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Starting a Business

Keep It Confidential

If you don't keep your company secrets under lock and key, your competitive edge might walk right out the door.
Magazine Contributor
6 min read

This story appears in the March 1998 issue of Entrepreneur. Subscribe »

Suppose one of your key employees leaves your company and goes to work for a competitor. That's bad enough in itself, but what if your former employee takes more than his or her talent and experience? What if that employee knows all your trade secrets: your formulas, suppliers, techniques, customers and contacts?

"In an information-based society, a company's greatest assets take the form not of, say, iron ore fields, but of information," says Robert Linn, an attorney with Cohen & Grigsby in Pittsburgh who specializes in the protection of intellectual property and trade secrets. Failure to protect those secrets, Linn says, can mean the loss of everything from key customers to confidential processes and techniques--the very information that gives your company a competitive edge in the marketplace.

The law treats trade secrets as property, which is illegal to steal. "There's a [growing] recognition of the value of trade secrets," Linn says. "And there's an increasing effort by the courts to fashion rulings allowing companies to retain their trade secrets."

Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

Under Wraps

The real question in these cases is whether a given set of information is really a trade secret. To some extent, it's a matter of degree. A departing employee who physically removes a crucial customer list--even by copying it and leaving the original--is taking something that belongs to the employer. But if the employee merely remembers the names of clients and reconstructs the list, that's not necessarily stealing trade secrets. Courts do not require former employees to forget what they know. Your best protection when it comes to customer lists is a noncompete agreement signed by employees while they are still working for you--or a clause in their employment agreements not to solicit former customers.

Under the Uniform Trade Secrets Act adopted in most states, information is a trade secret if it meets three criteria:

1. It must have independent economic value to people outside the company. Knowing your processes, pricing information and customer lists could give another firm a competitive advantage, while knowing your management structure probably wouldn't.

2. The information must be generally unknown and unlikely to be discovered by lawful means. If a customer list could be drawn from a trade directory, it's not likely to count as a trade secret. In a frequently cited Ohio case, an Arthur Murray dance studio sued to keep one of its former instructors from teaching its dance steps to Fred Astaire dance studio students across town. The court refused to recognize the dance steps as trade secrets because they simply weren't secret.

3. The owner of the secret must make efforts to maintain the secret. If the information is not labeled as confidential and anyone has easy access to it, chances are slim that a court would treat it as a trade secret. "You have to establish that something is a trade secret," Linn says. "Make sure it's not available outside the company, and make sure not everyone in the company has access to it."

On Guard

There are specific steps you can take to safeguard your trade secrets. Making these efforts provides a double layer of protection. First, it reduces the chances that trade secrets will get out of your company in the first place. Second, it builds your legal defense in the event a competitor obtains your trade secrets and starts using them against you.

  • Put employees on notice. Inform workers they will have access to information that they have a legal responsibility not to reveal to other companies. Then label confidential documents as such to remind employees which information you consider worth protecting.
  • Improve security. If documents contain trade secrets, keep them in locked cabinets and limit employee access. Number confidential documents and log them in and out. If the information is stored on computer hard drives, establish a system of passwords to prevent unauthorized access.
  • Be careful what you say in external communications. Don't divulge information you wish to keep confidential. For example, Linn says, suppose a company publishes the names of major customers in its promotional materials. "By doing so, it's running the risk that the identity of its customers may no longer be deemed a legally protectable trade secret."
  • Shred documents containing confidential information. A Wisconsin securities underwriter sold six boxes of waste paper to a scrap dealer in the early 1980s. The dealer then developed a list of the firm's customers and prospects and sold it to a competitor. Take precautions so this can't happen to you.
  • Use noncompete agreements or nonsolicitation clauses. In a noncompete agreement, the employee agrees not to work for a competitor or to form a competing company for a given number of years within a stated geographic area. These are more likely to be enforcable if they're reasonable in duration and geographic scope.

Have employees sign noncompete agreements when they first accept a job with your company or when they receive a promotion or a raise so employees are getting something in return. If your employees resist signing the agreement, consider using a narrower nonsolicitation clause, in which they agree not to solicit either your customers or your other employees if they leave to join a competitor. "Such restrictions are generally viewed more favorably by the courts insofar as they do not prevent an employee from working in the same industry," Linn says.

  • Conduct exit interviews. When an employee who has access to confidential information leaves the company, remind him or her of the obligation not to disclose sensitive information. Show that employee any confidentiality, noncompete or nonsolicitation agreements he or she signed.
  • Contact subsequent employers. In some cases, Linn advises, it pays to write to the former employee's new boss to inform them that the worker had access to confidential information and that this information must not be used to benefit a competitor. That way, the new employer knows you understand the situation and will be keeping tabs on future developments.

If an employee is dead set on stealing information, your best security measures probably won't stop the leak. However, by making a concerted effort to protect your trade secrets, you've set up a strong case if you have to go to court.

Contact Source

Cohen & Grigsby, 625 Liberty Ave., Pittsburgh, PA 15222-3115, (412) 394-4900

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