How to Avoid Trade Secret Liability when Hiring New Employees

The Great Resignation may be past its peak in 2022, but companies across all sectors are struggling to fill openings without sacrificing their standards.  The latest data shows that job openings have climbed to a record high 11.3 million according to the US Bureau of Labor Statistics.  Given this environment, businesses are more tempted than ever to take risks when it comes to hiring individuals bound by non-disclosure agreements (NDA’s) who might possess trade secrets.  These conditions have led many employers into uncharted territory for trade secrets liability.   Even more concerning is the fact that employers can be held liable for trade secret misappropriation when hiring employees with trade secrets, even when the employer is unaware of those secrets.  This article will help you avoid liability for misappropriation of trade secrets and other related claims.

The first question that needs to be addressed is “what is a trade secret?” With the passage of the Defend Trade Secrets Act of 2016 (DTSA), there is now a federal trade secrets definition available in all 50 states, with the same definition adopted at the state level in 49 states (New York being the only exception).

DTSA

A trade secret is any information, including a formula, pattern, compilation, program, device, method, technique, or process that:

  1. Has economic value that is unattainable to others and derives value from its unattainability; and
  2. Its owner has made reasonable efforts to keep secret.

At a federal level, the law of trade secrets is evolving rapidly; however, recent court decisions like Turret Labs USA, Inc. v. CargoSprint, LLC have driven home the following lesson: physical, digital, and legal protection forms the chain that gets you from confidential information to trade secret, and courts evaluating a trade secret claim will be judging that chain based on its weakest link.

Now let’s assume that your company has hired someone in possession of a ‘trade secret’ from their former employer, the next big question for employers is what triggers liability for trade secret claims.  A trade secret claim against an employer typically requires that:

  1. The company/person suing possessed a trade secret; and
  2. The employer being sued “knows or has reason to know” that the trade secret was acquired through “improper means” (e.g. theft, bribery, breach of a duty to maintain secrecy).

However, even if the employer does not know or have reason to know a trade secret was abused, they can still find themselves in trouble if an employee’s misappropriation of trade secrets if (1) it was in furtherance of the employer’s business and (2) was within the employee’s scope of employment.

Given that trade secret liability can extend to employers for almost any act of misappropriation by an employee, what can an employer possibly do to protect themselves?  Most guidance in this area focuses on what to do when being sued for trade secret claims – which is all well and good – but one of the takeaways here is that those measures will not be enough.  Instead, our recommendation follows the expression: an ounce of prevention is worth a pound of cure.  Employers should focus on measures designed to prevent trade secret violations from occurring in the first place.  Here are a few best practices:

  • Have rigorous intake procedures and questionnaires as early as possible in your hiring process looking for knowledge of trade secrets (or confidential info) from applicants; be on the lookout for devices or documents they may have retained from a prior position.
  • Have new employees sign an agreement confirming that they are not in violation of a non-compete agreement, and stating that they will not use any trade secrets they might have in their possession (and that any confidential in their possession will not give them an advantage in their new role).
  • Consult with a legal expert to determine the scope of a potential hire’s existing non-disclosure and confidentiality obligations in light of their intended role.
  • Have a firm, clear policy against hiring individuals to acquire trade secrets (or leverage a competitor’s confidential info)– and make sure this policy is widely known throughout the company (i.e. develop a culture where its taboo).
  • Make trade secret misappropriation a zero tolerance, terminable offense as part of your company policy; if a potential hire possesses trade secrets, consider limiting their responsibilities to minimize the risk of disclosure – or the appearance of disclosure.

Finally, the more of a paper trail you have on these practices, the better.  Not only will these practices help your company avoid liability for misappropriating trade secrets, but it will help you defend against such claims, and negotiate from a position of strength, by having documents that show your company made a serious effort to prevent any such misappropriation.

Contributing Advisors