Monday, November 23, 2009

Trade Secrets and Confidential Information Revisited

by John L. Watkins

We have addressed the importance of trade secrets and confidential information previously on this blog and in our series of podcasts. We have discussed huge jury verdicts that have recently come down against companies found to have violated the trade secret rights of others. We have also discussed how some prosecutors are now taking an interest in criminal prosecutions of trade secret violations under federal law. However, it should be noted that a California jury just acquitted two defendants who had been criminally charged with economic espionage.

Although the foregoing should have been enough to get anyone’s attention, the news just keeps coming. According to recent reports, a Chinese company just agreed to a $200 million settlement of a trade secret case in California. Associated Press has reported that a former Home Depot manager has been criminally accused of passing trade secret information. These issues are extremely serious and should be considered carefully by any company large or small.

To reiterate some of the key points: Each company should have practices in place to protect its own confidential information and to assure the confidentiality of the confidential information of others that it has agreed to keep secret. Potential legal protections should include: (1) Non-disclosure agreements (“NDAs”) with employees. These NDAs should cover the company’s information. In addition, if the employee will be handling confidential information of others, the NDA should cover that as well; (2) NDAs with consultants or outsourced resources; (3) NDAs with actual or potential suppliers; (4) NDAs with actual or potential customers; (5) NDAs with actual or potential investors; and (6) NDAs with potential business “partners.” Depending on a company’s business, there may be other parties who should be subject to an NDA. It is also a good idea to have company policies stressing the need to protect the company’s own confidential information and trade secrets, and the confidential information and trade secrets of others.

Having an NDA program in place, however, is probably not enough. A company should take other common-sense steps to avoid legal entanglements. These steps should probably include: (1) stressing periodically to employees the need to maintain confidentiality; (2) advising employees that particular information is sensitive; (3) making sure that only employees or others with a true need to know have access to confidential or trade secret information; (4) keeping hard copy confidential or trade secret information under lock and key; (5) password-protecting or otherwise restricting access to electronically stored information; (6) restricting copying of sensitive information; and (7) restricting or monitoring use of portable storage media such as thumb drives and portable hard drives. There may well be other steps that a company should take depending on the circumstances.

The one thing a company should not do is assume that it will avoid issues regarding confidential information and trade secrets. Burying one’s head in the sand may work for an ostrich, but it will not work for businesses in today’s complex and litigious world.

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