Protecting a Company’s Most Valuable Assets:  Its Trade Secrets, Employees and Customers

Among its most valuable assets are a company’s trade secrets, staff and customers. But protecting these can be much more difficult than protecting equipment or inventory. With the right agreements and precautions, a company can mitigate the misappropriation of these valuable assets.

Trade Secrets

Trade secrets are generally defined as financial, business, scientific, technical, economic, or engineering information that has actual or potential independent economic value. The value is enhanced when the information is kept confidential and not generally known or ascertainable by others who could obtain economic value from the disclosure or use of that information. Federal law (18 U.S.C. §1831 et seq.) makes it a crime to wrongfully disclose, copy, steal, etc. a trade secret (with a few narrow exceptions) or to receive or accept trade secrets that were stolen and allows a court to impose significant fines and jail sentences for such activities. Connecticut law (C.G.S. §35-50) permits a court to grant injunctive relief if there is an actual or threatened misappropriation of a trade secret and to impose punitive damages if the misappropriation was “willful and malicious.”  Both statutes require that the owner take reasonable steps to keep the information secret in order to be protected under the law.

The most common and important step that a company can take to provide clear evidence that it is taking reasonable steps to protect its trade secrets is to require employees, contractors, vendors, and any other people who may have access to a company’s trade secrets, to execute non-disclosure, or confidentiality, agreements. Such agreements should provide that the company’s confidential information, which would include trade secrets as well as employee information and other confidential data, must be kept confidential until it becomes public by legal means. The federal trade secrets law requires that such an agreement include language specifying certain exceptions to the prohibition on disclosing a trade secret including in connection with a government investigation or whistleblower situation. A non-disclosure agreement puts the other party to the agreement on notice that they are expected to protect confidential information and that the company will take action if the counterparty wrongfully shares it.  Without non-disclosure agreements in place, a company may have a difficult time proving to a court that it took reasonable steps to protect its trade secrets.

In addition to non-disclosure agreements, company rules and policies should require that confidential information be protected by all employees. For example, computer systems should be protected from invasion by outside entities, company policy should prohibit removing trade secrets from the company’s offices, and access to trade secrets should be limited to employees with a need to know.

Non-Solicitation and Non-Competition Agreements

Companies that spend time and money training employees, such as manufacturers who need employees who are trained on high-tech equipment, cannot afford to lose those employees to competitors. There are some steps that employers can take to discourage the loss of employees to competitors. One such step is to have employees and vendors sign non-solicitation agreements. These agreements require employees to promise that if they leave the company they will not try to induce other employees to follow. Vendors and contractors may not be direct competitors but may still seek to hire good employees from a company; a company can require that these parties sign an agreement not to do so. Non-solicitation agreements may also be used to prevent employees, vendors or contractors from soliciting customers of a company.

Another common tool for minimizing the departure of employees who want to work for a competitor of the employer is a non-competition agreement, or “non-compete.” A non-compete between an employer and an employee restricts the ability of an employee to work for a competitor of the employer for some period of time after the employee ceases employment with the employer. If a former employee violates a non-compete, the employer can ask a court to enjoin the former employee from working for the competitor. Because a non-compete restricts an employee’s ability to earn a living, most courts throughout the U.S. require that the agreement protect a genuine interest of the employer in a reasonable way and be limited by time and/or geography. In Connecticut, there are specific professions for which non-competition agreements must be limited or are not permitted, including physicians, security guards, nurse’s aides, and media personalities. The Connecticut General Assembly is currently considering bills that would restrict the terms of non-competition agreements generally. Several other states have also modified their laws on the permissible extent of non-competition agreements, or restricted the enforcement of such agreements.

Companies should strongly consider taking steps to protect their trade secrets, their employees and their customers, but need to consult with an attorney conversant in the drafting of the necessary covenants in order to maximize a company’s ability to enforce them.