Expensive Trade Secret Protection Lesson for Employer — $17.5 Million Verdict in Lawsuit Over Employee’s Hard Drive

Hey, that's MY hard drive!
Photo credit: doortoriver via flickr

Trade Secret Protection Efforts Land Company in Losing Lawsuit

Earlier this month, after a seven-week trial, a California jury awarded $17.5 million to a former employee in his lawsuit against his former employer for breaking into a laptop owned by the employee.

The former employee is Dallen Trealoff, who founded an RV-related company with his wife in 2003. In 2002, Trealoff’s former employer, Forest River, Inc., removed the hard drive from Trealoff’s personal computer, alleging that Trealoff was preparing to make off with company trade secrets in order to found his company.

Trealoff had used his spare time to develop a software program that kept track of Forest River’s sales and production information.

In removing the hard drive, the company was pursuing protection of that information, which it considered trade secrets.

However, the computer also contained Trealoff’s personal financial information.

So how does a company end up losing valuable information, its public reputation, AND more than $15 million in punitive damages? By not taking proper precautions for trade secret protection, that’s how.

How Did The Employer Blow Its Trade Secret Protection? Let Me Count the Ways…

1. Trealoff’s employer allowed him to work with confidential company information on his personal computer.

   Laptops are not that expensive. If Trealoff had been issued a company-owned one, it would have been returned when he left.

   While he could certainly have taken information from it before returning it, there would have been a high likelihood that such activity could have been discovered through forensic examination of the laptop. Such examination would have given rise to no claims by Trealoff because the company would have been free to examine its own property.

   Any claims that Trealoff was entitled to privacy in personal information on the laptop could have been defeated by a simple policy providing that no such privacy right existed and that the company reserved the right to monitor and examine all employee use of its computers.

   If the policy had also required company business to be done on company computers only, and prohibited use of company computers for personal business, this would have further avoided the key contention in the lawsuit that the company invaded the privacy of Trealoff’s personal financial information.

2. Trealoff’s employer didn’t require him to sign a protective agreement.

   Granted, California employment law doesn’t recognize noncompete agreements. However, California employers can use nondisclosure agreements to protect their trade secrets, customer lists, customers, and employees from being taken when an employee leaves.

   If Trealoff’s employer had required him to sign such an agreement, it may have been able to avoid both costly litigation and a potential public perception that it steals from its employees, rather than the other way around.

   However, under trade secret law, an employer still has certain trade secret protection rights, even without such an agreement.

3. Trealoff’s employer didn’t file suit first.

   By doing so, the company could have made any legitimate trade secret law claims the central issues of the case, rather than having them relegated to counterclaim status.

   In addition, filing suit first would have allowed the company to gain access to Trealoff’s hard drive legally — through the discovery process.

   Perhaps the company felt it lacked sufficient evidence of trade secret misappropriation upon which to base a lawsuit, and seeking such evidence for this purpose may be why it took the hard drive. But the suspicions that led it to take the hard drive may have been sufficient to justify filing a trade secret action.

4. Trealoff’s employer may have failed to take sufficient security and confidentiality precautions to establish that the information qualified for trade secret status.

   One of the requirements for information to qualify for trade secret protection is that reasonable efforts have been taken to maintain secrecy. Lack of a noncompete agreement, confidentiality agreement, or computer policy, and allowing the use of a personal computer for company business may have all been factors supporting the conclusion that the company failed to take such precautionary efforts.

5. Trealoff’s employer may have failed to take appropriate steps to protect its rights in the software he created in his spare time.

   The news article’s reference to the fact this software was created in Trealoff’s spare time suggests perhaps the lawsuit included a dispute about ownership of the software.

   Employers are well advised to clarify by written agreement the ownership of inventions and other intellectual property created by employees.

By failing to institute sufficient safeguards, Trealoff’s employer lost its trade secrets, customer information, and an awful lot of money — money that will, no doubt, be put to good use in Dallen Trealoff’s business, which is already thriving, reporting sales of $56 million in the third full year of operation.

Trade Secret Protection Tips for Protecting Your Company’s Hard-Earned Success

In today’s layoff-heavy employment environment, it is more important than ever that you protect trade secrets and customer lists from tomorrow’s potentially very angry former employees.

In addition, a national corporate culture that has shown little loyalty to employees for two decades now has provided more seemingly legitimate reasons than ever before to current and former employees to consider the results of their work their own rather than their employer’s.

It is also important to note that California is not the only state that is likely to err on the side of protecting workers’ ability to earn a livelihood during these tough times rather than enforcing overly-restrictive agreements.

On the other hand, courts in most states will enforce what they consider reasonable restrictions.

Therefore, it is incumbent on companies to target their non-compete and other protective policies very carefully lest they be deemed as excessively restrictive of workers’ right to pursue employment.

Resources

Check out the following resources from our Bookstore as references to help you protect your company’s information from the most common threats — internal ones:

• Trade Secrets: Law and Practice, by David Quinto, Stuart Singer
• Video Leadership Seminars: Structuring Non-Compete Agreements, with Richard D. Glovsky of Prince Lobel Glovsky & Tye LLP
• Intellectual Property: Patents, Trademarks, Copyrights and Trade Secrets (Entrepreneur Magazine’s Legal Guide), by Catherine J. Holland, Vito A. Canuso III, Diane M. Reed, Sabing H. Lee, Andrew I. Kimmel, Wendy K. Peterson
• Trade Secrets: A Practitioner’s Guide (Practising Law Institute Intellectual Property Law Library), by Henry H. Perritt Jr.