Protecting Your Edge: Detecting Trade Secret Risks and Preparing for Litigation

Early detection of trade secret theft and a strategic response are crucial for protecting your proprietary assets.

Mitigating risk in common scenarios that can trigger trade secret disputes

Theft by current or former employees

Departing employees, especially those joining or starting a competitor, can put trade secrets at high risk. If you learn an employee leaving your company is headed to the competition, a forensic audit of their devices can help detect misappropriation early. For example, such audits could identify the software engineer downloading design documents, the sales executive sending customer lists to a personal email address, or the departing manager exporting files related to patent strategy.

Risk indicators include:

• Unusual or voluminous file downloads before or after giving notice
• Attempts to access confidential databases outside of job scope
• Departures to direct competitors

Breakdowns in business relationships: Joint ventures and vendor partnerships

Third parties with access to sensitive company information pose risks to that information. When business partnerships break down, disputes can arise over the ownership and continued use of shared proprietary information. If a former partner uses this information after the partnership has ended, it can trigger legal disputes over intellectual property (IP) and contractual obligations. Well-crafted contracts can help minimize and resolve these disputes.

Preventative measures include:

• Requiring written non-disclosure and confidentiality agreements
• Clearly defining who owns what rights in shared information and jointly developed IP
• Detailing post-termination protocols for returning or destroying confidential information

Accidental disclosure in patent filings

Patent applications require revealing inventions, while trade secrets rely on keeping information hidden. Filing a patent application can thus lead to inadvertent destruction of a trade secret.

Preventative measures include:

• Coordinating between R&D and legal teams before filing patent applications
• Determining what information should remain protected as a trade secret
• Evaluating draft and pending patent applications for potential over-disclosure

Preparing for trade secret litigation

If a trade secret threat emerges, it is essential to respond strategically, and often swiftly.

Launch a privileged internal investigation to establish a sound legal basis for any claim

Before initiating litigation, companies must establish a solid legal foundation by conducting an investigation. Involving attorneys protects those investigations under the attorney-client privilege. Such investigations help ensure that any claims of suspected misappropriation are supported by tangible evidence.

The investigation should include identifying the trade secrets at issue and determining who had access to them. Device logs and file activity should be investigated to trace any potential unauthorized access or misuse. Interviews with relevant personnel can also corroborate findings. By taking these steps, businesses can assess the strength of their case.

Evaluate where to file

Trade secret owners may pursue claims under the federal Defend Trade Secrets Act or state laws, most of which are based on the Uniform Trade Secrets Act. Although these laws share the same basic elements, there are nuanced differences to consider.

Choosing where to file involves weighing several factors. Federal courts may offer greater procedural efficiency and more experience handling complex commercial disputes, which is valuable in high-stakes trade secret cases. The speed at which a court can issue emergency relief (for example, a temporary restraining order or preliminary injunction) can also be critical to preventing further dissemination of confidential information. Additionally, some courts require trade secret owners to identify the disputed trade secrets earlier in the litigation without the benefit of discovery. Arbitration clauses or forum-selection clauses in existing contracts can also affect where cases may be filed.

Name defendants strategically

Naming the defendants in a trade secret complaint is a critical strategic decision. In cases involving former employees, plaintiffs may choose to sue the former employee, their new employer, or both. In disputes stemming from joint ventures, the company or specific individuals could be held liable.

Contractual obligations, such as mandatory arbitration clauses, may limit who can be named as a party or where the case can be filed. Insurance coverage also affects who is named, as involving officers and directors with applicable coverage could impact the availability of resources for settlement or defense. Moreover, reputational concerns also play a role, as parties consider how their actions in litigation affect their public perception.

Takeaway: Enforcement begins with preparation

Trade secret disputes carry high stakes and can escalate quickly. By identifying risks early, implementing protective measures, and responding strategically when issues arise, companies can be armed to effectively defend their trade secrets. When litigation becomes necessary, preparation makes all the difference.

For more detail on the legal challenges posed by trade secret threats and the importance of addressing them proactively, please see ”Trade Secrets: How to Protect IP You (Probably) Already Own” and “Trade Secrets: Launching and Defending Misappropriation Claims.”