The Enemy Within: Why HR Needs to be Worried About Trade Secrets

by | Aug 2, 2015 | Business

Imagine that you are Director of Human Resources at a small cupcake baking company, Volcano Cupcakes. The company specializes in molten cupcakes – flourless cupcakes that have a reservoir of molten chocolate inside along with a rich topping of icing.

You recruit a salesperson, Benedict, who quickly becomes an integral part of the company. Benedict not only develops new catering accounts, but he also becomes expert at how Volcano makes its cupcakes and suggests new varieties that customers will like. Volcano’s owners promote Benedict to Director of Business Development and they consult him regularly on matters of strategy.

One day, without warning, Benedict quits. The owners are surprised and then enraged when they learn that their former employee has opened his own molten cupcake bakery, Pompeii Confections. Sales plummet as Volcano’s biggest clients begin ordering their cupcakes exclusively from Pompeii. Pompeii’s cupcakes taste exactly like Volcano’s tasty treats.

You come into work and find the owners of Volcano sitting in your office. They have just finished speaking to an attorney and they want to know what agreements Benedict has with the company. Did he sign a non-compete agreement? Didhe sign a non-disclosure agreement? What policies does the company have in place to protect the secrecy of its customer list and its cupcake recipes?

Unfortunately, this is the wrong time to pose these questions and a worse time to answer them. Once an employee has walked off with the company’s confidential information there is little that human resources or any other department can do. The time to address these issues – which relate to an area of law known as “trade secrets” — is before a scenario like the one that befell our hypothetical molten cupcake factory occurs.

The movement of employees from one company to another carries with it significant risk. Often, your company will favor filling a position with an experienced candidate that has worked in the same industry. Not infrequently, the candidate will come from a competitor. Similarly, your employees are most attractive to your competitors.

Human resources must guard itself against two risks arising out of the recruitment process. First, the possibility that a hired employee will take trade secret information learned while employed at your company and misuse it, perhaps by sharing it with a competitor. Second, when you hire an employee, your company runs the risk that it will be vulnerable to a suit for misappropriation by a competitor.

Knowing those risks ahead of time, a prudent human resources department will assess potential risks and put in place policies to reduce those risks.Human resources should look to achieve the following:

  • Developing hiring protocols that assess a candidate’s obligations to predecessor companies and ensuring that trade secret information is not elicited during the hiring process;
  • Reaching appropriate agreements with employees regarding confidential information and trade secrets;
  • Implementing procedures to ensure that employees know how to handle confidential company information;
  • Ensuring that employees that leave the company are properly apprised of their obligations.

To be sure, human resources cannot do this alone. Management will ultimately have the say in who is hired and will want to elicit certain information from candidates during the interview process.In-house counsel will be needed to assess risks and draft agreements. Departments will need to identify their confidential information and buy in to procedures developed to safeguard it.

Regardless, because many risks associated with trade secret misappropriation fall within the purview of human resources, HR needs to be cognizant of trade secret issues so that it can work with other departments to generate strategies to safeguard confidential information and avoid potential litigation.

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