Ideally, the company should obtain a signed written acknowledgement of those obligations as part of the exit interview process.

It may even be prudent, depending on the circumstances and nature of the trade secrets, to send a letter to the employee’s new employer noting the individual’s obligations regarding trade secrets and other confidential information. Be sure to be consistent with implementation of your policies, and consult an attorney with experience litigating trade secret matters before sending correspondence that could lead to litigation.

Trade Secret Counsel For Employers And Employees In California

At Delahunty & Nash LLP, our team of skilled civil litigation attorneys have represented both companies and employees in high-stakes disputes concerning the protection of trade secrets and employee mobility. We have experience on both sides of these cases: helping companies pursue damages against former employees who misappropriated trade secrets, and representing employees threatened with litigation when moving to a competing company.

When representing the employer, our aim is to counsel clients in the implementation of company policies and procedures to prevent the loss of trade secrets before an issue arises. To that end, we help clients implement confidentiality policies, human resource trainings, and employee on-boarding and exit procedures. We also facilitate and conduct internal investigations when an employer has reason to believe a departing employee has misappropriated trade secrets. Based on our findings, we provide practical advice on the best strategies for protecting those trade secrets and preventing harm to the company from their misappropriation — including through litigation if necessary.

For more information on how we can assist you in proactively safeguarding your trade secrets, conducting an internal investigation regarding potential trade secret theft, or representing you in trade secret litigation or threatened litigation, contact our team today for a consultation of your case.

Patrick Delahunty

Patrick Delahunty is a former federal prosecutor with deep experience in resolving disputes. He advises individuals and companies in complex criminal, regulatory, and commercial litigation.