Shhh, Can You Keep the Company Secrets?

January 23, 2013

Guarding company secrets and confidential Information is not only advisable, it’s imperative in order to prevent improper disclosure of your company mojo to competitors or the public. Sales data, customer lists, secret formulas, drawings, and ingredients are all examples of company information that should be protected from unauthorized disclosure and use by employees and third parties.

Confidential company information is often referred to as “proprietary information” in the business world. “Confidential Information” is information that is “not public knowledge (such as certain financial data, test results, or trade secrets) and that is viewed as the property of the holder.”

When it comes to protecting valuable company information, the greatest obstacle is often the business owner’s failure to establish and follow best practices in safeguarding trade secrets and confidential information. A good protection program includes clear procedures to identify and label information as confidential, and limits access to a need-to-know basis. Monitoring access and use by third parties is also vital. How your company treats its valuable information, can and will be used against you, if and when it becomes necessary to enforce rights. 

When confronted with theft of confidential information, the company will be required to produce a paper trail and identify its practices for safeguarding company secrets, including procedures that place employees and vendors on notice that the information is confidential at the time the information is disclosed.

Rules of Engagement: Employees

1. Key employees should sign a restrictive covenant agreement as a condition of employment. There are several types of restrictive covenants including non-competition, non-solicitation, employee inventions, and confidentiality, and it is important to select the appropriate type for each situation. Further, take care to ensure that the terms of such agreements are reasonable, i.e., not overly broad. For example, in many states, non-competition agreements must be narrowly drawn as to time and location if they are to be enforceable at all.

2. Label documents, both paper and electronic, as confidential when they contain sensitive information.

3. Restrict access to proprietary information to employees and consultants that have a real need-to-know.

4. Return and disposal should also be regularly and consistently monitored. For example, were key documents returned by vendors? Are paper documents shredded regularly?

Rules of Engagement: Consultants or Potential business relationships

Companies typically engage independent third parties as company valuation experts or to provide outside marketing. While some third parties have an obligation of confidentiality by virtue of the nature of the relationship, others are only obligated if a written agreement established a confidential relationship. For example, an obligation of confidentiality is automatically imposed upon doctors, lawyers, and CPAs, making it unnecessary to also sign a confidentiality agreement with them. On the other hand, other third parties have no obligation to safeguard confidential information absent a written agreement creating the confidential relationship by contract. Many clients reach for the standard “NDA” to sign, with little or no counsel as to whether the language of the agreement is appropriate to the situation. Before signing the agreement, answer these questions:

1. Does the agreement involve an introduction of two parties by another party for purposes of a possible transaction? If so, it may be important to also include a non-circumvention provision so the introducing party is not left out in the cold if the two parties introduced run away together, forgetting who brought them together.

2. What type of relationship is being contemplated? For example, an independent graphic designer is less likely to be a threat to the disclosure of vital information than a competitor or key supplier with access to the deepest workings of the company and its products while in the process of providing services.

3. Is an invention or work product being created on behalf of the company? If so, other documentation may be required such as assignments of patents and copyrights, as well as work-for-hire provisions to ensure ownership by the company.