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Trade Secrets and Non-Compete Agreements

You hire the wunderkind programmer away from your competitor and get a letter from your competitor’s attorney stating that you are liable for damages associated with trade secrets the new programmer has divulged to you. What do you do? You do not even know exactly what a trade secret is, let alone that your new programmer might have given them to you.

The first step,which you unfortunately missed, was to have the programmer sign a statement that he is not bound by any confidentiality or non-compete agreement or duty to his former employer not to divulge trade secrets. If the new employee states there may be some restrictions, it is time to get a lawyer involved to determine how to ensure the employee does not breach any existing obligations. If you have already received a letter from your competitor, it is also imperative that you immediately contact your attorney to mitigate any damages that may be accruing.

What is a trade secret? Well, the exact definition is governed by state law and, therefore varies from state to state. Generally, a trade secret is information which:

1) derives economic value from not being generally known; and
2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

A trade secret may be a customer list, algorithm, method, recipe, technique or anything that gives you a competitive advantage over your competition. Even if other companies discovered the trade secret on their own, it is still a trade secret if it meets the above criteria.

How may you be liable for “misappropriating” a trade secret? Like the laws governing the definition of trade secrets, the laws governing what constitutes misappropriation also vary from state to state. Generally, misappropriation involves:

1) the existence of a trade secret;
2) acquisition of a trade secret as a result of a confidential relationship; and
3) unauthorized use of the secret

Damages for misappropriation of a trade secret can be devastating. If you publish a trade secret, say, for instance, in a blog post, the trade secret may be destroyed, making the damages even greater. Damages associated with a lawsuit for misappropriation of a trade secret can cripple, or even destroy, your company.

Ask all new employees whether they may have any existing obligations with regard to trade secrets. Even if they deny any such obligations, if you have any doubt, consult your attorney before making the hire. It could be the difference between keeping and losing your company.

Brett Trout

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