California federal courts, particularly the U.S. District Court for the Central District of California, have the highest number of trade secret cases, according to a July 2018 “Trade Secret Litigation Report 2018” from Lex Machina (“the Report”). Much of those cases are trade secret misappropriation claims under the Defend Trade Secrets Act (“DTSA”).
Over the years, California has had the reputation of being the most difficult state for employers to enforce a noncompete agreement against their key employees. According to the Report, a majority of the trade secret cases filed in California federal courts involved California employers filing claims against competing businesses who hired their former employees suspected of misappropriating trade secret information. Therefore, one of the reasons California has the highest number of trade secret cases may be that employers are turning to trade secret claims to protect confidential and proprietary information from competitors who are the current employers of their former employees.
In 2016, the Federal Government adopted a set of laws under the Defend Trade Secrets Act (“DTSA”) (codified at 18 U.S.C. §1831-1839). The DTSA provides aggrieved trade secret owners with a private cause of action for civil trade secret misappropriation under federal law. The DTSA doesn’t eliminate or preempt, but rather supplements, the existing state law remedies for trade secret misappropriation. Popularity of DTSA claims may be due to the fact that it grants litigants access to federal courts in cases involving alleged theft of trade secrets, irrespective of the amount in controversy. Additionally, unlike state trade secret law remedies, the DTSA authorizes ex parte seizure orders where it is clearly shown that injunctive relief would be inadequate.
In this article, some practical tips are offered for preventing misappropriation of trade secrets. The list provided below is intended to be a sample checklist of general preventive measures. Please note, the “reasonable” precautionary measures that a business is obligated to take varies according to the type of business.
Tips For Preventing Misappropriation Of Trade Secrets
- Prepare a list of key employees and a list of trade secret information to which such employees have access. The list should be periodically reviewed and modified as to grant access to confidential materials only to specific people on a “need to know basis.”
- Draft confidentiality agreements with all employees and consultants having access to trade secrets. The confidentiality agreements should include a Notice of Immunity as set forth under the DTSA.
- Have your attorney prepare a narrowly tailored non-compete agreement for key employees (in addition to the confidentiality agreement) that is enforceable in California.
- Mark confidential documents (in both electronic and physical form) with a notice such as:
“This document contains information that is the confidential and proprietary property of _____ and may not be copied, published, or disclosed to others, or used for any purpose other than review, without the express written authorization of an authorized ____ of _____.”
- Have your IT department, or have an outside cyber security consultant, determine the level of security that is recommended for your type of business, according to the current industry standards. Please note that the level of “reasonable” precaution a trade secret owner is obligated to take varies according to the type of business involved.
- Password-protect confidential documents so that a log-in is required to access them.
- Encrypt confidential documents with secure encryption passwords.
- Limit access to encryption passwords.
- Frequently change encryption passwords.
- Track who logs in to access confidential documents.
- Keep documents on a server which are not accessible outside the company, such as through the internet.
- Try to obtain information about the departing employee’s new employer (which could help determine the potential risk of misuse of the company’s confidential or trade secret information).
- Request that the departing employee sign a Certificate of Compliance Post-Termination, stating that the employee has returned everything as requested and will preserve the company’s trade secrets.
- Require terminating employees to leave behind all materials and immediately deactivate their access to computer records.
- Send a follow-up letter to former employees reminding them of their confidentiality obligations.
In part II of this series, some of the pros and cons of bringing a claim for misappropriated trade secrets under either the DTSA or the California Uniform Trade Secret Act (“CUTSA”) will be discussed.
If you have any questions about preventing misappropriation of trade secrets or the DTSA, please contact an attorney in Leech Tishman’s Intellectual Property Practice Group.
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