A Brief Introduction

In September 2006, Dr. Sining Mao, the Senior Director for Advanced Head Concepts and a Seagate engineer for 11 years, accepted a job offer from Seagate's rival, Western Digital.  In October 2006, Seagate brought suit against Dr. Mao and Western Digital.  The court granted the defendants' request for arbitration and stayed the lawsuit. 

At issue in the arbitration were Seagate's claims of misappropriation of trade secrets by Dr. Mao, misappropriation of trade secrets by Western Digital, breach of contract by Dr. Mao, breach of fiduciary duty and duty of loyalty by Dr. Mao, and wrongful interference with contractual relations by Western Digital. 

Seagate bore the burden of showing 1) the existence of a trade secret and 2) the improper acquisition, disclosure, or use of the trade secret.  On April 19, 2010, Seagate made a motion for sanctions, claiming Dr. Mao and Western Digital fabricated evidence, in order to show public disclosure of 3 specific Seagate trade secrets.

The arbitrator concluded Seagate had taken reasonable efforts to maintain secrecy, that Dr. Mao fabricated evidence to try to show that Seagate's trade secrets were already in the public domain, and that Dr. Mao's fabrication of evidence and Western Digital's complicity by submitting obviously fabricated evidence were "egregious" litigation misconduct that "warrants severe sanctions." As a result, the arbitrator precluded the admission of any evidence by Western Digital that it had not misappropriated or used the three Seagate trade secrets.  (The arbitrator did not, however, find there was sufficient evidence that Western Digital's attorneys were complicit in presenting fabricated evidence.)

The arbitrator characterized Dr. Mao's testimony as "evasive" and lacking credibility.  The arbitrator found that Dr. Mao breached his employment agreement by using Seagate documents to prepare presentations and train Western Digital engineers, and by soliciting Seagate employees to leave Seagate to work for Western Digital. 

The arbitrator decided it was most appropriate to calculate Seagate's damages under the theory of unjust enrichment.  Because Western Digital saved significant time and expense researching the innovations brought by Dr. Mao, Western Digital was able to introduce new products to the marketplace roughly nine months earlier than it would have otherwise.  Seagate was awarded damages of $525 million, with interest at 10% per year, for a jaw-dropping total of $630 million.

In late January 2012, Western Digital filed a motion in Minnesota state court to overturn the arbitrator's award.  We should keep our eyes on this case as it moves forward, but as with any arbitration decision, overturning such a result may be difficult.

With Mao in mind, we now review a few trade secret best practices regarding the loss or acquisition of a key employee.

An Ounce of Prevention Is Worth a Pound of Cure

Although it is difficult to prevent key employees from leaving for (apparently) greener employment pastures, there are many ways to mitigate the risk of such departures and to minimize the potential damage that a company may suffer if such a departure occurs.

One of the most important steps a company can take to protect its trade secrets is to conduct a trade secret audit.  Working closely with legal counsel, a company must take stock of its trade secret assets, then establish the necessary protocols to protect those assets.  A trade secret audit can help a company establish approximate values for its trade secrets, as well as identify areas of concern that may require immediate correction to improve security or protocol.  A trade secret audit should be comprehensive, and a company undertaking such an endeavor would be well-advised to plan the nature of the audit, the involvement of key employees, and the coordination of cooperation between legal counsel and any third-party entities, such as accountants. 

Also, it is important to start any employment relationship by educating the employee as to his or her duties and responsibilities regarding the protection of trade secrets.  An employee must signal his or her understanding in writing. 

Further, an employer should, of course, have the employee enter into a non-compete agreement.  Covenants-not-to-compete help protect against losing investments in employee training and development, and minimize the risks that result from exposing employees to confidential information and key customers.  Employers must make sure that a non-compete agreement is enforceable in a particular jurisdiction and include, inter alia, proper geographic and temporal limitations. 

Related to covenants-not-to-compete are forfeiture-for-competition and compensation-for-competition agreements, in which an employee either forfeits certain benefits or pays an agreed-upon amount of money to the former employer if he or she engages in activities that compete with the former employer.  A variation on this theme is the forfeiture agreement.  A forfeiture agreement is one in which an employee forfeits benefits when his employment terminates, regardless of whether he engages in competitive activities.  Forfeiture agreements provide incentive for employees to remain with the current employer.

Another common way employers protect themselves is with a nondisclosure or confidentiality agreement, in which an employee promises not to use or disclose an employer's confidential information.  When establishing nondisclosure agreements, it pays to have completed a trade secret audit in advance, and to have properly informed an employee regarding his or her duties, responsibilities, and exposure to the employer's trade secrets.  Furthermore, an employer will need to update confidentiality agreements whenever there is a change in an employee's position or title, and should take any update in policy as an opportunity to have an employee reaffirm his or her commitment to maintaining the confidentiality of the employer's confidential information by signing an updated confidentiality agreement.

Two additional forms of protection are the non-solicitation agreement and the anti-piracy agreement.  A non-solicitation agreement compels an employee not to solicit or accept business from the employer's customers, and an anti-piracy agreement requires that the former employee not solicit or hire the employer's employees.  Both agreements are generally subject to the same kinds of limitations that apply to covenants-not-to-compete.

Particularly important for businesses that create new products and services is the "invention assignment" agreement.  Invention assignment agreements compel an employee to assign to the employer any potential inventions conceived of during employment.  In general, an invention assignment agreement covers inventions created while performing the employee's employment duties and/or while an employee uses the employer's resources.  Such agreements may not apply to inventions an employee creates while working with his or her own resources, away from the employer's premises, in an area unrelated to his or her employment.  If a company pursues a patent on an invention created by an employee as part of his or her duties, it is important to secure an assignment in writing, and to submit the assignment to the PTO.

Finally, to avoid liability for tortious interference or unfair competition when hiring a competitor's former employee, it is incumbent upon the new employer to anticipate the possibility of misappropriating, and prevent the disclosure of, trade secrets held by the new employee.  One way to ensure that misappropriation does not occur is by "fencing in" or separating the new employee from projects or initiatives that could lead to misappropriation.  While it is fair to use the business acumen and professional or technical skills acquired by an employee, it is important to prevent the employee from crossing the line into trade secret misappropriation.

The new employee also should be discouraged from using or instructing others in how to use the former employer's confidential information, and from recruiting former colleagues, and should confirm in writing that he or she will not do so.

If these best practices are followed, an employer can prevent the potentially costly business and legal repercussions of trade secret misappropriation.

Don Daugherty is an intellectual property litigator in the Milwaukee, WI, office of Whyte Hirschboeck Dudek S.C.  He is co-chair of the firm's Business Litigation Practice Group and can be reached at ddaugherty@whdlaw.com.

Christopher Walker is an attorney in the Milwaukee, WI, office of Whyte Hirschboeck Dudek S.C. and a member of the Intellectual Property Team.  He can be reached at cwalker@whdlaw.com.