Protecting Trade Secrets: Part I (Using Non-Disclosure Agreements)

In today's competitive marketplace, employers must take proactive steps to protect their trade secrets from theft by competitors and/or employees. Employers have two lines of defense against trade secret theft:

1. requiring employees to sign covenants not to disclose confidential information during or after employment, combined with policy statements, exit interviews, and acknowledgment forms for departing employees; and
2. requiring employees to sign covenants not to compete, in which they promise not to work for competitors for a certain period of time after leaving the employer, and/or promise not to solicit the employer's customers or employees upon departure.

This memo discusses the benefits of using non-disclosure covenants and related procedures to protect trade secrets. Our legal alert memo for June will focus on using non-compete and non-solicitation covenants.

Legal Protection for Trade Secrets

Common Law Protections. The courts of both North and South Carolina protect an employer's trade secrets from "misappropriation." A trade secret may include any information not generally known to or readily ascertainable by competitors, such as information about customers, prices, production methods, and marketing plans, as long as the employer takes steps to guard the information's secrecy. Requiring employees who have access to trade secrets to sign non-disclosure agreements is one important step that employers can take to guard the secrecy of the information.

Under the judicially-created common law of both states, an employee "misappropriates" trade secrets if the employee understands that the information was shared with him or her in confidence, but he or she nevertheless makes an unauthorized disclosure of the information, usually to his or her new employer.

Statutory Protections. The North Carolina Trade Secrets Protection Act (NCTSPA) and the South Carolina Trade Secrets Act (SCTSA) make it unlawful for an employee to disclose his or her employer's trade secrets. The federal Economic Espionage Act (EEA) makes it a crime to take, copy, or receive trade secrets without the permission of the owner of the trade secrets. These laws provide protection even if an employee never signed a non-disclosure agreement.

Remedies. In both Carolinas, employers whose trade secrets have been misappropriated may file suit requesting:

1. a preliminary and/or permanent injunction against disclosure;
2. damages for any actual losses suffered by the employer and any amounts that the person misappropriating the trade secrets may have unjustly received; and
3. in South Carolina, "exemplary" (double) damages if the offending employee acted in a "willful, wanton, or reckless" manner, plus attorney's fees if the employee acted in bad faith; or
4. in North Carolina, punitive damages and attorney's fees if the offender acted in a willful or malicious manner.

In addition, the SCTSA and EEA create criminal penalties for trade secret theft. Penalties range from a maximum fine of $5,000,000 to a maximum prison sentence of 10 years.

Recommendations for Employers

To strengthen their positions in legal battles to protect trade secrets, we recommend that employers take the following steps to enhance the secrecy and security of confidential information:

1. Require employees with access to trade secrets to sign non-disclosure agreements. Consider including the following clauses in the agreements:
   1. Forum selection, choice of venue, and choice of law clauses to give the employer a "home court" advantage in the event of litigation. (Be aware that courts will not always enforce forum selection clauses against some non-resident employees.)
   2. A provision permitting the employer to assign the agreement without the employee's consent to any successor, joint venture partner, or corporate parent, affiliate, or subsidiary of the employer.
   3. A clause requiring the employee to inform any subsequent employer about the agreement.
   4. A "tattle-tale" provision requiring the employee to report to the employer all unauthorized disclosures or uses of the employer's trade secrets or confidential information which come to the employee's attention.
   5. A clause providing that if the employee has a question about whether specific information is considered confidential, he or she must request a written clarification from a designated company official.
2. Include a policy statement regarding confidential information in the employee handbook as an additional layer of protection. A signed acknowledgment form stating that the employee received, read, and understood the handbook should be kept in each employee's personnel file. Employers also should have a policy for protection, retention, and destruction of confidential documents, including procedures for marking confidential documents with a statement such as "Confidential-Proprietary Information of [name of employer]."
3. Conduct exit interviews with departing employees. An exit interview gives the employer the opportunity to review with the employee the terms of the non-disclosure agreement (as well as any non-compete and non-solicitation agreements) and to emphasize the employee's obligations. The meeting will also remind the departing employee that the employer is prepared to enforce the agreement and that the employee cannot remove any confidential information from the employer's premises. The exit interview also may alert the employer that the employee is about to engage in activities that violate the agreement, and that a close monitoring of the employee's activities is warranted. During the exit interview, present the employee with an exit acknowledgment form. The form should ask the employee to provide the following information:
   1. the name of the new employer, the employee's new work and home addresses, the commencement date of the new employment, and the employee's responsibilities and duties in the new employment;
   2. an acknowledgment or reaffirmation of the employee's obligations regarding confidential information; and
   3. an acknowledgment that the employee has returned all originals and copies of all confidential documents and information to the company.
4. Additional examples of security measures employers can use to prevent the disclosure of confidential information include:
   1. storing confidential information in locked files and locked rooms;
   2. limiting employees' access to confidential information on a need-to-know basis;
   3. using pass codes for computer access which are changed on a periodic basis;
   4. limiting computer access for certain types of information; and
   5. restricting visitor access to areas in which secret processes or machines operate or are being developed, and requiring all visitors to sign a log stating the visitor's name, address, telephone number, purpose of visit, etc. All visitors should be escorted by appropriate employees.
5. Act swiftly and decisively when the integrity of confidential information is threatened. This may include sending a cease-and-desist letter to any former employee who breaches his or her non-disclosure agreement (and possibly the new employer), initiating criminal proceedings, or filing a civil lawsuit.

In conclusion, trade secrets are assets that have monetary value and must be protected by taking a number of affirmative steps. The more important and confidential the information, the more stringent the measures an employer should take to protect the information. If you have further questions about how to protect trade secrets, please do not hesitate to let us know. Thank you.