Protecting Trade Secrets and Other Unfair Competition Issues Arising from the COVID-19 Pandemic
June 30, 2020
By: Stephen B. Stern
This is another article in the series of articles we have posted regarding legal issues that businesses of all sizes should consider when navigating shelter-in-place orders during the COVID-19 pandemic and as they prepare for the “reopening” of the economy. As companies try to adjust to the COVID-19 business environment, there are many areas of employment law that present potential liability for companies. While one of our prior COVID-19 related articles (see article here dated May 28, 2020) addressed some issues involving the protection of trade secrets and unfair competition, this article addresses those and other related issues in further detail.
• Identifying Trade Secrets: To maximize the effectiveness of a trade secret protection program, it is helpful if the company identifies which information constitutes a trade secret. Not all confidential information necessarily qualifies as a trade secret. In many jurisdictions, a trade secret generally is defined as any information, including a formula, pattern, compilation, program, device, method, technique, or process that (1) derives independent economic value, whether such value is actual or potential, from not being generally known to, and not being readily ascertainable by lawful means by, other persons who can obtain economic value from its use or disclosure, and (2) is subject to efforts that are reasonable under the circumstances to maintain its secrecy. Companies need to review how confidential (non-public) information to protected electronically on their computer network. For example, companies may want to consider labeling documents as “Confidential” when possible in the title and/or on the documents themselves. Also by way of example, access to certain directories containing such confidential files should be limited to those employees that need access and should be password protected if possible. Thus, it may be appropriate to evaluate the identity of and safeguarding trade secrets in consultation with legal counsel.
• Cybersecurity: In addition to an internal review of trade secret safeguards, companies should safeguard against external attacks as more employees work remotely. It is well documented that the number of cyberattacks has increased substantially since the shelter-in-place orders were implemented. While we know of no court holding an alleged trade secret does not qualify for trade secret protection because of inadequate cybersecurity, that does not mean companies should not be proactive in implementing appropriate cybersecurity to protect some of their most valuable assets. Indeed, companies want to be vigilant and expend appropriate resources to protect their networks against cyberattacks, whether trade secrets are involved or not. The amount of expenditure may be influenced, however, by the amount of risk the company faces in the event of a hack/cyberattack.
• Telecommuting and Remote Access: In “normal” times, having employees work remotely poses certain challenges for businesses in their efforts to protect trade secrets and other confidential business information. With more employees working remotely due to COVID-19, the challenge is even greater, as there are more opportunities for employees to misappropriate or inadvertently disclose trade secrets and other confidential business information. For example, during such uncertain economic times, employees may feel more emboldened to take risks that involve the misuse of trade secrets and other confidential business information since it is harder to monitor employee activity as they work remotely and off a company network. In addition, with employees working from home, there are more opportunities for employees to work with or save trade secrets and other confidential business information on devices outside the company’s network/servers, which diminishes the company’s ability to track, protect, and maintain control over, such information. Also by way of example, the opportunities for inadvertent disclosure on video calls is much greater. Businesses should revisit and effectively communicate policies, procedures, and practices regarding the protection of trade secrets and other confidential business information. These policies, procedures, and practices should address not only securing trade secrets and other confidential business information during the employment relationship, they also should address circumstances where employees working remotely are laid off or furloughed. The policies, practices, and procedures implemented should follow guidance from applicable case law. For example, employees should be required to work with trade secrets and other confidential business information on company networks/servers and companies should develop methods of securing company equipment and information in a remote environment when employees leave the company voluntarily or involuntarily. Also, businesses may need to apply a more critical analysis to providing such sensitive information to independent contractors who are working remotely, as companies will have less ability to monitor these individuals who they have less control over in the first place.
• Implementing Appropriate Nondisclosure Contract Provisions, Policies, and Practices: A successful trade secret protection program typically includes the use of appropriate nondisclosure agreements (or nondisclosure provisions in employment agreements that include other terms) and confidentiality policies and practices. These contract provisions and policies and practices should be tailored to each business’ needs. Contract provisions and policies that are overbroad and overreach do not provide any meaningful guidance to employees and run the risk of not being enforced. In addition, employees should be trained on practices and procedures regarding the protection of trade secrets and other confidential business information. While the risk of having employees discuss confidential information in an elevator is low at the moment, there are a number of other risks that companies face with employee misappropriation and disclosure while working remotely.
• Implementing Appropriate Noncompete and Nonsolicitation Contract Provisions: During “normal” times, companies should be vigilant about utilizing appropriate noncompete and nonsolicitation agreements. The parameters of enforceability vary according to state law, but these agreements generally are enforceable in most jurisdictions if drafted narrowly to protect the legitimate, protectable business interests of the company. Companies may need to revisit the terms of these agreements as a result of the COVID-19 pandemic, however, particularly where COVID-19 has had a substantial impact on the company’s business interests. For example, some businesses have seen markets shrink – in some instances substantially – which may make existing agreements overbroad with provisions that are not narrowly tailored to protect the legitimate business interests of the company. As a result, existing agreements may not be enforceable and perhaps should be rewritten. On the other hand, some businesses have experienced growth and expanded business opportunities into new markets, which may make existing provisions in agreements inadequate to protect the company’s new, broader business interests. As a result, those company’s may want to update their noncompete/nonsolicitation agreements to protect their expanded business interests. It also should be noted that these analyses should not be looked at in a binary manner (i.e., the company either expanded or contracted), as some companies, particularly larger businesses, may have seen contraction in some divisions and expansion in others. In short, when a company’s business interests have changed, the terms of their agreements may need to change or, with respect to those existing agreements that are in place, they may be less likely to be enforced by a court. Plus, companies should be aware of new laws regarding limitations on the use of noncompete agreements.
• Identifying Other Forms of Unfair Competition: As noted above, unfortunately, when people feel desperate, they may be more inclined to engage in various forms of misconduct that violate contractual obligations, as well as applicable statutes and common law. One example where that behavior may rear its ugly head is having a competitor falsely assert to potential clients that the company is going out of business or is on the brink of going bankrupt. We have already seen that occur on multiple occasions and we are working with clients to combat such allegations. It would not be surprising (as sad that is) to see a number of other false allegations disseminated in an effort to try to gain a competitive edge in a very challenging economic environment. For example, employees of one company may allege that another company has experienced an outbreak of coronavirus among its workforce or that products designed to protect against the spread of COVID-19 are defective. The number and nature of potential false accusations that could give rise to any number of claims under the label of unfair competition can be endless. Companies should be mindful of these ploys and take appropriate action if such tactics are discovered. Similarly, companies also should take affirmative steps to train employees and implement appropriate policies and practices that prevent such behavior, as having an employee engage in such conduct may give rise to a claim against the company, even if the employee acted without permission from the company.
• Taking Action When Unfair Competition Occurs: In the event a trade secret is misappropriated, a noncompete or nonsolicitation agreement is breached, or any other form of unfair competition occurs, a company should be prepared to act swiftly and decisively. An initial step would be sending an appropriate cease and desist letter to the proper parties. If that does not achieve the desired outcome, the company should determine whether emergency injunctive relief (in the form of a temporary restraining order (“TRO”) and/or preliminary injunction) is warranted or whether the matter is more likely limited to a damages case that can and should be litigated as such. Often both forms of relief are sought, particularly when emergency injunctive relief is requested, but sometimes a TRO is not likely to be issued and there is no need to expend such funds in a futile cause. When evaluating whether to pursue a TRO or any judicial relief, it is important to understand the existing procedures of the court where relief will be pursued. In this regard, most courts are operating on a limited basis due to COVID-19 while shelter-in-place orders are in effect and as courts gradually resume full operations after such orders are lifted. Even though most courts will schedule hearings to address requests for emergency relief, those hearings often are not being scheduled as quickly as they would be in “normal” situations and it may be more challenging to obtain the desired relief in light of the limitations on hearings conducted remotely, if the court conducts such a hearing by phone or video. Not only is it possible that there will be limits on the introduction of documentary evidence, there may be challenges with getting witnesses served with subpoenas and having them appear for testimony.