What Happens When an Ex-Employee Steals Company Secrets?

Ex-employees and business partners are the people most likely to steal your company's trade secrets. And bringing them to justice isn't cheap or easy.
February 05, 2013

Even business owners totally dedicated to open-door management have their share of secrets, ranging from confidential client lists and product plans to patents and proprietary processes. So what should they do if they suspect a former employee of making off with some of this information on the way out the door to a new job with a competitor?

When this happens at big technology companies, lawsuits frequently follow. Advanced Micro Devices, for instance, recently sued four ex-employees. The chipmaker claimed the former workers stole hundreds of thousands of documents before going to work for a rival, Nvidia.

Sometimes swiping secrets lands perpetrators in jail. Last summer, a former Intel Corp. employee was sentenced to three years in federal prison for stealing confidential design and manufacturing information after leaving to work for another company.

IP Theft: Common and Serious

Legal tussles over theft of intellectual property (IP) are neither new nor rare. During 2002, according to a 2004 study by the U.S. Department of Justice, plaintiffs filed civil 8,254 cases alleging patent, trademark and copyright infringement. The same year, 134 criminal defendants were convicted of IP-related offenses in U.S. district courts, the study found.

The dollars are also large, with the cost of theft of trade secrets estimated as high as $300 billion per year, according to a statistical analysis of federal cases published in the Gonzaga Law Review. The same article reported that in 85 percent of cases, the miscreant was either an employee or business partner.

Justice Isn't Cheap

Small firms have trade secrets and former employees just like big firms. But small companies have fewer resources to pursue justice. That’s a problem. According to a survey by the American Intellectual Property Law Association, the average patent-infringement case costs the plaintiff $2.6 million in legal fees and costs.

And the rewards are not necessarily certain or great. The Department of Justice study said in 83 of the 140 IP cases settled by a trial verdict, the plaintiff won. Fifty-three of those got monetary settlements, with a median amount of $965,000.

Federal prosectors alleged that a former employee of Intel downloaded proprietary design and manufacturing documents (Photo: Getty Images).

One Small Business's Experience

Some small-business owners are willing to risk spending a lot for small or no reward, when they go after ex-employees they suspect of stealing trade secrets.

After two employees left in 2008 and started a competing business, Southern California waterproofing contractor Wanke Industrial Commercial Residential Inc. sued, claiming they’d stolen customer lists and other secrets.

The case settled in 2009. Defendants agreed not to use Wanke’s customer list. But the matter went back to court a year later. Wanke claimed the pair were still going after its former customers. This time, the defendants had to pay $58,615, including $50,000 in damages and $8,615 in attorneys’ fees.

Was it over? Not yet. As recently as October 2012, the two companies were still wrangling over the matter in court.

Protecting Secrets from Ex-Employees

If you’re concerned about losing trade secrets to former workers, here’s what to do:

  • Know what you can protect. In most states, a legally protected trade secret can be information such as a formula, method or process employed by the business. It has to be something not everybody knows or can figure out. And it has to be valuable, in part, precisely because it’s a secret.
  • Protect it. For trade secrets to be legally protected, business owners must keep them secret. The Gonzaga analysis shows that requiring employees and third parties to sign non-disclosure agreements is one of the most effective ways to show that a business is taking reasonable steps to protect its IP.
  • Limit ex-employee access to secrets. It may seem harsh to immediately revoke computer passwords and escort resigning or terminated employees off the premises. But it may be better than having an employee go back to his or her office, purportedly to pack personal objects but really to download gigabytes of customer lists, product designs, marketing plans, licensing agreements and other valuable secrets.

Secrecy’s Limits

One of the problems with suing over trade secrets is that you’ll have to reveal what the secrets are. Ideally, you’ll be able to do this without disclosing everything to the public. Records can be sealed, hearings can be closed, participants can be ordered not to discuss what they see. But you can’t just say you have a secret without describing it in some detail.

Legal protection for trade secrecy is a shifting target. On Dec. 31, 2012, for instance, President Obama signed the Theft of Trade Secrets Clarification Act of 2012. This new law was specifically designed to address a case involving the theft of computer code used in stock trading programs. However, as it is interpreted in future cases, it may also affect other kinds of intellectual property and trade secrets.

In any event, the value and number of trade secrets, as well as their theft and lawsuits revolving around them, is growing rapidly. The number of trade secret legal cases doubled between 1988 and 1995, and doubled again 1995 to 2004, according to the Gonzaga study. “At the projected rate,” the authors wrote, “trade secret cases will double again by 2017.”

Read more about small-business legal issues.

Photo: iStockphoto