Can a Lawsuit Help Mitigate the Risks of Trade Secret Theft?

Trade secret law is constantly evolving as technologies in the workplace change.  Staying up to date is critical.   Recently, I attended an online seminar focused on theft of trade secrets in the workplace. The presenters included private practice attorneys from a national firm and in-house IP counsel from two large companies.

There was a consensus that you cannot prevent an employee from stealing trade secrets in all cases. This is especially so with the advent of cloud computing and bring your own device policies in the workplace. The focus should be on mitigation of risk before the theft, and implementation of an action plan after the theft.  I have commented on these same issues several times on this blog.

With respect to action plans after theft, I was interested in the insights of the in-house IP attorney. The attorney stressed the importance of having a team assembled to address trade secret theft to include security, technology, and legal.  When making a decision on pursuing an injunction in court, the assembled team will need to identify objectives based on a series of factors including the value of the intellectual property at issue and the business issues implicated.

I agree with these points.  Having a team in place, with written documentation of it, not only will help a business act quickly, but will also serve as evidence of the reasonable measures taken to protect the trade secrets.  A dedicated team will also facilitate regular communication between departments to stay on top of changing technologies and workforce demographics.

The pros and cons of litigation were also discussed.  The cons are understandable and include costs of litigation.  One presenter mentioned that litigation should be a last resort.  That might be agreeable as a general policy provided other measures are utilized to consistently address the issue via other means.  However, there are some upsides to pursuing litigation that may not be readily apparent.

Litigation serves as a reminder to others of the personal financial risks of misusing confidential information or trade secrets.  If employees understand that a business will not hesitate to file a lawsuit to protect its valuable information, the employees are less inclined to engage in misconduct.  In addition, a good attorney advising an employee on exit strategy will always ask about a company’s policy on enforcing non-compete or non-disclosure agreements.  Thus, the enforcement policy impacts the strategy of the departing employee.  

To illustrate the point, consider the NFL.   I know of an author who wanted to publish a book that arguably (but unlikely) used intellectual property of the NFL.  The author’s attorney advised against using the material despite the fact that the material was unlikely to infringe as a matter of law.  Why not use it? Simple. The NFL will crush you and they have a track record of doing it.  

There are many instances where the NFL took immediate action to shut down a potential infringer.  A quick Google search turned up a law review article and numerous stories of enforcement.  The word gets out.  The NFL will enforce its intellectual property rights.  The NFL does so in a broad and sweeping manner.   

The NFL’s policy is certainly not going to mesh well with every corporate culture, and I do not intend to advocate for litigation in all circumstances.  However, strategic use of litigation for the right case can go a long way toward protecting a business in the future.  Litigation can address an immediate risk, but also serves as a reminder to others about the risks of misuse of intellectual property.

Deciding to Enforce A Non-Compete Agreement in Connecticut – 5 Tips

Many Connecticut business owners have agreements (so called "non-compete agreements") in place with their employees concerning competition or solicitation. When an employee leaves a company, business owners have to decide if they should try to enforce the non-compete agreement by filing a lawsuit or engaging an attorney. Here are 5 factors to consider:

 

1. Is the contract reasonable? I have reviewed hundreds of these agreements, and they are all different (even the agreements I draft). There are various legal and factual requirements that you will need to satisfy for enforcement of non-compete or non-solicitation contracts. However, in general, the first question you have to ask is whether the contract is reasonable in light of the business you are in and purpose behind the specific contractual terms.

For this reason, it is always a good idea to have an attorney draft your agreement specifically tailored for your legitimate business concerns. Getting a form template online and applying it to your business may seem like a cost effective approach, but what happens when you really need to enforce your agreement?

2. What are you trying to protect? Generally speaking, it is easier to convince a court to stop a departing employee from taking your customers or manufacturing process than it is to stop the employee from working for a competitor. For example, the chances of successful enforcement increases if your contract was drafted to protect customers the employee was working with as opposed to trying to stop the employee from working in any type of role for a competitor. Additionally, courts are much more likely to entertain an injunction for protection of legitimate confidential information.

3. Are you worried about creating a standard for other employees? Employees that leave always talk to the employees that stay behind. It is a fact of life. In addition, word gets around about the details of any settlement involving non-competes. Why? Well, for one, everyone wants to know whether a business will actually seek to enforce their contracts. If a company continually declines to enforce their non-compete agreements, other employees may get the idea that the same rule will apply. 

4. What are the risks involved?  It may be difficult to know the full extent of the risk posed by a departing employee. However, it is important not to underestimate the risks. I have seen circumstances where a business loses only one small client at first, but suffering major loses many months down the road. Some questions to consider: (1) have you lost clients or are you in danger of losing clients; (2) is there a danger of the employee disclosing or using legitimate confidential information; (3) what did the employee have access to while at work (i.e. client lists, trade secrets, and financial information); and (4) was there an exit interview conducted and return of confidential information verified.

 

5. Litigation costs v benefits. I ask clients to make a business decision by weighing the risks (see # 4) versus the costs involved. Litigation costs are dependent on a number of factors. Some examples of factors that impact litigation costs include (1) the nature of the dispute; (2) the strength of the contract; (3) the ability of the departing employee to defend the case; (4) the lawyer defending the case; and (5) the type of action you decide to bring.

These are only some of the many factors a business should consider when confronting a decision on enforcement of a non-compete.

Understanding Risks and Avoiding Lawsuits – Negotiation of the Master Services Agreement

Recently, I received a call from an attorney trying to figure a way out of a Master Services Agreement for his client.  His client, the purchaser, was stuck owing a lot of money to a technology vendor under a Master Services Agreement that was not working for the client.  The problem – – there was no protection under the contract for the purchaser and no clear way out without owing money to the vendor. 

The problem is not unique to technology purchasers.  Bad contracts also can hurt technology providers.   Take for example a recent case involving a technology company in a lawsuit over installation of new software for a small business.  The business claimed loss of profits due to extended down time as a result of a claimed breach of warranty.  The problem for the technology vendor – –  no protection in the contract with a limitation of remedy provision or disclaimer of warranty.  This opened up a claim for consequential damages that neither party contemplated.

In these cases, whether you are the attorney for the customer or the vendor, many times you are left saying "I wish you called me when you negotiated this contract."   In most instances, when a large or significant service and technology purchase is involved, the relationship between customer and vendor is set forth in a Master Services Agreement.  Master Services Agreements are typically contracts in information technology or professional services that govern a long term vendor-client relationship.  The contract includes general provisions on price, payment terms, and project scope.  The contracts usually include a Statement of Work. The Statement of Work will define the project specifics, services, or deliverables.

While the negotiation of a Master Services Agreement can be quite complex depending on the scope of the project, there are some general terms and clauses that should be considered or included in each agreement to avoid mutual misunderstandings, bad financial decisions, and unnecessary business litigation.  This applies to both sides of the negotiation whether you represent the customer or the vendor.  

There are some standard clauses and considerations in Master Services Agreements that can help the parties reach a true meeting of the minds as to the scope, risks, and obligations. Here is a checklist of some topics and questions that should be discussed as part of the negotiation of a Master Services Agreement:

  • Price.  Very important to remember that the sticker price or price on the contract is many times not as important as the soft costs and expenses.  It benefits both sides of the deal to make sure the price and payment terms (including add on fees like renewals, maintenance and service) are clear and understood.
  • Payment.  Is the agreement going to call for payment by time and materials?  A fixed fee?  A hybrid of both?  Will the payments be tied to meeting milestones on deliverables?  Penalty or late fees? Any retained amounts until completion?  For both sides of any deal, it is better to work out the details on payment ahead of time and avoid problems before they arise.
  • Intellectual Property.  Who is going to own the intellectual property rights to the new software or work performed?  If this is not addressed in the contract, unintended results may occur where the vendor has future property rights for a project paid for by the customer. 
  • Warranty.  What is the scope of the warranty of the work? Will the warranty be limited to the vendor’s performance in a workmanlike manner or is greater warranty protection needed for a new product installation?  Does the vendor warrant the software or other products? The warranty many times provides the basis of the claim for damages against the vendor.  By limiting or expanding the warranty, the scope of liability is understood by both parties at the outset. 
  •  Statement of Work.  This is the document that will provide the specifics on the deliverables under the agreement.  Will it be a separate document?  How much detail will be included?  What assumptions are made?  How can the scope of the project increase?  What are the due dates and deadlines?  An overly broad Statement of Work can be a problem for both a vendor and customer. 
  • Confidentiality Agreement.  Typically, the parties to a Master Services Agreement will want a mutual confidentiality agreement or non-disclosure agreement to prevent disclosure of proprietary information and company trade secrets.  How will you define proprietary information and trade secrets?  How long will the agreement last?  What are the penalties for violation?
  • Indemnification.  These clauses typically shift the risk associated with a loss or a claim from one party to another.  For example, what happens if the customer gets sued for patent infringement for work product of the vendor?  Should the vendor have to defend and indemnify the customer for the lawsuit?
  • Attorneys fees and Alternative Dispute Resolution (ADR).  How will disputes under the contract be resolved?  ADR clauses in the contract can provide for the award of attorney’s fees to the prevailing party and force all disputes to be resolved in a binding arbitration as opposed to a typical lawsuit in court.   More and more, both customer and vendor are seeking to avoid costly litigation by electing for a streamlined dispute resolution process.
  • Insurance.  Does the vendor have errors and omissions insurance?  Should it be required in the contract?
  • Termination.  What terms will govern when one party is unhappy or if a party is in breach?  How do you get out of the contract?  30 days notice?  10 days notice?  Is there any payment for at will termination?  Does work stop upon notice?

These are just a few of the major considerations at play for both a purchaser and vendor under a Masters Services Agreement.  For any significant transaction,  it is advisable for a technology lawyer to negotiate the contract.  Early involvement of a technology attorney can save time and expense later and help each party understand the risks of any particular project.