Protecting Your Company's Trade Secrets From Employee Theft

Know how to protect your company’s most valuable assets.

Almost every business has trade secrets: valuable inside information that gives a business a competitive advantage in the marketplace. To keep others from stealing (or “misappropriating”) your trade secrets, you must take certain steps to protect your proprietary information. This is especially important when it comes to employees, who might accidentally disclose trade secrets during their employment or intentionally use your company’s trade secrets when they leave.

What Laws Protect Trade Secrets?

Until recently, trade secret protection was available only under state law. Because the vast majority of states have adopted the Uniform Trade Secrets Act (UTSA), at least in some form, there are many similarities in how trade secrets are protected across the country. However, there are still differences among state laws and how certain provisions of the UTSA have been interpreted by the courts.

In May of 2016, Congress passed the Defend Trade Secrets Act (DTSA). The DTSA is a federal law that prohibits the misappropriation of trade secrets and gives trade secret owners the right to file a lawsuit in federal court. The DTSA contains many of the same provisions as the UTSA, but has some new protections. For example, it allows trade secret owners to make an “ex parte” application to the court—meaning without giving prior notice to the alleged violator—to seize the property of the violator in order to avoid further disclosure.

What Is a Trade Secret?

A trade secret is confidential information that adds value to a business—such as customer lists, manufacturing processes, recipes, formulas, marketing strategies, and other methods or techniques. To qualify for protection, a trade secret must meet the following requirements:

  • Independent economic value. The trade secret must provide the company with a substantial business advantage. For example, a manufacturing process that allows a company to produce its goods quicker and more efficiently has economic value.
  • Not generally known. The trade secret must not be generally known to the public or to those who can gain economic value from the information. For example, competitors in the same industry must not be aware of a particular marketing strategy in order for it to be a trade secret.
  • Reasonable efforts to maintain secrecy. The trade secret holder must also take reasonable steps to keep the trade secret from being disclosed. For example, the owner of a secret recipe might keep it in a locked safe or a password-encrypted file, separate the production process so that no one knows the entire recipe, and require employees to sign nondisclosure agreements.

Trade secrets are not protected if they are acquired by independent discovery or reverse engineering. For example, if another company develops the same manufacturing technique entirely on its own, it is free to use it. Likewise, if another company takes apart your product and discovers your trade secret in the process, it is free to use that information.

Do I Need to Register My Trade Secrets?

Information that qualifies as a trade secret is automatically protected under the law. You don’t need a nondisclosure agreement to keep people from revealing or using your trade secrets (although such an agreement can be very helpful, as described below). And, unlike other types of intellectual property, such as patents or trademarks, trade secrets are not registered with a government agency. Trade secrets are protected for as long as they remain confidential. Once they are revealed to public or otherwise generally known, they are no longer protected.

How Can I Protect My Company’s Trade Secrets?

Even though a nondisclosure agreement (NDA) isn’t required to protect your trade secrets, it can be very useful in a few ways. First, it defines the scope of the trade secrets not to be disclosed, so there is no confusion as to what information is protected. Second, it is less likely that employees will reveal trade secrets when they have signed a written contract agreeing not to do so. Third, an NDA can protect a broader variety of confidential information that doesn’t qualify as trade secrets and wouldn’t otherwise be protected. (To learn how to put an NDA in place for your business, see our article on nondisclosure agreements.)

In addition to using NDAs with employees, contractors, vendors, partners, and others with access to your company’s proprietary information, you can also take the following steps:

Include a confidentiality policy in your employee handbook. Your employee handbook should describe how employees should handle trade secrets and other confidential information. For example, a policy might prohibit employees from disclosing confidential information to those outside the company, from taking confidential documents home, or from emailing them to a personal email account. For help drafting or updating your employee handbook, including a confidentiality policy, see Create Your Own Employee Handbook, by Amy DelPo and Lisa Guerin (Nolo).

Mark items confidential. All hard copies and digital copies of confidential documents should be stamped or marked “Confidential.”

Limit access to proprietary information. Hard copies of confidential documents should be stored in a locked cabinet; digital copies should be password-protected. Access to documents should be given on an as-needed basis and only on the authorization of senior management.

Collect confidential documents at termination. When employees leave the company, be sure to collect all confidential documents and have employees delete digital copies from their personal computers or other devices. If you are concerned about employee sabotage, you may want to revoke the employee’s access to company systems during the termination meeting.

Ask employees to sign noncompete agreements. In some states, you can ask employees to sign noncompete agreements, which prohibit them from starting their own businesses or working for a competitor for a certain period of time after they leave the company. These contracts should be reserved for high-level and skilled employees who have access to highly confidential company information. However, there are many restrictions on these types of agreements—for example, they must be reasonable in scope, location, and duration. And, some states—notably California—outlaw noncompete agreements altogether. (To learn more, see our article on creating an enforceable noncompete agreement.)

Are There Limits to What I Can Ask Employees to Keep Confidential?

The National Labor Relations Act (NLRA) is a federal law that guarantees employees the right to discuss the terms and conditions of their employment. This means, for example, that you can’t prohibit employees from discussing their wages or benefits or from sharing employee contact information with each other. These rules apply to union and non-union workplaces alike. To learn more, see our article on unfair labor practices.

What Can I Do If My Company’s Trade Secrets Have Been Stolen?

If an employee has left your company to start a new business or to work for a competitor, you can’t stop the employee from using his or her general knowledge gained at the company. However, you can stop the employee from using trade secrets or other confidential information protected by an NDA. A lawyer can help you take immediate legal action to prevent your trade secrets from being misused—by sending a cease and desist letter, filing for an injunction to stop the use of your trade secrets, or filing a lawsuit to recover damages for violation of federal or state trade secret laws.

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