To Disclose Or Not to Disclose: Responding to Trade Secrets Misappropriation By an Employee

By Rebecca Edelson
June 1, 2020

“The average employer may balk at the idea of telling its competitor that one of its employees has misappropriated that competitor’s trade secrets. However, it very well may be in that employer’s best interests to make the disclosure.”

https://depositphotos.com/72052625/stock-photo-folder-with-the-label-trade.htmlAn employee comes to you with a recipe for your competitor’s “secret sauce.” You know she worked for your competitor before coming to work for you. How do you respond? It’s an important question, because it may go to the core integrity of your organization and because exploring this trade secret conundrum may offer some decision-making principles that businesses can apply when addressing other difficult decisions that they are being called to make in these stressful COVID-19 times.

This trade secret scenario initially raises various practical issues, depending on where you sit. Engineering may love to have the “secret sauce” recipe but management may be concerned about  the potential negative monetary ramifications to the company if engineering uses the recipe. The legal department may put a stop to the whole thing, to everyone’s relief, citing exposure to liability for theft of trade secrets.

But what comes next? The question of what to do once the legalities are sorted out can often be critical. In an effort to mitigate the current situation and/or avoid similar situations in the future, the employer may consider: (i) what made the employee think the company would be receptive to receiving a competitor’s trade secret, and (ii) what should the company do to try make it right? In other words, what should the employer do that would be consistent with its company values?

Here, we address question (ii), specifically, whether the employer should disclose the situation to the competitor. The average employer may balk at the idea of telling its competitor that one of its employees has misappropriated that competitor’s trade secrets. However, it very well may be in that employer’s best interests to make the disclosure. Many employers may be surprised to learn that a proactive disclosure may offer concrete economic benefits for the employer in addition to demonstrating that the company is a good corporate citizen.

Thus, “doing the right thing” from a values standpoint can be coextensive with the employer’s other interests.  Aligning risk mitigation obligations with core values can improve judgment, enhance decision making, and create the most successful outcome (See Sheppard Mullin, Organizational Integrity Group, “Heed Organizational Values and Culture).

As an example of a company’s consideration of its core values in decision-making, we offer the following. Over a decade ago, PepsiCo disclosed to Coca-Cola that someone had offered to sell Pepsi trade secrets of Coca-Cola’s. At the time, a Pepsi spokesperson said that Pepsi had done what any responsible company would do by assisting Coke. He noted, “competition can sometimes be fierce, but also must be fair and legal.” Pepsi’s decision to voluntarily disclose the scheme to Coca-Cola showed Pepsi to be a company with laudable corporate values and a commitment to compete fairly in the marketplace.

In the incident mentioned above, the wrong-doers were not Pepsi employees, so the question arises: should an employer contact a competitor if the employer discovers that one of its own employees had misappropriated the competitor’s trade secrets?

Here, we explore:

  • an affirmative disclosure to the former employer (“the Competitor”) as a potential option for an employer (“the Employer”) that discovers that an employee (“the Employee”) has misappropriated the trade secrets of the Competitor; and
  • some potential benefits and risks to the Employer of making such disclosure to its Competitor.

Potential Responses from an Employer to a Discovery that an Employee Has Misappropriated a Competitor’s Trade Secrets

So let’s say an Employer learns that an Employee has misappropriated its competitor’s secrets. Perhaps the Employee brought the Competitor’s confidential documents to the Employer’s facilities, used the Competitor’s confidential information to create new technology for the Employer, or has disclosed the Competitor’s confidential information to the Employer’s other employees.

There are a range of steps that the Employer may consider taking in response to the discovery that its Employee has misappropriated the Competitor’s trade secrets (“the Discovery”). For example, the Employer could:

  • retain a forensic consultant to extract from the Employer’s systems any misappropriated documents or those derived from misappropriated information (but without spoliating any potentially relevant evidence);
  • instruct employees that no information gleaned from the Employee is to be used unless it is in the public domain or from a third party source (that is not the Competitor) and, to the extent it was already used, such work product is to be re-done by personnel that had no exposure to information derived from the Employee;
  • suspend the Employee during the Employer’s investigation and then terminate the Employee if the investigation shows termination is warranted; and/or
  • disclose to the Competitor the Employee’s misappropriation (“Disclosure”). Which steps to take will likely depend on a number of delicate considerations, including the Employer’s business goals, and various judgment calls and risk assessments. Further, implementation of the steps can be very complicated, requiring expertise to maneuver around potential land mines. A poorly designed or implemented remediation plan can make the situation worse. Thus, steps taken in response to a Discovery, including any Disclosure, should not be made without careful consideration and consultation with legal counsel. A remediation plan in response to a Discovery is beyond the scope of this article.

Potential Benefits to the Employer of a Disclosure to its Competitor

Below, we focus on some potential scenarios where a Disclosure may benefit the Employer.

Benefit: Credibility Through Transparency. If the Competitor ends up filing litigation against the Employer, the Employer’s credibility may drive whether the Employer is found liable, and whether the Employer is hit hard with a large monetary award. A voluntary Disclosure by the Employer before any litigation is filed may make the Employer’s assertions in litigation more credible, including those about:

  • lack of its inducement, involvement and ratification of the Employee’s conduct,
  • non-use of the Competitor’s information (e.g., in the Employer’s technology or products or services),
  • the effectiveness of its remediation efforts,
  • its sincere respect for others’ intellectual property rights, and
  • its good faith in general

(collectively, “Credibility”). A judge and jury may assume that the Employer never would have made the Disclosure voluntarily if the Employer had engaged in wrong-doing and, thus, had an incentive not to draw attention to the incident. For more see Sheppard Mullin’s Organizational Integrity Group’s Credibility Through Transparency.

If it is revealed during the litigation that the Employer knew of but did not disclose the incident, the judge and jury may assume (albeit perhaps wrongly) that the Employer did not make the Disclosure in order to cover-up wrong-doing on its part. A perceived cover-up by the Employer may cause them to view the Employer’s evidence skeptically and believe the Competitor’s claim that the Employer encouraged and took advantage of the employee’s misappropriation.

The Employer’s credibility also may increase the possibility that the Employer and the Competitor can resolve the situation without litigation. If the Competitor discovers the situation on its own, the Competitor may be more suspicious of the Employer and require extensive evidence to support the Employer’s assertions that it did not engage in any wrong-doing. The Competitor may make the Discovery by sources other than the Employer, such as:

  • an employee of the Employer who later becomes an employee of the Competitor,
  • the Employee herself (especially if the Employer terminates or suspends her without pay).

Thus, depending on the circumstances, it may behoove the Employer to proactively make the Disclosure to the Competitor.

Benefit: Disclosure May Reduce Risk of an Injunction. The Employer’s proactive Disclosure may also negatively impact the Competitor’s ability to obtain injunctive relief against the Employer if the Competitor were to file litigation. For example, the judge may believe that the Employer does not threaten misappropriation since it brought the issue to the Competitor’s attention (i.e., the judge may perceive the Disclosure as inconsistent with an intent to misappropriate).

Benefit: Disclosure May Bring Closure to the Issue Sooner than Later. If there is to be a dispute about the ramifications of the Employee’s misappropriation (e.g., whether the Employer can proceed with the new technology if it is the product of the Employee’s misappropriation), it may be in the Employer’s interest to have the dispute resolved sooner than later before it invests more time, money and other resources in the new technology.

Early Disclosure (even if it leads to litigation) also may permit the Employer to ascertain sooner than later whether it must redesign certain aspects of its new technology product. If the Competitor asserts a claim in response to the Employer’s Disclosure, the Competitor will file litigation to resolve the issue or the employer can file a declaratory relief action to obtain certainty. The litigation may be concluded before the new technology product is scheduled to launch in the marketplace.

If there is no early Disclosure, the Competitor may file a lawsuit only after the Employer launches its new product (because the product arouses suspicion in the Competitor that misappropriation has occurred). Sales and marketing of the new product may be materially disrupted during the pendency of the misappropriation litigation.

Benefit: Disclosure May Create Time-Based Defenses. The Employer’s early Disclosure may give the Employer time-based defenses (e.g., statute of limitation, laches, or estoppel) if the Competitor materially delays initiating litigation after the Disclosure. The Employer may be able to assert that the Competitor should be barred from belatedly asserting a misappropriation claim after the Employer continued with the development of its technology, investing time and money in reliance on the Competitor’s silence after the Employer made the Disclosure. The Disclosure may also start the statute of limitations running.( A statute of limitations is the time in which a claimant must file its claim.)

Benefit: Disclosure May Reduce Risk of Criminal Liability. A Disclosure may also reduce the Employer’s exposure to criminal liability. There can be criminal liability for possession of the Competitor’s trade secrets even if they are not incorporated into the Employer’s technology (See 18 U.S.C. §1832, making it a crime to possess trade secret information knowing it was misappropriated). The crime requires an intent to injure the trade secret owner. The Disclosure by the Employer to the Competitor may constitute evidence that the Employer lacked of such intent.

Benefit: Disclosure May Reduce the Employee’s Ability to Blackmail the Employer. If the Employer does not make the Disclosure, the Employee may threaten that she will disclose the conduct to the Competitor if the Employer does not give her unwarranted benefits or consideration (e.g., a raise, a promotion). Other employees who are aware of the situation could similarly attempt to leverage benefits from the Employer if the Employer does not make the Disclosure to the Competitor.

Benefit: Disclosure Demonstrates and Reinforces the Employer’s Commitment to Its Own Core Values. If the Employer has stated a commitment to transparency, fair competition, respect for others’ intellectual property, and good corporate citizenship, then the Disclosure strengthens that stated commitment by demonstrating that the commitment is not simply words and instead is real. If customers learn of the Employer’s Disclosure, such knowledge may make them proud to do business with a values-driven business. Similarly, to the extent that the Employer’s employees learn of its Disclosure to the Competitor, the information may affect positively the employees’ productivity and morale. Research has repeatedly demonstrated that when a workforce believes their employer has high ethical standards, morale is higher, productivity is improved, and overall performance is enhanced. People want to be part of an organization that does the right thing.

Potential Downsides to the Employer of Disclosure to its Competitor 

All that being said, there are potential downsides to Disclosure. For example, the Disclosure could trigger unwanted litigation against Employee, or the Employer, or both. Without the Disclosure, the Competitor may never discover the Employee’s misconduct and not file litigation. The Competitor may also try to use the situation to try to discover the Employer’s proprietary information (e.g., “if you didn’t use our information, how did you develop your new technology?”). The information that the Employer is willing to offer to resolve the dispute may never be enough for the Competitor. Thus, it may be impossible to settle without litigation. However, if the Competitor attempts to take advantage of the situation, the Employer can file a declaratory relief action to have a dispute resolved in court sooner than later for the reasons previously stated.

Consider Whether the Difficult Decision (Here, Disclosure) is the Right Decision

At bottom, although there are potential downsides to the Employer making a Disclosure in response to a Discovery that an Employee has misappropriated a Competitor’s trade secrets, the Employer should reconsider a knee-jerk reflex to reject a Disclosure (e.g., why would I ever want to poke a sleeping bear?). Depending on the particular circumstances, a Disclosure may provide material legal, business, and organizational integrity benefits to the Employer if implemented correctly with counsel’s assistance.

Image Source: Deposit Photos
Author: designer491
Image ID: 72052625 

The Author

Rebecca Edelson

Rebecca Edelson is a partner in Sheppard Mullin’s intellectual property and litigation practice groups and leads the firm’s trade secrets team.

For more information or to contact Rebecca, please visit her Firm Profile Page.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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