Protecting trade secrets during corporate transactions
January 2019 | SPECIAL REPORT: INTELLECTUAL PROPERTY
Financier Worldwide Magazine
January 2019 Issue
In 2013, Michael Hunter Gray co-founded software start-up Calaborate, which developed a group-scheduling mobile app called Klutch. Mr Gray and other Calaborate employees executed assignment agreements agreeing that all proprietary information and innovations developed during their employment with Calaborate would remain the sole property of the company. Gray later attempted to sell Klutch, nearly closing a deal with international online ticket marketplace StubHub, Inc. But the deal failed, and Calaborate ultimately declared bankruptcy. Calaborate’s assets, including the Klutch app and all related IP, were ultimately acquired in a foreclosure sale by Calendar Research LLC.
As alleged by Calendar Research, in the midst of this restructuring, Gray and other Calaborate employees transitioned their efforts from finding a business deal for the company to securing their own future employment with StubHub. Calendar Research later claimed that Gray and other former Collaborate employees copied key trade secret information and made arrangements to use those trade secrets in future work with StubHub – even going as far as collaboratively planning their exit strategy and storing confidential Collaborate documents in an Evernote account.
Corporate transactions raise risks for trade secret theft
While the specific facts of this transaction remain hotly disputed in ongoing litigation, the allegations of trade secret theft in Calendar Research’s subsequent multi-million dollar lawsuit against Gray and StubHub follow an all too familiar pattern. Trade secret protection can be challenging for technology-focused companies even in the best of circumstances. These challenges increase substantially, however, when companies undertake substantial restructuring, such as acquisitions, mergers or bankruptcy.
First, employee departures often increase substantially in anticipation of significant corporate transactions. Employees may be motivated to leave by concerns about job security in anticipation of a prospective change in leadership or the adverse impact of a failed deal. Similarly, employers anticipating such transactions are often motivated to reduce headcount as a means of presenting a more attractive acquisition target. Regardless of motivation, increases in employee departures lead to increased risks that departing employees will seek to depart with trade secret and other confidential commercial information.
Second, this increased risk of trade secret misappropriation is often exacerbated by failures to enforce trade secret protection protocols during times of corporate restructuring. When companies evaluate the potential synergies of a merger or acquisition, they often focus on opportunities to reduce IT, HR, legal and other corporate administrative expenses. These are often precisely the corporate functions most directly involved in ensuring the protection of trade secret and other proprietary information. Even companies with well-established protocols for restricting access to electronic files containing trade secret and other confidential proprietary information may have difficulty enforcing those protocols when key IT and HR personnel depart, or when electronic storage capabilities necessary to audit compliance with trade secret protections are reduced. Similarly, physical relocations of offices or other facilities may require the physical transfer of confidential files. Proprietary information ordinarily kept under lock and key can be temporarily left unprotected.
Third, amid these increased risks, many companies experience decreased vigilance and oversight of corporate compliance during periods of corporate restructuring – just when they need it most. Policies may be changing and merging. There may be turnover in employees responsible for enforcing confidentiality and security protocols, and a ramp-up period for their replacements to get up to speed. An acquiring or merging entity may not be aware of all of the original company’s proprietary information until the information has already been stolen. Without adequate reminders, departing employees may not even realise what information is proprietary or that there are laws prohibiting the use of the original company’s proprietary information in the employee’s new role.
These factors combine to create an environment ripe for misappropriation of trade secrets and other confidential information. Company leaders, investors and potential transaction partners must be especially vigilant to employ strategies to combat these risks and protect trade secret information during periods of corporate transactions.
Start with a plan
Companies should have a trade secret protection plan in place long before any corporate transaction occurs. If companies do not already have such a plan in place, they should work to prepare a plan as soon as possible. The specific elements of a company’s plan should be tailored to both the specific nature of a company’s trade secrets and to the geographic areas in which the company does business. The federal Defend Trade Secrets Act (DTSA) and most state trade secret laws broadly define the scope of potential trade secrets. For example, the DTSA defines trade secrets as “all forms and types of financial, business, scientific, technical, economic, or engineering information”, “whether tangible or intangible” and “whether or how stored”. To qualify as a trade secret, information must “derive independent economic value, actual or potential, from not being generally known” and must be subject to “reasonable measures to keep such information secret”.
What constitutes “reasonable measures” to maintain the secrecy of trade secret information will vary based upon the nature of the information and the way in which it is maintained. Companies should consult with an attorney specialising in intellectual property (IP) and technology law to develop a comprehensive plan.
In many instances, however, elements of a trade secret protection plan include the following.
First, restricting access to physical and electronic files containing trade secret information to those with a genuine business need for access.
Second, requiring employees to execute confidentiality and non-disclosure agreements (NDAs) acknowledging the employees’ access to trade secret and other confidential information, and creating a contractual obligation to protect the disclosure or misuse of such information. In addition to reflecting written efforts to maintain the confidentiality of trade secrets, agreements of this type can create a broader scope of protection for confidential information that may not otherwise qualify for trade secret protection.
Third, requiring employees involved in research and development efforts to assign inventions or other IP relating to the employees’ work or developed using company resources. This prevents employees from independently developing competing technology while still employed by the company. Companies should, however, be aware of various state laws – such as those of California and Washington – that place limitations on the scope of such assignment agreements.
Finally, consistently reminding employees of their obligations not to disclose or misuse trade secret or other confidential information. Many companies choose to require written acknowledgement of such obligations as part of annual performance reviews, promotion decisions, and upon the employee’s separation from the company.
Companies should consult with an attorney to determine whether and how to implement these strategies, and whether additional steps should be taken. Acquiring entities in corporate transactions should review the target company’s protections as part of their due diligence. If necessary, they should require up-to-date policies to be implemented prior to the acquisition to ensure that appropriate policies are being followed before any acquisition or other transaction takes place.
Follow the plan
Like all other business planning, a company’s trade secret protection plan is only as good as its implementation. A critical point of implementation occurs when an employee leaves the company. Regardless of the reason for departure, an exit interview provides an excellent opportunity to remind departing employees of their obligations to prevent the disclosure or misuse of trade secrets and other confidential information. Companies should also consider requiring departing employees to acknowledge their obligations to maintain the confidentiality of such information and to return any electronic files or hard copy documents that may contain such information.
A company’s IT department may play a substantial role in enforcing existing trade secret protection plans. Many companies have the capability to track an employee’s efforts to download or transfer designated volumes of information considered by the company to contain trade secret or other confidential information. An electronic record of such downloads or transfers can be a critical piece of evidence in the event of any subsequent dispute. Accordingly, even during times of corporate restructuring, companies should take special efforts to maintain any such electronic records – especially those relating to key research and development personnel or others with access to trade secret and other valuable confidential information.
Trust but verify
Trade secret protection efforts need not end when a former employee walks out the door. Many companies make specific inquiries during exit interviews to determine whether the departing employee is planning to join a directly competing business. If so, the employer may choose to advise the employee’s prospective employer that the employee has had access to trade secret or other confidential information. Depending upon the nature of the relationship with the prospective employer, such simple factual notice may allow the prospective employer to take measures to avoid any inadvertent disclosures of trade secret or other confidential information. Alternatively, such notice may help provide a clear paper trail to establish the wilfulness of any subsequent misappropriation.
Companies may also wish to monitor new product releases or other publications by future employers of key departed employees who have had access to trade secret or other confidential information. Such efforts require resources, but there are a variety of third-party services that allow companies to selectively monitor such publications for designated periods of time. Efforts of this type may help to uncover potential trade secret violations before a company suffers irreparable harm.
Finally, companies must be prepared to enforce their rights promptly whenever a trade secret violation is uncovered. When a company suspects that its proprietary information has been stolen or misappropriated, or that an employee developed a ‘new’ invention while still employed by the company, the company should consult counsel promptly to map an appropriate course of action. Every case is different, but options may include sending a cease and desist letter to both the former employee and their new employer, filing suit in state or district court, or seeking a more business-oriented solution such as a cross-licence. Importantly, however, delays in taking action may limit a company’s ultimate ability to enforce its trade secret rights.
Despite the heightened risk imposed by corporate transactions, companies have a wide array of tools at their disposal to combat potential theft of their proprietary information. With a comprehensive and consistent approach in consultation with an experienced attorney, companies are far more likely to guard their confidential information and, if necessary, ultimately succeed in enforcement of their rights.
Christopher K. Larus is a partner and Rajin Singh Olson is an associate at Robins Kaplan, LLP. Mr Larus can be contacted on +1 (612) 349 0116 or by email: firstname.lastname@example.org. Mr Olson can be contacted on +1 (612) 349 8776 or by email: email@example.com.
© Financier Worldwide
Christopher K. Larus and Rajin Singh Olson
Robins Kaplan, LLP