Although employers may not think that the COVID-19 pandemic is threatening their trade secrets, it is.  The massive layoffs resulting from the COVID-19 pandemic[1] place employer trade secrets at risk.  Here, we offer 6 steps employers can consider to protect their trade secrets in these extraordinary times.

 Coronavirus, Layoffs

Whenever an employee is terminated, there may be an increased risk of misappropriation or loss of trade secrets.  By way of example, a laid-off employee who is angered by the termination may retaliate against the employer by taking the only record of the trade secret (or otherwise concealing a trade secret from the employer), or by placing the employer’s trade secrets on the Internet.[2]  In addition, a competitor could hire the laid-off employee to benefit from her insider knowledge of her former employer’s trade secrets.  Of course, in these times during which job openings are scarce, it also is possible that a laid-off employee will attempt to sell his former employer’s trade secrets as a source of income because he is unable to find a new job.[3]  Thus, there is an increased risk to the trade secrets of those employers that have laid-off employees in response to the COVID-19 pandemic.

Employers that are implementing lay offs in response to the COVID-19 pandemic should resist the temptation to give the short shrift to the usual protocols for terminations.  This may be easier said than done (e.g., because employers are overcome by the sheer number of terminations in a relatively short period and/or by other demands driven by the pandemic).  Nevertheless, employers should make every reasonable attempt to adhere to their termination procedures – at least with employees to whom they have given access to their trade secrets.  This is because, among other reasons, an employer’s trade secrets can be one of its most valuable assets, the misappropriation of which could jeopardize its competitive standing in the marketplace.

Employers who are in the midst of COVID-19 layoffs or contemplating them may want to consider the following measures to attempt to limit the risk to their trade secrets in connection therewith:

  1. The employer should mandate that its employees promptly disclose to it during the employment any inventions or other trade secrets that they develop for the employer. Before notice of termination, the employer should ask the employee about whether there are any inventions or trade secrets that they have not yet disclosed.  If there are, request that the employee make a detailed written disclosure at that time.  The employer’s tone in these discussions should be informal; formal requests may provoke suspicions in the employee that he is about to be terminated.  An employee who believes that they are about to be terminated may be less cooperative in disclosing the inventions and trade secrets to the employer.
  2. The employer should conduct an exit interview with the employee even if it has to be conducted by phone or video conference. An exit interview can expose an intent by a particular employee to misappropriate (e.g., if she repudiates her duty to hold the employer’s trade secrets in trust; if she refuses to return confidential materials of the employer; or if she misstates her new employment).  Statements during an exit interview may be used to support a court order against the employee or her new employer.
  3. The employer should send a letter to the terminated employee, reminding the employer of his or her ongoing obligations to protect the employer’s trade secrets.
  4. The employer should make sure that the employee returns all of its property, including materials that contain its confidential information. The HR representative should affirmatively probe with the employee whether any trade secret materials of the employer are at the employee’s home, or are maintained by the employee on the employee’s personal email and/or cloud storage accounts and/or USB and hard drives.  The employer should also remove the employee’s access to its trade secrets (e.g., by deactivating the employee’s email accounts and passwords).
  5. If misappropriation is believed to be threatened, the employer should attempt to preserve all evidence that is potentially relevant to the future litigation against the employee and/or the new employer. Even if misappropriation is not believed to be threatened when the employee is terminated, the employer still may want to preserve for some time the employee’s computer and other devices should misappropriation become a concern in the future.
  6. The employer should also affirmatively watch for misappropriation by the terminated employee (e.g., abnormal downloads; astonishing innovations by the new employer shortly after the employee’s employment begins there). If the employer believes that the employee has engaged in misappropriation or threatens to do so, it should immediately contact counsel.

There is no clear-cut authority or bright line rules about what are reasonable steps to protect trade secrets in connection with COVID-19 layoffs.  This article is not an unequivocal statement of the law, but instead offers some potential reasonable steps for consideration.  This article does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the COVID-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay and other issues.

Check out Sheppard Mullin’s Coronavirus Insights Portal which now aggregates the firm’s various COVID-19 blog posts on a broad range of topics. Click here to view and subscribe.

FOOTNOTES

[1] See News Release of Labor Statistics U.S. Department of Labor USDL-20-0521 (“The number of unemployed persons rose by 1.4 million to 7.1 million in March.  The sharp increases in these measures reflect the effects of the coronavirus.”).

[2] See, e.g., Covenant Testing Technologies LLC v. Judge, Case No. 2020-22716 (127th District Court of Harris County, Texas) (the defendant allegedly retaliated by deleting data files minutes after she learned of her termination).

[3] See, e.g., HC2 Inc. v. Delaney, Case No. 1:20-cv-03178 (U.S. District Court for the Southern District of New York) (defendant, a former employee of a legal staffing company, allegedly attempted to extort hundreds of thousands of dollars from its clients by threatening to release confidential information after a document review project was suspended as a result of the COVID-19 pandemic).