When a company hires talent away from a competitor, onboarding the new employee can pose significant legal risks for both the company and the new employee. A fundamental aspect of Silicon Valley is that employees are generally free to move between competitors.
This unrestricted movement of talent facilitates the robust competition that helps drive the Silicon Valley economy. While this is no doubt positive, unfettered employment mobility also creates unique challenges when it comes to protecting a company’s trade secrets, which are the lifeblood of many Silicon Valley companies.
Because of California’s policies regarding free employment mobility, unlike in most other states, California companies cannot protect their trade secrets with non-compete contracts. So, they instead rely heavily on trade secret laws for protection.
And, of course, when trade secret theft occurs, it is often when an employee transitions from one company to another. Thus, when a key employee gives notice that he or she is leaving for a competitor, it sets off alarm bells for the soon-to-be former company.
Unfortunately, because of the hypersensitivity to protecting trade secrets, many departing employees who have no interest in actually taking their former company’s trade secrets get accused of theft. This allegation can trigger a long, stressful, expensive legal process for both the employee and the new company, and sometimes cost the employee his or her reputation and new job.
This article explains how this situation arises and provides some practical considerations for how the employee transitioning jobs, and the onboarding company, can avoid an unnecessary legal fight.
1. California companies’ aggressive protection of trade secrets.
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In most states, companies can reliably protect their trade secrets through contractual non-compete clauses. These companies can require each employee to enter into a non-compete agreement that prevents the employee from working for a competitor for a time (often a year or two) after his or her departure.
As a practical matter, this provides significant protection for trade secrets because it generally pushes departing employees to non-competing businesses, where the company’s proprietary information is less useful and/or its use is less harmful to the company.
California has long taken a different approach. It highly values unrestrained employment mobility, which has become a pillar of the cutting-edge Silicon Valley economy. A by-product of this policy is that, with few exceptions, California does not permit non-compete agreements.
Unable to rely upon these contractual restrictions, California companies must carefully guard their trade secrets to keep them out of a competitor’s hands. In California, a trade secret is information that derives independent economic value from not being commonly known in the industry in question.
This can include customer lists, sensitive marketing information, performance metrics, formulas, techniques, and any other information that is secret and provides a business advantage. Taking, using, or sharing a company’s trade secrets without permission can significantly harm a business, and for this reason trade secret theft is against the law and gives rise to liability.
When trade secret misappropriation does occur, it often happens when one or more employees leave one company to work for, or start, a competing business. And because most sensitive data is now kept digitally, an employee trying to steal trade secrets usually will transfer that data to himself or a third party either via email or by transferring the information from a work computer to an external storage device, such as a USB drive.
Thus, when a key employee departs for a competitor, California companies often immediately take steps to investigate the outgoing employee’s digital activities to determine whether the employee misappropriated its trade secrets.
To do this, the company will generally hire an expert to conduct a forensic examination of the departing employee’s computer. The forensic exam and related analysis can show whether and when the employee plugged external storage devices into the computer, an internet search history, and whether and when documents were viewed and/or downloaded from the company database/cloud onto the computer’s hard drive.
The company will also often analyze the departing employee’s work email account to determine whether the employee forwarded the company’s proprietary information either to the employee’s personal email account or to third parties. The problem with this analysis, as described below, is the results are often ambiguous, which leads companies to conclude the departing employee may have taken trade secrets. This presents the opportunity both for mistaken allegations and for more nefarious conduct such as using vague investigative findings as a way to stifle legitimate competition.
2. Uncertain results lead to unnecessary legal disputes.
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Two types of uncertainty commonly lead a company to take action against a departing employee and/or her new employer. First, because of the limitations of forensic examinations, companies are often unsure of what exactly the departing employee took with her.
Imagine that a high-level employee, “Sara,” who had been at the company for three years, gives notice she is leaving, and the company suspects she will soon be joining a competitor. Per company policy, Sara is escorted out of the building and her email access is shut down.
The company then undertakes a forensic exam, and it reveals only that the Sara plugged in a USB device to her work computer a week earlier and, around the same time, viewed information relating to a project she was working on, which the company considered proprietary. The company now reasonably suspects Sara has downloaded something to a USB device, which may or may not be the company’s new, cutting edge technological designs.
This triggers several events in rapid succession. The company hires litigation counsel to send a “cease and desist” letter to Sara, threatening to sue her and seek a temporary restraining order for her apparent theft if she does not immediately return all company property.
The company also sends a letter to Sara’s new employer, the competing business, warning them that Sara may have stolen the company’s proprietary information and threatens to sue if any of it is shared with, or used at, the company. Sara’s new employer now must get litigation counsel and an outside expert to analyze the risk, interview Sara, and collect her USB drives, personal phone, and computer for analysis.
The company sidelines Sara from working until the dispute is resolved and has internal discussions regarding it is worthwhile to continue employing her. Suffice it to say, Sara’s first week at work does not go how she had hoped, and now she is scared she will be left without a job.
The thing is, Sara didn’t take the company’s new technological designs. Over the years she worked at the company she had saved family photos on her work computer so she could create albums while traveling for business. Once she knew she would be leaving the company, she downloaded her photos onto a USB device a week before her departure.
She explains this to her new employer’s lawyers. But when they look at the USB device, they find not only the photos, but materials from her prior company (though not the technological designs).
Sara explains that she used the USB drive to transfer company data from one device to another during her three years at the company, and that the information on the device is nearly two years old. But she can tell from the lawyers’ reaction that the situation remains complicated and is not likely to end soon.
The second common form of uncertainty is regarding whether the information in question constitutes a trade secret. Here, imagine John, a high-level salesman, brought a list of customer contacts and related information when he joined the company four years ago.
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He has all of these contacts in his personal phone, but also put them on the company’s system to track business, etc. Over the years, he used those contacts to generate new business for his company.
But now, John wants to start his own competing business. So, he sends an email from his work email address to his personal email attaching his customer contact list. It’s just easier to have them all in one place rather than finding them on his phone.
After John gives notice and leaves the company, the company reviews his recent email traffic to determine whether he has improperly sent himself any company proprietary information. The company finds the email forwarding himself the customer contacts.
Unlike in the situation with Sara, here, the company decides to skip the angry letters and immediately sues John and his startup, asking the court to enjoin both of them from using any of the contacts. In other words, John has unnecessarily found himself in the middle of a legal firestorm over one innocent email. His chances of obtaining funding plummet and his legal fees mount.
These types of scenarios occur every day in Silicon Valley. While sometimes the misunderstanding can be worked through and the disputes can be resolved amicably, oftentimes it takes weeks or months for that to occur, after requests for emergency relief have been sought in court.
Moreover, there is unfortunately another element that occasionally seeps into these fact patterns: companies improperly using threats of trade secret misappropriation as a backdoor way of obtaining a non-compete or hampering a new competitor in the marketplace. For example, sometimes when companies find evidence that indicates a departing employee may have taken trade secrets, instead of trying to determine whether a theft actually occurred, they use this ambiguous evidence as an excuse to engage in unfair competition.
For example, a company could threaten to sue Sara and her new company unless her employment is terminated, sue Sara’s new employer for trade secret misappropriation in an effort to bleed its revenues and slow it down in the marketplace, or sue John and his start-up to crush a fledgling competitor with legal fees and hinder its funding efforts.
3. Ways for the departing employee and new company to protect themselves.
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Both the departing employee and onboarding company can follow several steps to protect themselves against unwarranted allegations of trade secret misappropriation. First and foremost, both an employee and the onboarding company should consult with counsel regarding the best steps to take under any given circumstances.
Second, as an employee, before changing jobs, you should consider sending an email to your manager or other appropriate superior informing her that you have personal information on a work computer that you would like to take when departing the company. Do not insert any external storage device to your work computer without first alerting your employer.
You should consider volunteering, in writing, to allow the company to review any information before you download it. Furthermore, you should get the company’s written consent to download specific information and copy your personal email address on the communications so you don’t lose them when you no longer have access to your work email.
Moreover, if you have any company information on any other device, such as a personal USB device, your phone, or a personal computer, you should alert the company and ask if it should be deleted or returned. The fact that company information is on your personal devices does not mean it is somehow no longer company information, and it could still constitute a trade secret.
If you are unsure whether information is “company” information, and you do not absolutely need it, err on the side of caution and alert the company. If there is information you would like to take with you, but are concerned it may be trade secret information and therefore do not want to raise it with your current employer, then consult a lawyer regarding the risks associated with taking this information before leaving. Depending on what counsel says, you may also want to raise this issue with your new company—which will probably tell you to not take the information in question.
Third, when onboarding an employee from a competitor, in consultation with counsel, a company should notify the onboarding employee, before he or she begins working for the company, that it does not want the employee to bring any trade secret/proprietary information with him from his prior employer. The company should consider obtaining independent counsel for the employee, and paying the fees, because there is often a potential conflict of interest for the company’s counsel to represent both the business and the onboarding employee.
On this point, the onboarding employee is likely to be more truthful and transparent with his or her own counsel, which means it is more likely that any problematic information can be addressed in advance of the employee’s start date. This protects not only the employee, but also the company from allegations that it received and/or is using a competitor’s trade secrets.
Taking these simple steps on the front end in consultation with counsel can save everyone an unnecessary, expensive legal fight down the line.