Practical Tips when hiring employees who know trade secrets

Vondran Legal® Trade Secret Litigation

Legal Issue: Practical Tips for Hiring New Employees Who May Come Loaded with Trade Secrets 

When hiring new employees, particularly those from competitor companies, it is essential to ensure that they do not bring trade secrets or confidential information from their previous employers. Misappropriating trade secrets can lead to significant legal challenges for both the new employee and the hiring company. Here are practical, detailed steps to navigate this sensitive area effectively. 

Review Their Agreements 

Before extending an offer to a prospective employee, it is vital to request and thoroughly review any employment agreements they have signed with their former employer. These documents often include non-compete clauses, non-disclosure agreements (NDAs), and other restrictions that might affect the new hire’s ability to perform their duties without breaching their previous employer’s rights. 

Example: In Edwards v. Arthur Andersen LLP (44 Cal. 4th 937 (2008)), the California Supreme Court ruled that non-compete agreements are generally unenforceable in California. However, NDAs and clauses protecting trade secrets are enforceable. Therefore, a meticulous review of these agreements ensures that your company remains compliant with legal obligations and avoids potential disputes. 

Sign Warranties and Representations with Indemnification 

Once an offer is made, have the new employee sign documents that warrant they are not bringing any trade secrets or proprietary information from their former employer. This documentation should include an indemnification clause, which serves as a safeguard for your company in case of any breach. 

Legalese Defined: 

• Warranty: A guarantee that certain facts or conditions are true or will happen. 

• Indemnification: A contractual obligation to compensate another party for any loss or damage that has occurred or might occur. 

Example: In Baxter International, Inc. v. Abbott Laboratories (297 F.3d 544 (7th Cir. 2002)), the court emphasized the importance of warranties and indemnifications in employment agreements to prevent the transfer of confidential information. This step helps protect your company from potential legal repercussions. 

Provide New Email and Computer 

To prevent any accidental transfer of information, provide new employees with a fresh email address and a new computer. This measure ensures that no information from their previous job, which might include trade secrets, is transferred to your company’s systems. 

Example: In United States v. Nosal (676 F.3d 854 (9th Cir. 2012)), issues related to unauthorized access to a former employer’s computer system were addressed. By providing new equipment, you help avoid such unauthorized access and related legal issues, ensuring a clean start for the new employee. 

Prohibit Use of Personal Cloud Services 

Instruct new employees not to use personal cloud storage services like Dropbox for work-related files. Instead, provide access to your company’s secure storage solutions. This policy prevents the inadvertent transfer of confidential information from their previous employer to your company. 

Example: In Waymo LLC v. Uber Technologies, Inc. (No. C 17-00939 WHA, 2017 WL 2123560 (N.D. Cal. May 15, 2017)), the use of personal cloud storage by a former employee led to a significant trade secret misappropriation case. Implementing strict policies on storage can help prevent similar issues from arising. 

Conduct Thorough Exit Interviews with Departing Employees 

When employees leave your company, conduct comprehensive exit interviews. This process helps you understand whether departing employees might take any proprietary information with them. Use this opportunity to remind them of their continuing obligations under any NDAs or non-compete agreements they may have signed. 

Example: In PepsiCo, Inc. v. Redmond (54 F.3d 1262 (7th Cir. 1995)), PepsiCo successfully argued that a former employee’s knowledge constituted a trade secret that could not be taken to a competitor. Thorough exit interviews can reaffirm these obligations and prevent future disputes. 

Educate New Employees on Trade Secrets 

Provide training to new hires on what constitutes a trade secret and the importance of maintaining confidentiality. This education can prevent accidental disclosures and reinforce the seriousness of these issues. 

Example: In Silvaco Data Systems v. Intel Corp. (184 Cal. App. 4th 210 (2010)), the court highlighted the importance of understanding what constitutes a trade secret. By providing training, you help employees recognize and protect such information, thereby reducing the risk of inadvertent disclosures. 

Monitor Compliance 

Regularly monitor compliance with these policies through audits and reviews. Ensure that employees adhere to company protocols regarding data security and confidentiality. 

Example: In WEC Carolina Energy Solutions LLC v. Miller (687 F.3d 199 (4th Cir. 2012)), failure to monitor compliance led to a significant loss of trade secrets. Regular audits can help prevent such occurrences and ensure that your company’s policies are being followed effectively. 

Key Legal Concepts and Cases 

Trade Secret: Information that derives independent economic value from not being generally known and is subject to efforts to maintain its secrecy. (Uniform Trade Secrets Act, 18 U.S.C. § 1839) 

Example: In DuPont v. Kolon Industries (564 F. App’x 710 (4th Cir. 2014)), DuPont’s trade secrets regarding the manufacturing process of Kevlar were misappropriated by Kolon Industries, resulting in significant legal consequences. Understanding the value and protection of trade secrets is crucial for any business. 

Non-Disclosure Agreement (NDA): A contract through which one party agrees not to disclose certain information. NDAs are critical in protecting trade secrets and other confidential information. 

Example: In IBM Corp. v. Papermaster (No. 08-CV-9078, 2008 WL 4974508 (S.D.N.Y. Nov. 21, 2008)), the court enforced an NDA to prevent a former executive from disclosing IBM’s confidential information to Apple. NDAs play a vital role in protecting proprietary information during and after employment. 

Non-Compete Agreement: A contract in which an employee agrees not to enter into or start a similar profession or trade in competition against the employer. These are generally unenforceable in California but may be enforceable in other states under certain conditions. 

Example: In Continental Car-Na-Var Corp. v. Moseley (24 Cal. 2d 104 (1944)), the court ruled that non-compete agreements are generally unenforceable in California. Understanding the enforceability of such agreements is essential when hiring new employees. 

Inevitable Disclosure Doctrine: A legal principle suggesting that a former employee will inevitably disclose trade secrets of a former employer to a new employer, even if inadvertently. This doctrine is not widely accepted in California. 

Example: In Whyte v. Schlage Lock Co. (101 Cal. App. 4th 1443 (2002)), California rejected the inevitable disclosure doctrine, emphasizing the state’s strong public policy favoring employee mobility. Companies must be aware of this doctrine’s limited acceptance when considering potential risks. 

Conclusion 

Hiring new employees who may come with trade secrets from their former employers requires careful consideration and proactive measures. By reviewing their agreements, having them sign warranties and representations with indemnification, providing new equipment, prohibiting the use of personal cloud services, conducting exit interviews, educating employees on trade secrets, and monitoring compliance, companies can protect themselves from potential legal issues related to trade secret misappropriation. 

Understanding the legal framework, including relevant civil codes and case law, is essential in navigating these complexities. Implementing these practical tips can help safeguard your intellectual property while fostering a legally compliant and ethical work environment. By taking these steps, companies can minimize risks and create a secure environment for both new and existing employees.