Anticipate This!™ | Patent and Trademark Law Blog

Some Finer Points Regarding Trade Secret Law (No. 3)

Posted in Practice Commentary by Jake Ward on March 4, 2007

JW Note:  This discussion is continued from earlier posts (see No. 1 and No. 2) on the relationship between patent law and trade secret law. 

A TS holder’s options for restricting an ex-employee’s use of the TS is limited.  

In most businesses, employees represent a large risk with regard to maintaining trade secrets (TS).   To combat this risk, the use of explicit legal contracts that attempt to limit an ex-employee’s use of trade secrets are commonplace.  However, the legal and practical effectiveness of such agreements are generally acknowledged to be limited.  Although reasonable contracts may serve to clarify what information is trade secret, and provide an employer a basis for a remedy in case of misappropriation, excessive restrictions may impinge on an employee’s ability to find work or can create an oppressive work environment.

There are at least three types of contracts that are typically used to help businesses protect trade secrets: 1) confidentiality/non-disclosure agreements; 2) covenants not to compete; and 3) invention assignment contracts.  Often, these agreements are included as clauses in a generic “employment contract” that is signed when the employee begins employment.

1) Confidentiality or Non-disclosure Agreements:

          A confidentiality or non-disclosure agreement (NDA) is a contract that can be used to protect trade secrets.   An NDA requires that trade secret information disclosed to an employee during the course of business be kept a secret, for example, by requiring the employee to keep the information confidential.   If a person has signed an NDA and uses the trade secret without authorization (TS misappropriation), the employer may sue for damages and stop the unauthorized use. 

          Practically speaking, however, it is often difficult to ascertain whether a former employee has kept trade secret information confidential in the course of new employment.  This is particularly true when the trade secrets are not copies of information but are experiential in nature.  Thus, the practical effectiveness of confidentiality contracts can be difficult to ensure.

2) Covenants Not To Compete:

          Another method for preventing disclosure of trade secrets is the covenant not to compete (non-compete agreement).  Such covenants protect trade secrets when an employee leaves the business.  By requiring an employee to sign a non-compete agreement, the employee must agree not to work for a direct competitor for a certain amount of time after leaving your company.  The theory behind this type of agreement is that the trade secret will become less valuable with time, and therefore the agreement limits a competitor’s access to the trade secret while its value is highest to the business.

          A serious problem with non-compete agreements is that they run counter to a strong public policy, namely freedom to follow one’s profession.  Courts generally use a “reasonableness” test in deciding whether a noncompete agreement is legal.  For example, the terms of a non-compete agreement must be reasonable as to the duration, geography, and scope of the activity.  Courts will also look at whether the restraint is unduly harsh and oppressive in curtailing the employee’s legitimate efforts at a livelihood.  In many cases, a one-year restriction is generally acceptable.  Acceptable agreements also often specify a list of competitors the employee may not join, as opposed to broadly preventing the employee from participating in a particular industry.  Third, adverse consequences for third parties, even if the restraint is narrow in scope, are also considered by courts in determining whether to enforce such contracts.

3)  Invention Assignment Contract:

          Although most courts will deem trade secrets developed within the scope of employment to belong to the employer, having the relation memorialized by an Invention Assignment Contract clarifies trade secret rights and makes both the employee and the employer aware what information belongs to the employer.  Such a contract also may recite explicit obligations to turn over all copies of trade secret information upon termination of employment. 

Using explicit contractual measures to protect one’s trade secrets is undoubtably wise.  These agreements are good evidence that reasonable security measures have been taken to protect trade secrets, and make the employee aware that confidentiality is expected and that there will be consequences if the trade secrets are improperly disclosed.  For example, contracts make available breach of contract and trade secret liability actions to employers. 

However, one should be aware that such agreements have limits, as described above, and the best way to protect TS from leaving a business may be to: 1) ensure that only limited persons have access to critical TS information, and 2) bolster loyalty with these employees by keeping them happy (preventing employee turn-over and subsequently limiting the transfer of TS to competitors).

One Response

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  1. Jake Ward said, on February 14, 2008 at 2:15 pm

    A good post at Zura’s 271 blog on employee defections and its effect on knowledge diffusion through an industry here:

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