Non-Disclosure Agreements

Covering Your ATS applies to more than software engineers.

By example, a broker and a software engineer develop a new computer system containing a novel matching process for their start-up ATS. They may sign a non-disclosure agreement forbidding either party to disclose without the other party's consent. If the software engineer tries to use the novel matching process in a side business, without the broker's consent, the broker may sue the software engineer for misappropriation of the trade secret.

To further protect the innovation, the software engineer and broker may require anyone they share the information with to sign non-disclosure agreements. If a financier is interested in investing in the technology, the software engineer and broker may require the financier to agree not to disclose or use the matching process trade secret. If the financier starts a new business using the novel matching process, in a way that violates the non-disclosure agreement, the software engineer and broker may sue the financier for misappropriation of the trade secret and breach of contract. However, if a third-party investment bank independently develops the same matching process, the software engineer and broker cannot stop the investment bank from marketing their process.

This is a good description of what a non-disclosure agreement does, and its defects have to do with the generality of the original article.

That non-disclosure agreement needs careful drafting so as to provide the protection expected by the parties. Yes, get a lawyer to do this. Is a lawyer necessary? Not really but having a person who can is not immersed in the deal gives you someone who view the deal critically and find any flaws in the agreement.

Trade Secrets - A Good Article to Read

I could not decide how to digest Musical chairs: brokers and insurers must fight to retain their clients when key employees leave. The article covers a lot of territory - some of it focused upon in my earlier posts on trade secrets. Yes, the article focuses on the insurance industry but the following points apply equally to any type of business:

Companies have a variety of ways to protect themselves when employees leave and try taking business with them, said Steven A. Goldfarb, a partner with the Cleveland-based law firm of Hahn Loeser & Parks.

These legal tactics include pursuing violations of common law, fiduciary duty or the Uniform Trade Secrets Act against the defector and rival company. One common tactic is pursuing violations of restrictive covenants, which are contracts that limit what employees can do after they leave a company.

Such documents can include geographical covenants, which restrict an employee from working for a competitor within a certain area for a certain length of time. Another is the non-solicitation covenant, which restricts an employee from soliciting the company's clients or employees for a certain period of time.

Non-lawyer writing on non-compete agreements

Unlike some lawyers, I do not mind when non-lawyers write about legal matters - so long as they do not muff the law. No-Fault Divorce. Is It Time To Tie The Knot With A New Employee? from insurancenews.net does a good job with the legal issues. Besides, how can I object to an article that has the following paragraph:

To create a truly good agreement, start from the basics. It is worth the money to have an attorney involved in the drafting. But that is just the beginning. More important is that you, as the agency owner or manager, must guide the attorney to include the specific contractual elements you need.

I often wonder if my readers think my pronouncements about needing lawyers for a business are not a bit self-serving. Of course, they are self-serving to a point. I am looking for new clients, but I prefer to prevent problems for those clients to cleaning up the avoidable messes.

If you have a business then read all of the article. It applies to more than insurance agents.

Trade secrets - an overview

USA Today published an article Ask an Expert: Protecting your customer list that is a succinct and simple overview of trade secrets, confidential agreements, non-competition agreements, non-solicitation and non-disclosure agreements.

It has some of the same information as I have published on this blog but is a good starting place. Read the article and then come back here for some more detail on trade secrets, non-disclosure agreements, and/or non-competition agreements.

If you need to hire legal counsel for an Indiana case involving trade secrets or non-competition agreements, please contract me.

Four Steps to An Injunction

The trial court issued a preliminary injunction in the Symons case for misappropriating trade secrets. Here are the four standards for issuing a preliminary injunction:

1) Whether or not the party seeking the injunction has an adequate remedy at law;

2) Whether granting the injunction would disserve the public interest;

3) Whether the party has established a reasonable likelihood of success at trial; and,

4) Whether the injury to the party seeking the injunction outweighs the harm to the party who would be enjoined.

Indiana State Bd. of Public Welfare v. Tioga Pines Living Center, Inc. (1994) Ind.App., 637 N.E.2d 1306, 1311

Non-Competition Agreement and Trade Secrets

From yesterday's Indianapolis Business Journal:

Marion Superior Court Judge Thomas J. Carroll yesterday issued a preliminary injunction ordering an Indianapolis company controlled by high-profile businessman Alan G. Symons to return computer files and other information allegedly taken from a Fishers competitor. The competitor, Product Action International LLC, claimed in a lawsuit filed in May that Symons' company--Fast Tek Group LLC--used Product Action's business blueprint to build a similar company. Both firms sort defects out of parts lots for manufacturers.

Symons filed an appeal shortly after Carroll issued the injunction. "This is two competitors beating each other up," he said, denying wrongdoing.

This story bears some resemblance to other similar cases that I have posted about here and here and here and here.

Carroll's injunction said the former employees, Anthony Roark and Chan Chanthaphone, admitted taking the information, then took the 5th Amendment protection against self-incrimination and refused to testify.

Roark allegedly transferred operating methods, process flow charts, a quality manual and other trade secrets from Product Action computers to a zip drive, and then gave the information to other Fast Tek workers and used the information in Fast Tek operations.

Roark, who started working at a Fast Tek office in Saginaw, Mich., in 2004, climbed to vice president a year later. He resigned in December 2006.

I hate basing anything on a newspaper report and so this may just be two competitors fighting things out in out. However, the bit about the two taking the 5th does make me skeptical about any pleas of innocence.

What I find truly astounding in this story is the aplomb with which the new company took in these former employees of a competitor. These problems ought to have been sorted out before hiring these persons. Instead of resorting to counsel before the manure hit the fan, the attorneys did what they could fix the results of that manure hitting the fan. I have little sympathy for business owners who are in this position - particularly one who sounds as sophisticated as this fellow. If I do accomplish nothing else with this blog, I hope it is instilling this idea in my readers: consult an attorney before doing anything that could sink your business.

Based on the facts from the IBJ, I would have counseled not to hire these people. If hiring, then restrict their activities either in regards to a non-competition agreement (a point on that below) or a strict review of any information that they brought with them or offer for use. Finally, document everything about them and the information they possess and my client uses and how the client used their information.

I speak a little harshly about the company hiring these people but the former employer missed a few points. First, the former employer does not seem to have had non-competition and/or non-disclosure agreements. In the long run, these missing documents did not matter in this case as the former employees' conduct seems to been outrageous. A closer case and the results would differ. Second, the former employer would have avoided financial and business costs with a better method of securing their trade secrets.

4/18/08 update: Trade Secrets: Indiana Court of Appeals Issues Opinion Involving Fast Tek.

Protecting trade secrets in Indiana

See below for my post below about how Indiana defines trade secrets. Now about protecting those trade secrets.

Remember this: no trade secrets unless the business uses reasonable efforts to keep them secret.

Reasonable efforts do not require a business take "overly extravagant, measures to protect its secrecy." Figure out who must have access to the information, document these persons know that the information is a trade secret, and restrict access to everyone else. Determining those who must have access to the information must depend on the business, but should include employees, vendors, supplier or job candidates.

A non-disclosure agreement accomplishes the documentation. For employees, the business needs a non-competition agreement incorporating a non-disclosure agreement. By signing a non-disclosure agreement, the person given access to the information acknowledges the existence of a business' trade secret. Others need only a non-disclosure agreement. As misappropriation of a trade secret requires the person acquiring the information knew of it as a trade element, a non-disclosure agreement eases proof of a necessary element.

In the past week, the Indiana Court of Appeals handed down an opinion showing how important a well drafted non-disclosure agreement/non-competition agreement can be in a case. See Timothy Glenn v. Dow Agrosciences, LLC . I think the employee presented himself as one who would not misappropriate trade secrets while Dow appears to have bungled its non-competition agreement. With the non-competition agreement being defective, Dow completely lost the preventive effect of its non-disclosure agreement. One can say that Dow only lost its ability to get a preliminary injunction. Consider that at issue here is information in Mr. Glenn's head, that nothing keeps him from using what is in his head other than the threat of monetary damages, and that getting those monetary damages involves costs and the risk of proving those damages. Protecting a business' trade secrets from employees means a well-drafted non-disclosure/non-competition agreement.

The business must do more than execute non-disclosure agreements. Keeping information secret includes securing the information with passwords on computers, a locked area for hard copies, marking things as confidential, keeping the public away from seeing devices or techniques. Accomplishing these goals means the business needs to establish directives on how its employees are to handle this information and educating its employees about these directives. Then the business must consistently enforce these rules.