By Lisa Chapman, Esq.
The hidden gem of intellectual property is the “trade secret”. The reader’s digest version of the definition of a trade secret is that it is something that has economic value to a company which that company takes efforts to treat as confidential. Translation – it is something that gives your company an edge over your competitors which you treat as secret. As for this latter point, this means that you don’t post the secret information on the internet, or share it with those who don’t have a “need to know” the information. Examples include both technical information (i.e., information about products, software and business designs) and non-technical information (customer lists, customer information such as pricing and preferences, and business plans.) Think of this as the “secret sauce” that makes your customers pick you over your competitors. Damages for trade secret violations can be “trebled” (i.e., tripled), so the legal risk if theft can have crippling economic consequences. This applies both to startups as well as other types of new companies.
Scenario No. 1 – You are an entrepreneur in startup mode and are forming a business. You think that you can ramp up quickly by “borrowing” your former (or current) employer’s trade secrets. This is never a good idea. Both employment law and commercial law have a lot to say about this topic. When you leave your former employer and form a competing business know that your former employer is watching your actions. When you begin to solicit their customers, expect that your former employer will find out. And, when you begin to develop and market a product that is strikingly similar to a product which you developed when employed by them and they rejected it, know that they will (rightfully so) fight you for ownership of that idea. Solution – start your new business with your own ideas and property; don’t “borrow” them from your former employer. Litigation that you may very well face will wipe out any early and easy profits that you might have gained from “borrowing” your former employer’s trade secrets. You could face litigation for violation of employment, contract and intellectual property laws. For those new companies that are willing to take this risk, there are key steps that you can follow to minimize the risk and help to ensure a better litigation outcome, most of which you will need to coordinate with counsel well in advance of forming your new company.
Scenario No. 2 – Key members of your team have left your company and formed a competing business and are soliciting (or you fear they are soon going to solicit) your customers. Your business is at a serious point of risk – you need to take action to stop the threat of trade secret theft. Likely they have violated key employment laws. You have leverage, but only if you use it. Legal action is required, either in the form of a lawsuit seeking an order enjoining the new company from contacting your customers (which should stop them in their tracks), or alternatively a letter from counsel threatening future litigation if they don’t cease their unlawful activities. Either way, enlist counsel to guide you. If you ignore this, and let it persist, then you will waive your right to claim damages, and will jeopardize future success in a claim for injunctive relief. Time is NOT on your side. The good news is that your economic position is likely much stronger than your opponents. Employment as well as other laws protect you, but only if you avail yourself of the benefits of the protections that they offer.
So, to conclude, be mindful of both the defensive and offensive aspects of this area of the law – and use it to your advantage.