Guarding Trade Secrets During Layoffs Requires Quick Thinking

With last year’s surge in layoffs anticipated to linger into this year, companies that are reducing their workforce face risks of unauthorized disclosure or use of trade secrets and other valuable confidential business information.

Understanding these risks is critical to mitigating them. Taking proactive measures to safeguard trade secrets and other confidential information can be an important strategy—because it’s more difficult to remedy disclosure of protected information after the fact.

Misappropriation Risks

Companies also have an array of tools to strengthen their position in litigation, stop further dissemination of confidential information, and recover damages if they suspect an employee has misappropriated or disclosed trade secrets.

Individual employee separations can be more easily planned to safeguard confidential business information. However, larger-scale separations can make it challenging for companies to:

• Identify what trade secrets the impacted employees can access or possess
• Ensure that impacted employees realize their post-employment confidentiality obligations
• Monitor for intentional or unintentional misappropriation or unauthorized access, use, or disclosure of trade secrets

Departing employees may be more motivated to retain or use competitively sensitive or otherwise nonpublic information in approaching a business competitor for new employment, especially if they have been separated involuntarily.

These risks may be heightened if, during an organizational downsizing or restructuring, there are personnel gaps in departments responsible for monitoring and preventing unauthorized access and external transfer of company data.

The growing prevalence of remote work arrangements and technologies that allow employees remote access to employer systems and data makes safeguarding sensitive information more challenging.

For example, employees who work remotely may be maintaining hard copy work files containing confidential information at home, and they may not be disposing those files securely.

Risk Mitigation

When preparing for a reduction in force, first identify the universe of trade secrets and other confidential business information that may be affected. Assess the company’s rights to enforce post-employment confidentiality obligations, and take proactive steps to minimize inadvertent or intentional retention, unauthorized access, or use.

Businesses may want to review internal policies and relevant employee contracts that govern the definition and authorized use of trade secrets and confidential information and that describe employees’ post-employment confidentiality obligations.

A focused assessment can reveal the types of trade secrets and confidential information to which impacted employees have access and ensure a company can secure this information before and after the layoff.

A robust exit interview process can allow companies to confirm that departing employees have not retained company information inappropriately. Companies can use these sessions to remind departing employees of confidentiality obligations that continue after their separation from the company, as well as to assess the risk of violation.

A checklist of company devices, databases, or systems can help determine which employees’ access must be fully and promptly terminated. The list may include the company’s physical and digital document repositories and databases, email, instant messaging and IT systems, devices, and equipment—both company-issued and “bring your own device”—and passwords to the company’s internal and external accounts.

IT professionals can establish protocols for securing company information on remote devices and monitor for signs of misappropriation before and after termination. This can include forwarding information to a personal email address, downloading data onto cloud or external storage devices, and monitoring company systems for any attempts at data theft or other unusual activity.

Separation agreements can provide extra protection if they include provisions requiring employees to certify compliance with obligations to catalog, return and/or destroy confidential information, and provide an economic incentive for continued compliance with post-employment confidentiality obligations.

The National Labor Relations Board’s 2023 decision in McLaren Macomb may prompt companies to ensure their separation agreements don’t interfere with employees’ right to discuss labor conditions protected by law. Employers also must provide notice of the federal Defend Trade Secrets Act of 2016 in any agreement governing the use of a trade secret or other confidential information.

The Defend Trade Secrets Act protects whistleblowers who disclose trade secrets to government officials or an attorney solely to report a suspected legal violation, or in a legal proceeding under seal, and in connection with a lawsuit alleging retaliation for reporting a suspected legal violation. Failure to provide this notice precludes an employer from recovering damages.

Cases for Enforcement

If trade secret misappropriation is suspected, companies considering legal action to recover damages and prevent further harm may want to take certain actions to strengthen their litigation position.

Be prepared to show reasonable and diligent measures to protect trade secrets. Policies and protocols that limit and restrict access to trade secrets, and demonstrated enforcement of those prohibitions, are critical to any successful trade secret enforcement action.

Preserve and gather evidence of misappropriation. Review and gather evidence about the departing employee’s job responsibilities, access to trade secrets, any restrictive covenants, and conduct showing the misappropriation of trade secrets. The evidence gathering process may include a forensic analysis of the individual’s emails, devices, accounts, or access history.

Assess and establish harm. Companies may want to gather evidence concerning the harm caused by the trade secret misappropriation, realizing the different theories under which damages could be established and recovered. For example, recoverable damages could include lost profits, loss of competitive advantage or business opportunities, unjust enrichment, and the costs of legal action.

Promptly seek injunctive relief where unauthorized disclosure or misuse is imminent. In addition to seeking damages, companies may want to consider seeking injunctive relief to prevent imminent harm. In certain cases, failing to act promptly could be viewed as undermining the company’s claim that the misappropriated information constitutes a trade secret.

Outlook

Understanding trade secret-related risks that accompany downsizing, and planning to mitigate these risks, can help companies safeguard their most valuable information assets.

Even after misappropriation has occurred, companies that act quickly to preserve evidence, establish damages and, in appropriate cases, seek injunctive relief are in the best position for a successful enforcement action.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Melinda Haag is litigation partner at Paul Weissand co-chairs the white collar and regulatory defense group.

Liza M. Velazquez is litigation partner at Paul Weiss and chairs the employment law, workplace investigations, and trade secrets litigation practice group.

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