Much of the value of many companies often is wrapped up with and measured by their intellectual property (IP) portfolios. Some forms of IP, such as patents, are known by the public. Others derive their value from being hidden from the public. Many companies, for example, have gigabytes of data, or “know-how,” that may be worth millions, but only to the extent that it remains secret. This article discusses some ways to keep business information confidential when an employee who has had access to that information leaves the company.
Many companies traditionally turned to employment agreements, specifically noncompete clauses, to protect proprietary competitive information. The legality of noncompetes is in question following the Federal Trade Commission’s (FTC’s) ban on them, which is being challenged in court by the U.S. Chamber of Commerce, causing confusion and concerns about protecting information via noncompete agreements. The timeline of the FTC rule in question was as follows:
- The FTC promulgated new rules to take effect in September 2024 banning all noncompete agreements.
- The U.S. Supreme Court overturned the 40-year-old method of reviewing agency rules (Chevron Deference), throwing all agency rules, including the FTC’s rule on noncompetes, into question.
- The District Court for the Northern District of Texas preliminarily enjoined the FTC from enforcing its new rule banning noncompetes.
After this flurry of activity, noncompetes are, for now, not banned. But do they offer an effective solution for businesses seeking to protect their proprietary information?
Noncompete Clauses Are Not Always Effective
Vortexa, Inc. v. Cacioppo, a June 2024 case from the District Court for the Southern District of New York, illustrates the limitations of noncompete clauses in employment agreements. That case presents the familiar fact pattern of an employee leaving and going to work for a competitor. With some evidence of the employee’s access to proprietary competitive information in hand (but no evidence of actual misappropriation), the former employer sought a preliminary injunction to prevent the employee from working for the competitor for one year, the term stated in the noncompete clause in the employee’s contract with the former employer. The contract also included common nondisclosure and confidentiality clauses.
Absent evidence of actual misappropriation, the plaintiff employer relied on the “Inevitable Disclosure” doctrine, which assumes that a departing employee will inevitably disclose confidential information when they go work for a competitor. The court refused to apply this doctrine, explaining that inevitable disclosure may substitute for actual evidence of misappropriation only when the information is a trade secret. Here, none of the information about which the former employer was concerned was a trade secret.
The proprietary information that the former employee had was pricing data, marketing strategies and “intricacies of the business.” These types of information do not, in and of themselves, constitute trade secrets. In addition, the information was not afforded trade secret treatment because (1) some of it was ascertainable by the competitor without reference to the first employer’s information; (2) the companies sell different products; (3) some of the information was developed without the expenditure of a good deal of money and effort; (4) some of the information was provided to clients without a nondisclosure agreement; (5) some of the information was shared on company-wide collaboration channels; and (6) “Google drive log records show that [the former employee] opened and viewed these documents, which underlines the lack of security protecting this purportedly confidential information.”
Most of these reasons for the information not being accorded trade secret status cannot be changed by any action of the employer. For example, if information can be generated by means independent of the first employer, that information cannot be protected by trade secret law and nothing the first employer can do will change that after the fact. However, any business seeking to protect its valuable competitive information can change the way that it secures, protects, and manages access to its competitive information, and this may be enough to ensure that its information is protected by trade secret law.
What Businesses Should Do to Protect Their Proprietary Competitive Information
Generally, proprietary competitive information can be protected as a trade secret by operation of law or via contract. In many cases, the “boots and suspenders” approach is best—the information should be protected both by contract and by meeting the requirements for protection under trade secret law. As described, a contract alone is sometimes ineffective, so information that derives its value from not being generally known to the public should also be treated in such a manner that the courts would see it as being a trade secret.
Specifically, for something to qualify for trade secret protection under federal and state statutes and common law, it must be securely kept and carefully protected from disclosure. Some easy ways to protect information are to:
- Restrict access to folders on a company’s internal computer systems.
- Physically lock rooms that contain hard copies.
- Have computers lock automatically when not accessed for set time periods.
Protecting information via noncompete, confidentiality, and nondisclosure contractual obligations is another way to ensure that information remains secret, such that it is protected under trade secret law. Internal policies on how information may be shared with third parties, such as clients, also are helpful evidence of trade secret treatment. In addition, the business may consider maintaining records on the time, effort, and monetary expenditures required to develop proprietary information, which should allow the business to demonstrate that making such information freely available to a competitor is fundamentally unfair.
In some cases, information protected as a trade secret may be the most valuable IP that a company owns. But the value can easily be lost if the company does not properly secure the information. Different scenarios call for different methods of security, and a good rule of thumb to protect information from disclosure by a departing employee is to protect this information both by contract and as a trade secret.
This article originally appeared on Wilson Elser.
About the Author:
Sarah Fink is of counsel at Wilson Elser. sarah.fink@wilsonelser.com