Management Hot Topic: Protecting Corporate Intellectual Property (2/22)

Management Hot Topic: Protecting Corporate Intellectual Property

Learn how to keep coveted trade secrets proprietary in today's revolving-door labor market.

Oh, what the labor crunch has wrought. January was the second consecutive month that the unemployment rate stood at 4.3 percent -- the lowest since1970. You may think your biggest worry is how to replace talented staffers, but the truth is, that's just the beginning. A bigger and more daunting problem is ensuring that your trusted employees who are walking out the door don't take with them and reveal your coveted trade secrets.

Theft of intellectual property is one of the most serious threats to businesses big and small. Losses from intellectual property is estimated to cost U.S.-based companies more than $300 billion annually, according to the 1997-98 study of the Fortune 1000 and 300 fastest-growing companies in the United States by the American Society for Industrial Security, an Alexandria, Va.-based international trade group for security professionals.

The problem has not gone unnoticed. The U.S. Chamber of Commerce and the Federal Bureau of Investigation this month joined forces to combat economic espionage. It's not just high-tech companies that have much at risk. Intellectual property includes patents, trademarks, copyrights, trade secrets, client lists, operating procedures, knowledge of deals, research and development information, manufacturing and marketing plans -- practically any proprietary information that is vital to your firm's competitiveness. Every company, therefore, is vulnerable.

"There is no challenge more ominous to global business competitiveness than economic espionage. The piracy of trade secrets, intellectual assets and intangible property is a menace to firms of all sizes," says Thomas Donohue, president of the U.S. Chamber. The program hopes to raise awareness and education within the business community and to work on short- and long-term strategies for identifying, developing and taking steps to prevent and solve economic espionage cases. That education is sorely needed. Many employers don't realize that the culprit is probably not some rogue outsider. The betrayers are likely current or former employees, temporary staff, vendors/suppliers or consultants, concludes the ASIS study.

It's not like employees haven't always had access to valuable information; it's just that many are like the miner that says, "There's gold in them there hills!" They've begun to realize the nuggets of information all around them are worth big bucks to somebody --especially a competitor. Worse still is if your employee is disgruntled. What better way to get back at the boss than to reveal prized company secrets?

Compounding the problem is the fact that company loyalty is all but dead, and job-hopping is in vogue. During the first nine months of 1998, the median separation rate averaged 1.1 percent of staff per month, unchanged from 1997 when the nine-month average climbed to its highest point since 1989, according to the Bureau of National Affairs in Washington, D.C. Or it could be that your employee has the entrepreneurial spirit and thinks you've given him or her a great foundation to launch a business.

But stolen goods are only worth stealing if the employee can get rid of the loot, and unfortunately, finding a taker is the easy part. "Business is the most competitive it has ever been," says Naomi Fine president of Pro-Tec Data in San Leandro, Calif., which assists companies in developing strategies for protecting intellectual property. Ethics can get lost in the pursuit of bolstering the bottom line. Technology with its instant worldwide reach, just makes information all the more accessible and transportable.

What You Can Do to Protect Yourself

Obviously, employee retention is one key to easing the problem. So how do you stop your company's door from revolving? "Treat your people well. The threat of your secrets leaving with your employees is a golden incentive to keep them happy," says Bill Murphy, a professor at the Franklin Pierce Law Center in Concord, N.H.

That said, make good use of the various legal protections that can go a long way in keeping what's yours yours. First, have your employees sign a confidentiality agreement stating that they will not disclose your trade secrets or other non-public information, even after they leave your company. A second option is utilizing a non-solicitation agreement, which bars your employees from raiding your staff or customers after leaving your firm to work for someone else or starting their own company.

Then there are non-competition agreements, which state that if an employee leaves, he or she will not work for one of your competitors for a specified period of time and within a certain geographic region.

When it comes to protecting your intellectual property, it's not just your employees that you should be concerned about, though. You need to be thoughtful in your employment contracts with independent contractors, as well. "Make sure you have in writing that any product or copyright developed during the course of employment is assigned back to the employer," advises John Band, a partner in the Washington, D.C., office of San Francisco-based Morrison & Foerster, who specializes in intellectual property. Otherwise, Band advises, that computer program or copyright could technically belong to the independent contractor. "You don't want a situation where a few years later your competitor is privy to a program you spent thousands of dollars to develop," Band adds.

Each of these legal documents must be drawn up with great care by a legal professional, and they must not be too prohibitive, or they won't hold up in court. The reason? Courts generally aren't keen on curtailing competition or someone's ability to make a living. "If they are too restrictive, courts will give an employee leeway," says Murphy.

For example, you shouldn't attempt to prohibit a staffer from working for the competition for a period longer than six months or so. If you want to limit the employee for a longer period, be prepared to hand them a bundle of cash to compensate for that requirement. It's also important to protect only what you really need to, such as a trade secret, which is information that has independent economic value that depends largely on its not being generally known.

Information that is in the public domain cannot be considered private, and therefore can't be protected by such means listed above. You'll want to be mindful, then, of what information goes into press releases, what gets said in speeches, and what details get posted on your Web site. The competition is always spying, and competitive intelligence is a big business these days. In fact, some 82 percent of companies with revenues of more than $10 billion now have an organized intelligence system where they legally scour for data on the competition -- so says a recent survey by The Futures Group, a Glastonbury, Conn., consulting firm.

You also don't want to have every employee signing some sort of agreement because doing so could dilute the documents' significance if you wind up in court. Realize, too, that while these documents protect you, they also protect your competitors. "You must be careful about how you handle material that belongs to others. You don't want to step over the line," advises James Pooley, a partner in the Palo Alto office of Gray Cary Ware & Freidenrich and author of "Trade Secrets" (Law Journal Seminars-Press). "Trade secret litigation has become a favorite pastime of competitors in dynamic industries. You can find yourself tied up in diversionary fistfights," Pooley adds.

During the hiring process, you'll want to find out what agreements your potential new employee has with former employers. Insulate yourself by having your new hire sign a disclosure agreement stating that he or she is not bringing any information from former employers. "At least if you get hauled into court, you can show you were acting in good faith. The court may treat you better by being less punitive," says Band.

Know the Law

Another way of protecting sensitive company information is to bone up on your state's statutes, but keep in mind that what happens in court depends mostly on the facts of the individual case.

Particularly dangerous legal minefields are created by patents in technology companies, says Pooley. "For years, the courts didn't enforce patents vigorously. They said that business methods and computer programs were not patentable," he explains. But that's changing now, and patents are being enforced. Pooley advises finding out what patents you have that can be used to squeeze license royalties out of infringers. In addition, he recommends making sure you aren't unknowingly infringing on others' patents and exposing yourself to expensive litigation and putting your business in jeopardy.

In addition, know that you have the protection of the Economic Espionage Act (EEA), which Congress passed in 1996, making theft of trade secrets a federal offense. Where espionage can be established, the EEA calls for sentences of up to 15 years and stiff fines. And many companies have already taken advantage of the Act. In 1999, an employee of Wright Industries, a subcontractor of Gillette, was sentenced to 27 months in prison for five counts of Theft of Trade Secrets under the act. The employee had to ante up $1.2 million to Gillette after disclosing secrets because he was angry at a supervisor and feared his job was in jeopardy.

There is a catch to this law, though: It puts responsibility for security on companies themselves. If you can't show that you took reasonable steps to keep that information secret, it won't wash. "With trade secrets, you must have a program in place to maintain secrecy internally and externally," says Roger Milgrim, a senior partner at Paul, Hasting, Janofsky & Walker in New York.

Put Together a Program

Your first task in putting a protection program in place is identifying what you want protected. "You can't expect employees, contractors and others to know this automatically," says Fine. Like other experts, Fine advocates protecting only the "crown jewels," but advises caution about other kinds of information, like test marketing plans and where you're conducting clinical trials, for example.

Once you know what you want to protect, establish policies and procedures to protect them. "You can't just say that employees have responsibility for safeguarding that information; you must convey how they should do it," says Fine. "Do you want them shredding material, marking documents 'confidential,' or encrypting information?" she offers.

Education is also a key part of your plan. Experts say that much intelligence is revealed by unsuspecting staffers when other firms call up and ask the right questions. Coach your employees about how to handle themselves on the telephone and in public, in general. "Make them aware that so-called networking with other professionals can seem harmless, but that they should be careful even in those friendly exchanges," says Leonard Fuld, president of Fuld & Company, a Cambridge, Mass., firm that specializes in competitive intelligence. "People should understand that if a document is labeled confidential, and they leave it on a counter and someone else sees it, then they have in fact relinquished the document's secrecy."

While having policies and procedures written in a manual is fine, manuals tend to collect dust in employees' desks, so having back-up methods for conveying the information makes sense. "It makes sense to have a written program that is online so employees can see the guidelines in their daily operations," points out Richard Heffernan of R.J. Heffernan Associates in Branford, Conn., and co-author of the ASIS survey.

You may also have to make some changes in your corporate culture. "Protection must be seen as a company value. Instill in senior executives how theft impacts the bottom line -- that security is a strategic imperative to the success of the company," says Fine. See where you can integrate security into key business practices. For example, says Fine, "Look at your sales cycle. Think about what occurs from the initial meetings to a product's sale. See where you are vulnerable throughout the process and where leaks can occur."

Consider, too, making the most of those in your company with entrepreneurial urges. "If your employees have ideas, encourage them to divulge them to you. Think of your company as an incubator of sorts. If you treat your employees fair and give them their due, they may lose the incentive to take their ideas to a competitor or to start a competing business," says Murphy.

Finally, keep in mind that policies and programs are useless if you don't enforce them. According to the ASIS study, only 51 percent of those surveyed had programs that had been uniformly implemented throughout the company. Be prepared to back up your agreements and policies. Says Milgrim, "If theft occurs, review the matter with experienced litigators and go into court with six guns blazing." Though suing former employees is expensive and time-consuming and there's no guarantee of the outcome, fight the good fight. Your company's ultimate success depends on it.