Now that the European Parliament is in the process of introducing the new EU Trade Secrets Directive, we decided to put the spotlight on this topic and discuss in practical terms what trade secrets are, explain why employees are the biggest threat when it comes to trade secrets, and, most importantly, what steps employers should take to make sure their trade secrets are effectively protected.
What is a trade secret?
A TS is a valuable piece of information for an organisation which is treated as confidential and gives that organisation a competitive advantage. It could be any type of information, for example formulas, recipes, devices, patterns, client lists, financial information, new inventions, and more. The requirements are that the piece of information be
– secret (or shared only in the context of confidentiality)
– valuable in a commercial sense and by virtue of being secret
– kept secret by its owner with reasonable efforts under the circumstances
To illustrate this, practical examples of ‘famous’ trade secrets include the Coca-Cola recipe, Google’s proprietary search algorithm, the Krispy Kreme Doughnut recipe or the KFC recipe. Actually, an enterprise needs to make a choice: either apply for a patent to protect the information if it is patentable, or brand it a trade secret and keep it strictly confidential (if possible).
If a patent application is made, however, the ingredients of the recipe or the details of the search algorithm will need to be disclosed and it will no longer be a secret. As a result, the business needs to balance the gain in terms of a monopoly right to use its information for a period of time, against the possible loss its competitive advantage.
That is why enterprises need to make sure they protect their trade secrets effectively. Obviously, employees would be the biggest threat to businesses when it comes to trade secrets. Sometimes the reason for this is that employees leave their former employer with bad feelings or they want to climb the ladder faster at their new job. So. here are some practical tips for employers to take precautions.
NDA and Non-compete clause
The Non-disclosure agreement is a contract between the employer and the employee where the employee would agree to maintain the subject matter of the contract a secret. Via an NDA, the employer could contractually bind the employee to keep the information strictly confidential and as with every contract, if breached, could lead to the award of damages or an injunction.
Typically, an NDA would include a definition of the information to be kept confidential, any exclusions, the employee’s obligations once the information is received and the duration of the agreement. It is crucial that the information not to be disclosed is clearly and unequivocally defined so that there is no doubt on part of the employee as to what is or is not confidential. And although the duty of confidentiality is implied in the employer-employee relationship, it is essential for the employer to emphasise how important it is for a particular piece of information to be kept secret especially if that information gives the business its competitive advantage.
Another instrument could be the non-compete covenant which, in essence, prevents the employee from working for a direct competitor or starting a competitive business for a defined period of time after termination of the current employment. However, to be enforceable the non-compete covenant needs to be reasonable in that it cannot be too long or too restrictive.
Employee IP handbook and Promote Employee Loyalty
A good idea is to create an employee IP handbook where the company’s confidential policy is explained, the duties in relation to this policy are clearly listed and employees are regularly reminded of their obligation.
It is important to step in the shoes of the employee as well and think about employee loyalty as much as you think about customer loyalty. The relationship between employer and employee should be of mutual respect and confidence and any disagreements should be handled with the employee’s feelings in mind. As already mentioned, one of the reasons for terminated employees to take away with them secret information is because of the employment relationship ending badly. That is why employers need to make sure they give appropriate rewards and benefits and recognise employees’ loyalty.
Add labels ‘confidential’ and use codes
When revealing trade secrets, you could label it as “CONFIDENTIAL” as well as use codes for recipes, formulas or ingredients so that users do not know the exact information and have no direct access to the trade secret itself. It is better if you reveal the exact trade secret to a limited number of people, such as the more senior employees rather than giving any employee access to secret information.
On leaving, it is advisable for the employer to conduct an exit interview with the employee – that is a well-conducted conversation to make sure the employee is reminded once again of his obligations. Ask him/her to confirm s/he has not taken any documents and has destroyed any that s/he had already had. Of course, this interview should not be conducted as if it is interrogation – the employer should find the balance between rightly underlining the obligations the employee has but at the same time avoid making the employee feel guilty or disloyal. If your business is very ‘trade secret sensitive’, that is, it is heavily dependent on trade secrets, you could take detailed notes at the exit interview and ask the employee to sign an acknowledgement that the notes are reflective of the meeting.
Send a letter to the new employer
To maximise your protection, provided there is a new employer of your former employee, you could also send a letter to the new employer to inform him/her of the situation – for example if you suspect the employee has taken secret information and have reason to believe s/he might disclose it. By doing this, you will not only inform the employer of the employee’s potential leakage of trade secrets, but you also have a strong basis for a future lawsuit if the new employer knowingly allows his/her employee to disclose or use this information.
To sum up, it is vital to make sure trade secrets and their protection are top priority sooner rather than later because even if you have a strong case against the employee, once the trade secret is disclosed, it will be too late to protect the information. Therefore, precautions are the key to effective protection of trade secrets. Make sure you do that!