"Critical Information Risks in Hiring?" InsideCounsel

May 11, 2016

In our first column, we emphasized that companies must continually identify all of the critical intellectual property assets created, owned and utilized for revenue generation in order to be in a position to consider whether the critical intellectual property warrants protection as a trade secret. The results of this internal evaluation allow for companies to better allocate capital resources to ensure the long-term protection of the valuable proprietary company materials. An additional benefit of such an evaluation extends directly to the management of the risks associated with hiring new employees, and specifically, the risks associated with hiring experienced employees from competitors.

Today’s workforce is highly mobile, and this mobility trend is exacerbated for potential employees who are highly skilled and experienced. Competition in most industries is not isolated to battles over customers and clients, but extends to efforts to recruit, employ and retain the most productive and talented workforce. It is not an exaggeration to state that for many companies, their employees and the knowledge and expertise that exist in their minds are the company’s most valuable assets. Even if no tangible confidential information is taken by a departing employee, the loss of a highly experienced resource can equal the loss of a competitive advantage.

Thus, it should come as no surprise that contentious litigation arising out of the recruitment of valued employees has become increasingly common.

However, there are steps that a hiring company can use to identify and mitigate the intellectual property risks associated with recruiting employees. These steps become especially critical when recruiting employees from a competitor.

Certainly, one important step for a hiring company is to ascertain if there are any restrictive covenants in play. In this context, employers must ask potential candidates whether they have signed any confidentiality, trade secret, non-compete or non-solicitation agreements with their current or former employers that could affect their ability to execute the job responsibilities.

Don’t be an ostrich! This question is not one that potential employers should avoid asking in an effort to mitigate potential liability for tortious interference, which would typically allege the hiring employer wrongly induced, encouraged or assisted the employees’ breach of the agreement. To the contrary, you are much better off being informed of the agreement(s), to the best of your abilities, so that you can make an informed business decision and risk assessment regarding hiring the candidate. Such a restrictive covenant question has become so commonplace that the failure to ask in a subsequent trade secret or confidentially claim can be used as a sword against the hiring company.   

The hiring company faces the potential risk that it will be accused of participating in the misappropriation of trade secrets or confidential information, even if the candidate does not have a restrictive covenant or if one can’t be identified by the candidate. For proper risk assessment, it is important to determine if the candidate had access to trade secrets and confidential information of their employer. General questions such as: “Did you have access to certain types of information that had restricted access (because it was considered confidential or trade secret), or were you aware of any marketing plans?” can help to frame the general categories of the candidate’s knowledge. A word of caution, however: be judicious with these general questions, and don’t be tempted to delve deeper into the specific nature of the candidate’s knowledge of the trade secrets and confidential information of their former (or soon to be former) employer as that specific questioning can potentially invoke a misappropriation claim. 

It is also noteworthy that a hiring employer can be liable for misappropriation of trade secrets under a theory of inevitable disclosure. This means that, despite the hiring company’s best efforts, the new employee will “inevitably disclose” trade secrets in the course of the conduct of their job responsibilities. The risks here are potentially compounded as many jurisdictions have not articulated precise standards for application of this doctrine. Given this relatively subjective approach to the issue, courts are likely to pay close attention to the equities of the parties’ positions in determining whether to apply the doctrine in a particular case. In fact, they may be more inclined to apply the inevitable disclosure doctrine when the defendant’s conduct suggests a lack of candor or a predisposition to misuse trade secrets.

One will appreciate that the risk of such an inevitable disclosure increases if an individual had access to or possesses “extensive and intimate knowledge” of information that would qualify as an employer’s trade secrets; if an individual joins a competitor in a similar position and likely will rely on the employer’s secrets to perform their new job duties; and, the actions of the hiring company regarding the recruiting or departure of the new-hire indicate bad faith or lack of candor. Therefore, to mitigate the risk of using the inevitable disclosure doctrine and the inference of a willingness to misuse a competitor’s trade secrets, a hiring company should conduct the hiring process in good faith and make it clear to the candidate that he or she is not being hired to obtain trade secrets.

Under the soon to be enacted Defend Trade Secrets Act of 2016 (DTSA), a company will be able to file a civil action in federal court for the misappropriation of trade secrets that is related to a product or service used in, or intended for use in, interstate or foreign commerce. The DTSA provides a barrier against a plaintiff’s assertion of claims for misappropriation of trade secrets under a theory of inevitable disclosure that results from the hire of a new employee. It also prevents a court from granting injunctive relief if it would prevent a person from entering into an employment relationship, and allows the court to place conditions on that employment relationship only upon a showing through evidence of “threatened misappropriation and not merely on the information the person knows.”

The DTSA further provides protection for whistleblowers and confidential disclosures of trade secrets within a lawsuit, including anti-retaliation proceedings. This immunity provision acts to protect individuals from criminal or civil liability for disclosing a trade secret if it is made in confidence to a government official, directly or indirectly, or to an attorney, and it is made for the purpose of reporting a violation of law.

This provision places an affirmative duty on employers to provide employees notice of the new immunity provision in “any contract or agreement with an employee that governs the use of a trade secret or other confidential information.” Under the DTSA, employers are required to give notice to their employees about this immunity in their employment or confidentiality agreements or policies or they will not be barred from obtaining attorney’s fees or exemplary damages.

Practically, to mitigate any potential misappropriation of trade secrets or confidential information risk, the hiring company should tell the candidate, prior to making the job offer, that it is not interested in obtaining any of the former employer’s trade secrets. This statement should be included in the written offer, which should also explicitly state that the candidate has reviewed the duties and responsibilities of the new position and is not aware of any contractual restriction that would prevent the ability to perform those duties. It is recommended that the offer letter also include a representation to be signed by the candidate that all agreements or restrictive covenants that may apply have been disclosed. 

Additionally, after the candidate is hired, the hiring company should issue instructions to the new hire in writing that he or she won’t use, disclose or volunteer any trade secret or confidential information of a former employer in the course of their new job responsibilities. The hiring company should issue instructions to the new hire’s peers and supervisors to not attempt to learn the new hire’s trade secret knowledge. Optionally, the hiring company can further insulate itself from misappropriation claims by insuring that the new hire’s job responsibilities do not overlap those of the former employer, at least until restrictions associated with a restrictive covenant have expired.

If an employee is signing a confidentiality agreement, the agreement should be modified to account for DTSA's provisions on lawful disclosures. DTSA provides that employers can comply with this requirement by "cross-referenc[ing] to a policy document provided to the employee that sets forth the employer's reporting policy for a suspected violation of law."

Thus, to lessen the burden, employers may be able to simply reference other policies that are already existent, rather than modifying existing policies to comply with DTSA. Hiring companies should have a human resources policy in place that deals with former employer confidential information a new-hire may have on a personal electronic device, such as a personal computer or cell phone that could be inadvertently transferred to the new employer. Such a policy should also instruct a new hire to not bring anything, either in paper or electronic form from the former employer and to return all work-related material maintained by the employee inside and outside the office to the former employer.

In a world of highly competitive companies vying for a limited pool of highly qualified job candidates, it is almost assured that companies will resort to legal enforcement of restrictive covenants or other potential misappropriation theories in an effort to retain what is identified or perceived as a proprietary competitive advantage. Simple steps and policies, such as those outlined above, should be rigorously followed by hiring companies in order to minimize the legal and financial risks associated with competitor misappropriation claims.

Reprinted with permission from the May 11, 2016, edition of the InsideCounsel© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877.257.3382 or reprints@alm.com.

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