Last week I attended the State Bar of Michigan’s Information Technology Law Section Seminar, Core Legal Issues in a High-Tech Business World. It was a great overall day of presentations.
One presentation that stood out from a business owner’s perspective, however, was given by attorney Leigh Taggart – Protecting Software Trade Secrets.
Trade Secret Misappropriation by the Numbers: Another Thing to Keep Employers Up at Night.
Mr. Taggart discussed a survey about trade secret litigation that covered 394 federal district court cases with written opinions issued between 1950 and 2008. The numbers further break-down as follows:
- The number of federal trade secret cases doubled between 1988 and 1995 and doubled again 1995 to 2004;
- With respect to trade secret misappropriation, 90% of misappropriators were known to trade secret owner: Employees were involved in 59% of trade secret misappropriation claims and business partners made up 31% of trade secret misappropriations; and
- When it came to what law applied, Michigan trade secret law was applied in 6% of the federal court cases, which was only behind Illinois (11%), New York (10%), and California (8%).
Significantly, when state court cases (appellate courts, not trial court decisions) were analyzed – 358 cases between 1995 and 2009 – the number of known misappropriators was similar (93%), but employees made up 78% of the misappropriation claims and business partners 15%.
According to Mr. Taggart’s presentation, these misappropriation numbers translate into an estimated $45 to $300 billion in annual losses.
Next Actions Employers Should be Taking to Protect Trade Secrets
For me, as well as most employers, the number that stands out is that employees are the biggest threat when it comes to misappropriation claims. Accordingly, two critical issues that employers should be addressing:
The first line of defense in trade secret protection is using smart, well-drafted employment agreements, that contain noncompete agreements and nondisclosure provisions. Such agreements are certainly a “best practice,” but they also provide significant strategic value when it comes to trade secret litigation.
Specifically, a breach of contract claim will more likely be easier to prove than a trade secret claim. And once a breach of contract claim is established, it is much more likely that a trade secret claim will also be successful.
The second benefit provided by appropriate employment agreements, such as noncompete and nondisclosure agreements is that it is an easy, objective means to show that the employer has taken reasonable steps to protect against improper disclosure of the alleged trade secret.
For employees, especially those with entrepreneurial goals for starting their own business, it is important to understand the scope of their contractual obligations before taking steps to start-up their business and compete against their prior employer.
This analysis begins with any noncompete or nondisclosure agreement signed by the employee and what restrictions are in place. It is equally important to evaluate whether the noncompete or nondisclosure agreement will likely be enforceable. For more information on these issues, see Are You Shooting Yourself in the Foot by Making this Common Mistake Before Starting Your New Business?
For more information about Michigan trade secret law or the drafting noncompete agreements or noncompete lawsuits see My former employer can’t prevent me from working, right? Dissecting the Enforceability of a Noncompete Agreement or What Happens When a Noncompete Agreement is Violated? A Blueprint for Noncompete Litigation. Also, contact Jason Shinn with any additional questions.