When Employees Leave, Are Your Trade Secrets Going With Them?

Guest Post by Expert Geoff Winkler

As a fraud and forensic expert, I am often confronted with the challenges companies face with employee theft.

Preventing the theft of trade secrets often requires the implementation of systems that will restrict and/or deter employees from even trying to take information with them when they leave. But how are financial services companies managing this process in a highly mobile workforce?

Introduction

The idea of an employee working their entire career with one company sounds appealing to many employers, however, the reality is that the average person will hold 11.7 different jobs between the ages of 18 and 48 years old. (Bureau of Labor Statistics - National Longitudinal Survey). Although almost half of these jobs are held between the ages of 18 and 24, that still means that the average person will have six jobs over the next 24 years of their careers. 

Table 1.0 – Median Years of Tenure with Current Employer for Employed Wage and Salary Workers by Industry, 2004-2014 (Bureau of Labor Statistics – Employee Tenure in 2014).

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Despite a flattening trend over recent years, the high job turnover rate has led to a median tenure of only 4.6 years across all industries and 5.0 years in the finance industry (see Table 1.0 above).  

What is a Trade Secret?

The term trade secret is often used by companies to describe information that they consider the key to their company’s success, like the recipe for Coca-Cola. However, since trade secret protection is a matter of state law, it is important to understand the definition used by state courts. The American Law Institute, in mirroring the common law language found in many states, defines “trade secret” as “any information that can be used in the operation of a business or other enterprise that is sufficiently valuable and secret to afford an actual and potential economic advantage over others” (Restatement (Third) of Unfair Competition, Chapter 4, Topic 2, Sections 39-40, 1995). In addition, 48 states have adopted the definition of trade secrets under the Uniform Trade Secrets Act (UTSA).

Why are Trade Secrets Taken?

In a global survey completed in 2013 by the cyber security company Symantec, half of all employees that quit or lost their jobs in the last 12 months kept confidential corporate data after leaving the company. In addition, an astonishing 40 percent of respondents stated that they planned to use their prior employer’s confidential data in their new jobs. Given these attitudes, it is important to understand why employees choose to keep trade secrets.

Employees leaving for negative reasons such as job dissatisfaction or termination may steal trade secrets in order to get even with their employer for perceived injustices (higher salary/bonus, ownership interests, etc.).

Employees that leave on their own to seek advancement, promotion or due to job dissatisfaction may also steal trade secrets. This can be caused by employees who believe they own the work that resulted in the trade secret, since they helped create it, or the employee may take the trade secret in order to win favor with their new employer through industrial espionage.

Finally, there are some employees that leave their former employers on good terms, but accidentally take trade secrets thinking they are innocent files. One example where this has come up was when a company (Company A) was hacked a couple years ago, which resulted in an innocent company’s (Company B’s) payroll data being leaked because a former employee of Company B had taken a few payroll templates she had created while working at Company B and was using them at her new employer Company A, not realizing that the files still contained payroll information from Company B.

What Laws Apply?

As we discussed above, trade secret protections are generally pursued at the state level, but most of these state laws are based on both common law and the UTSA. Under the UTSA, the term trade secret is broadly defined to include not only technical and scientific information, but also marketing and financial records, and need not be eligible for copyright or patent protection.

Companies are also finding protecting under the Computer Fraud & Abuse Act (CFAA), which was enacted in 1984 to protect government and financial institution records stored on computers. In 1996, the law was further expanded to also protect computers that are used in interstate commerce, thereby allowing companies to file suit under this little known law. 

In August 2004, the “Broker Protocol for Broker Recruiting” was adopted by Smith Barney (now Morgan Stanley), Merrill Lynch and UBS and created a common understanding among adoptees not to sue each other or their brokers if certain procedures and limitations are followed. The Protocol has since been adopted by over 500 firms. We will discuss this issue in greater detail in next week’s blog.

Conclusion

As I previously mentioned, preventing the theft of trade secrets often requires the implementation of systems that will restrict and/or deter employees from even trying to take information with them when they leave. When employees believe that they will be caught and prosecuted, they are less likely to attempt the theft. Some companies are concerned about lawsuits and bad press that can be associated with prosecution, but the impact of fraud can be much worse in terms of monetary loss or reputational damage though breach of sensitive information (trade secrets, personally identifiable information, etc.).

In my next post, I will be discussing the Broker Protocol for Broker Recruiting and its impact on departing employees.

Disclaimer

The information provided on this website is for information purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem.