Trade Secrets and Start-Ups: What to Do When Secrets Walk Out the Front Door

Start-ups often face a complex relationship with their trade secrets. Many of the strengths of early stage start-ups, such as collaborative work among a small number of business partners and open access to proprietary information by all team members, can obfuscate clear ownership rights and confidentiality obligations concerning trade secrets. The first employees of a company will also often feel a strong sense of ownership over his work, which can sometimes lead to the employee considering work developed for the company as his property, rather than the company’s. While proprietary information is often the lifeblood of the business, it can be expensive for young companies to protect. However, there are a number of inexpensive and overlooked best practices that can safeguard trade secrets without slowing down productivity or altering the company’s culture.

Start-ups often lack clear guidelines concerning employee departures, which can create an environment ripe for trade secret theft. The first step in an employee departure should be informing the departing employee of his confidentiality obligations and securing any means of access to trade secrets. It is a good policy to require exit interviews of departing employees where the employee is: 1.) reminded of his obligations to the company; 2.) confirms no confidential information is still in his possession (often inadvertently stored on a Dropbox account or personal email accounts); and 3.) signs an acknowledgement that he has not retained any confidential information. Further, securing access to trade secret information includes:

• collecting all company devices from departing employees;
• if devices cannot be collected, then remotely imaging and wiping those devices; and
• blocking access and disabling log-ins and accounts to all company data including internal sites, shared documents, email accounts, etc.

Second, if necessary, the company should conduct an internal investigation into whether information has been taken by the departing employee. This process can involve a forensic examination of the employee’s devices, shared databases and company accounts. It should also involve interviews of relevant employees. These interviews should focus on information that the departing employee had access to, roles and responsibilities in the departing employee’s old and new jobs, information used in both jobs, any information provided to the new employer, and any information gleaned from the forensic examination.

The third step is evaluating risk and determining whether litigation is required. In-house or outside counsel can provide start-ups with cost-effective methods for managing risk, as a variety of options may be available depending on the circumstances. Where the risk of harm is low, counsel may recommend contacting the former employee and the new employer, through counsel, to address the issue. Where the risk of harm is high, (for example, where an engineer has stolen trade secrets and is joining a competing company that could easily capitalize on that information), then litigation and a TRO/preliminary injunction may be the best course of action.