When you start a new technology company while employed by another, you put your startup’s intellectual property (“IP”) at risk.

One of the biggest threats to your new startup is a claim of trade secret misappropriation by your former employer.  It may allege that you used or disclosed its trade secrets in the creation of your startup’s IP and therefore it owns the resulting work.

One of the best ways to minimize this risk is to quit your old job like a newborn baby—leave naked like the way you entered the world.

You want to strip yourself of anything belonging to your former employer.

Do not take any documents, computers, paper or electronic files, electronic storage devices, prototypes or work that belongs to your former employer, regardless of whether you think it actually qualifies as a trade secret.

Do not take source code or software tools, even if you wrote them.

To stay safe, do not take your phone or your business contacts list.  Customer lists can qualify as a trade secret and companies frequently sue over their use and disclosure.

Keep NOTHING in your possession that refers to your former employer except a copy of any contracts you signed and minimal documents related to any pension, profit sharing or insurance documents.

If you need to take something else, get permission from the company in writing.

And even if they offer to let you take your company computer — don’t.

Remember that in the event of litigation, a trade secret plaintiff will typically seek all documents that mention its name.  You will have to turn over everything in your possession, custody or control.  That includes documents in your house and garage or on remote servers.  Many entrepreneurs are stunned to learn this after litigation has commenced.

Once a lawsuit is imminent or filed, it is too late to clean house.  Destruction of documents can lead to a claim of spoliation of evidence and the plaintiff may win on a technicality.

You may be characterized as a trade secret thief regardless of whether your possession of your former company files was inadvertent.

Further, when you quit, it is a good idea to write a letter to your former employer stating that you understand your legal obligation not to use or disclose company trade secrets.

Think of the letter as the first exhibit in your litigation defense.

Make a show of returning all company property.  State in your letter that you returned all company documents and files in your possession with the exception of your employment contract and 401 K documents.  State the name of the person who took the documents and the date of their return.

By leaving your old job like a newborn baby, you can decrease the risk of trade secret litigation by your former employer.

This is the final post in the Startup Launch Series.  Click on the category to see other related posts.

Shhhhhhhhhhh.  Be careful about sharing trade secrets.

Laws in all states prohibit trade secret “misappropriation,” which means the unauthorized use or disclosure of trade secrets in breach of a duty of confidentiality or by improper means.

Today’s post discusses misappropriation related to a duty of confidentiality.

You may be wondering, “When do I have a duty of confidentiality?”

A duty of confidentiality commonly arises in two situations:

1)   When you’re an employee and your employer gives you access to trade secrets, you automatically have fiduciary duty of confidentiality.

2)   You sign a non-disclosure agreement (“NDA”).

1. Fiduciary Duty. When you are an employee and in a position where your employer discloses trades secrets to you, you have a fiduciary duty not to use or disclose trade secrets to a third party without authorization.  Most employees receive trade secret information.  This duty continues even after termination of your employment.

YOUR FIDUCIARY DUTY OF CONFIDENTIALITY ARISES AUTOMATICALLY REGARDLESS OF WHETHER YOU SIGN A NDA!

Some employees wrongly think that they don’t have a duty unless they sign a contract.  You can be sued for trade secret misappropriation even if you didn’t sign a NDA.

Failure to have employees sign a NDA, however, is evidence that the employer didn’t take reasonable measures to its protect trade secrets.  (See last post for trade secret status requirements.)

2.  NDA. When you sign a NDA, you also have a contractual duty not to use or disclose trade secrets in unauthorized ways. Nondisclosure terms are usually found in employment agreements and independent contractor agreements. The  scope of the contractual duty of confidentiality will vary depending on the terms of the contract but it usually tracks the trade secret statutory requirements.

Most employees, therefore, have two different types of duties related to trade secrets:  a fiduciary duty and a contractual duty.

In some jurisdictions, you can be sued for a breach of both duties.

The most common type of trade secret litigation involves a company suing its former employees.  Trade secret litigation can easily bankrupt a startup.  Big firm attorney fees for an initial defense in trade secret litigation can be over a million dollars.

What is important to understand is that when you leave your job, you have a continuing duty not to use or disclose your former employer’s trade secrets.

What information can you use from your last job?

You can use your general knowledge, skill and experience.  You can use information that is commonly known in the industry.

But you can’t use customer lists, financial data, or the secret software code that you wrote at your last job.

It’s important to identify the types of trade secrets that you know from your former jobs and take care not to use them in your new venture.

My last post gave you some tips for identifying trade secrets, which may include customer lists, personnel information, prices, software code, product specifications, business plans, and many other types of business information that give a company a competitive advantage.

Remember, in your new company, don’t use or disclose your former employer’s secret, protected information that confers a competitive advantage.

Note:  In the context of an attorney-client relationship, attorneys don’t sign NDAS.  Attorneys have a separate professional duty not to use or disclose a client’s confidential information.  The duty related to confidential information arises in the context of an attorney-client relationship.  This relationship arises when a person seeks specific legal advice from an attorney, divulges confidential information, and the attorney provides specific legal advice based on the client’s facts, regardless of whether the person is paying the attorney.  This duty can arise in the context of an initial attorney consultation and the attorney will be under a duty not to disclose or use the confidential information.  The communication between the attorney and client may also be privileged and excluded from discovery.

You may be wondering, “Do I even know any trade secrets?”

If you’ve ever worked for a company, you do.  But if you aren’t a lawyer, how do you tell whether something is a “trade secret” that gets legal protection?

Does it have to be marked as “confidential”?

Does it have to be absolutely secret?

Does it have to be locked in a box with armed guards?

It’s confusing.  The problem is that the legal definition of a “trade secret” isn’t simple or straightforward.  Consequently, most people’s definition of “trade secret” is both too broad and too narrow.

What’s your definition?  Do you think you know what can be legally protected as a trade secret?

Here’s a little test.

1.   Can the information on your cell phone be considered a trade secret?

2.   Can a trade secret include information that is on the Internet?

3.   Can information be considered a “trade secret” if it isn’t marked secret, confidential or proprietary?

4.   Is everything that a company marks “confidential” a trade secret?

5.   Can software source code be a trade secret?

Here’s the simple explanation of how to identify a bona fide trade secret.

This following is a super, simple rule of thumb to remember:

A “trade secret” is secret, protected information that confers a competitive advantage.

When you’re trying to determine whether something is a trade secret, ask yourself three questions:

1.   Is the information relatively secret or not generally known?

2.   Have reasonable measures been taken to protect it from disclosure?

3.   Would a competitor gain an advantage if they knew it?

1.  Trade secrets are types of information.

Information. Companies commonly seek trade secret protection in court for the following:  customer lists, source code, hardware architecture, specifications, designs, business plans, pricing, financial data, technical methods and procedures.

Confusingly, some combinations of information in the public domain may be protected as a “combination trade secret.”  For example, if you use open source software that is available on the Internet but combine and modify it in a secret way that gives you a competitive advantage, the combination may be protected.  Courts still haven’t figured out a good analysis for determining which types of combinations should be protected.  Crafty lawyers have clever ways of identifying trade secrets in court including claims to combinations of public stuff.

Trade secrets are relatively secret.

Secret. Absolute secrecy is not required.  The legal requirement is that the information not be generally known by competitors.  The information must also not be readily ascertainable.  This means it must be secret enough that your competitors can’t easily get the information from just looking at a product, promotional materials or a website.  If it is generally known and used in your industry, it can’t be a trade secret.

2.  Trade secrets are protected.

Protected.  To qualify as a trade secret, the information must also be protected.  A business must take reasonable measures to protect information from unauthorized disclosure and keep it secret.

If the company doesn’t protect it, the courts won’t.

This is where a lot of businesses, especially startups, screw up.  They fail to take reasonable precautions to protect their valuable information and then they’re mad when they can’t get legal protection when their former employees walk away with it.

Evidence of reasonable protection measures include the following:

Marking. A trade secret owner should have a standard marking policy and consistently identify trade secrets and mark them confidential.  But just because information is not marked “confidential,” it doesn’t necessarily mean that courts won’t determine that it is a trade secret if other protections are in place.

NDAS. A trade secret owner should use non-disclosure agreements with its employees, independent contractors, vendors, or other third parties before disclosing confidential information.  This is critical evidence in court.

Verbal Warnings. A trade secret owner should identify and warn people when it considers specific information to be confidential and warn them not to use or disclose the information to other parties.

Education. A business owner should educate its employees, especially technical ones, about trade secrets and teach them how to take proper measures to protect them.  Education is one of the best forms of protection.  Do your employees know what they can discuss about your products at trade shows and at lunch with their buddies?

Physical restrictions.  A trade secret owner should only give highly confidential information to those who have a need to know it.  You should lock down and restrict access to your important, secret source code.  Access to highly confidential information should require a password or specific authorization.

3.  Trade secrets must confer a competitive advantage.

Competitive Advantage.  Finally, to qualify as a trade secret, the information must give the owner a competitive advantage.  Under most state laws (the UTSA), the competitive advantage may be actual or potential.  A “competitive advantage” means that access to the information would save a competitor time or money or give it a competitive edge.  For example, if a competitor saw your trade secrets and what they learned saved them development time and cost, that would be a competitive advantage.

Do you want to change your test answers?

Test Answers:

1.  Can the information on your cell phone be considered a trade secret?

Maybe.  For example, the list of customer contacts in your password protected Blackberry may be considered a trade secret.  Your emails and attached documents that contain protected, valuable, secret information may also be protected in some cases.

2.  Can a trade secret include information that is on the Internet?

Maybe.  Some protected, secret combinations of information in the public domain, even if the individual components are found on the Internet, can be protected as trade secrets.

3.   Can information be considered a “trade secret” even if it isn’t marked secret, confidential or proprietary?

Yes.  If a court is convinced that a company has taken other reasonable protection measures, like NDAs and physical restrictions, a court might find that an unmarked document containing protected, secret information that confers a competitive advantage is a trade secret.

4.  Is everything that a company marks “confidential” a trade secret?

No.  Indeed, willy-nilly, over-aggressive “confidential” markings are evidence that you can’t property identify legal trade secrets and you have no idea what you are doing.

5.  Can software source code be a trade secret?

Yes.  If source code is secret and protected, it can be a trade secret and get legal protection.  Indeed, trade secret law is the best way to protect source code.

Here’s the more precise legal explanation of a “trade secret”:

I’m including this section because I know that some of you love facts like I do and need an abundance of information.  This section is a little boring so if you want to skip it, just remember the rule of thumb about secret, protected information that confers a competitive advantage.  It’s really only the lawyers who need to know the statutory details.  Your determination of trade secret status won’t be a determining factor in a legal battle.

Trade secret law is a type of state law.  This is important because it means that there is no national standard that applies to everyone everywhere.

There are two main types of trade secret law:  the Uniform Trade Secrets Act (“UTSA”) and the Restatement of Torts.

Most states have adopted the UTSA.   A few hold-out states like Texas kept their old law based on the Restatement of Torts.  The exact scope of protection and the nitty, gritty details in litigation are different but the core protection is very similar.

The following are the more exact definitions of a legal “trade secret.” These are the definitions the lawyers use in court and argue about.

Specifically, the UTSA defines a “trade secret” as:

“[I]nformation, including a formula, pattern, compilation, device, method, technique or process, that:  (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

The Restatement of Torts defines a “trade secret” as:

“A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or us it.  It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.”

In trade secret litigation, the lawyers spend an inordinate amount of time fighting over whether specific information is or is not a trade secret. Ultimately, only a court can decide if all of the legal requirements have been met in order for information to be given the gold star protection of a “trade secret.”

By using the rule of thumb definition of a trade secret—secret, protected information that confers a competitive advantage—non-lawyers can make an educated decision about whether specific information might be considered a trade secret under the law and act accordingly.

Knowing how to identify trade secrets can be critical for a startup’s success.  It can help prevent misappropriation—using or disclosing trade secrets without permission.  More importantly, it can help a startup take the right measures to protect its trade secrets.

Stay tuned to learn more about trade secret misappropriation and when the duty of non-disclosure arises in next week’s posts.

This is the first in a series of four posts about trade secret law.

If you’re starting a business, whether it involves writing software or designing dolls, it’s important to know about trade secret law.

Why?

Because trade secret litigation could blow your startup to smithereens.  It’s a very popular type of litigation brought against successful startups.

Trade secret law is a land mine in the IP legal landscape that can ruin your company and even land you in jail.  Watch out software guys. (I’ll write more about criminal trade secret statutes and great cases involving jail time for software entrepreneurs in a later series of posts.)

I’ve been an IP lawyer for over ten years and I’ve fought in many trade secret wars across the country.  I’ve represented unfortunate startups sued for trade secret misappropriation by the founders’ former employers.  This type of trade secret case can be tough and intense for all of the people involved.  For startups, a trade secret case can be a matter of life or financial death.  In some cases involving VC funded startups, the old employers wanted the startups’ main assets, including the money from the recent round of financing.  The plaintiffs (the companies bringing the lawsuits) sought damages in the hundreds of millions of dollars and ownership of the startups’ intellectual property.

In some cases, the old employers wanted everything new the startups had built because it was allegedly based on the foundation of their trade secrets.

I’ve also represented larger companies who sued their former employees because they were furious that they paid for the intellectual property to great technology and then their employees left and started their own companies—with the same technology.

In one case involving Russian scientists, the Russians left their US employer on the East Coast because they wanted to live where the weather was better.

Really.

They got sued in sunny California.

Litigation is nasty.  It’s expensive and time consuming.

A lot of engineers and technical folks are shocked at the invasiveness of the “discovery” process in litigation.  All documents—at work or at home—within your possession, custody or control that are potentially relevant to the claims in the lawsuit are fair game.  This means that your home computer as well as your work computer may be searched.  The old backup tapes sitting in the chair of your office may also be searched.

Further, discovery usually involves searching documents and drives that you’ve stored off-site or at your house.  I’ve personally collected documents from the attic of a startup founder’s garage.  In court, I’ve also had a judge ask opposing counsel if they had checked for relevant documents in the boxes in the garage where the engineer played basketball.  No kidding.

Trade secret litigation can be particularly disruptive because the lawyers will go through your documents, especially your casual e-mails, with a fine-tooth comb looking for hints of trade secret misappropriation.  At your deposition, opposing counsel may also ask you detailed questions about your lunch conversations with your former co-workers — conversations that you thought were friendly and casual.  Lawyers can spin your allegedly innocent comments to your former co-workers into “evidence” of trade secret theft.

Litigation can result in losing the rights you thought you had in your key intellectual property and even destroy your company.  Litigation and bankruptcy go nicely together.

So stay tuned if you want to know more about trade secret law and understand what you can take and use from your old jobs in your new company, and what you had better leave behind.

The next post will explain how to identify bona fide trade secrets.