Trade secrets are among the most valuable assets a company owns. Customer lists, manufacturing processes, pricing strategies, and proprietary algorithms all qualify. When those secrets get into the wrong hands, the consequences can be devastating. But liability for trade secret misappropriation does not only fall on the person who stole the information. Businesses themselves often face legal claims for something an employee did, or even for something the business did unknowingly. This article explains how trade secret liability arises, what it means for your company, and how to avoid becoming the target of a lawsuit.
Under the Uniform Trade Secrets Act, which most states have adopted, misappropriation occurs in two main ways. First, someone acquires a trade secret through improper means, such as theft, bribery, or espionage. Second, someone discloses or uses a trade secret without consent when they knew or should have known that the secret was obtained improperly. That second part is where businesses get into trouble. If you hire a new employee who brings confidential files from their previous employer, and you then use that information, your company can be held liable even if you did not personally encourage the theft. The law treats you as responsible because you benefited from the misappropriation.
Another common scenario involves departing employees. An employee who leaves your company and joins a competitor might share your trade secrets with that competitor. If that competitor uses those secrets, they are liable. But your former employee is also liable, and so is any third party who helps. The key is that liability attaches to anyone who misappropriates a secret, not just the initial thief. This means your business can be both a victim and a potential defendant. If you do not have solid confidentiality agreements with your employees and clear policies about handling confidential information, you might even lose the trade secret protection altogether. Courts require that you make reasonable efforts to keep the information secret. If you leave a customer list on a shared server with no password, that list might cease to be a trade secret.
The damages in trade secret cases can be massive. The injured company can recover actual losses, which might include lost profits and the cost of developing the secret. They can also recover unjust enrichment, meaning the profit the misappropriator gained from using the secret. In many cases, courts award both, but not double recovery. Additionally, the plaintiff can get an injunction that prevents you from using the secret altogether. That can shut down a product line or a business unit. In extreme cases, where the misappropriation was willful and malicious, punitive damages and attorney’s fees may also be awarded. For a small or mid-sized business, a single trade secret claim can be financially ruinous.
What should you do if your business is accused of trade secret misappropriation? First, act quickly but do not destroy anything. Evidence spoliation is a serious problem that can lead to severe court sanctions. Second, assess how the information came into your possession. If a new employee brought files, quarantine those files immediately and stop using them. Consult a lawyer who specializes in IP litigation. Do not try to negotiate on your own because anything you say can be used against you. Also, investigate whether the information actually qualifies as a trade secret. Sometimes the alleged secret is publicly available or was independently developed. That is a solid defense, but you need proof.
Prevention is far better than defense. Start by identifying all the information that is truly confidential and valuable to your business. Label it as confidential. Limit access only to employees who need it. Use password protection and encryption. Require all employees to sign non-disclosure agreements that clearly define trade secrets. When an employee leaves, conduct an exit interview and remind them of their ongoing obligations. If you hire from a competitor, have the new employee confirm in writing that they have not brought any confidential materials from their former employer. That simple step can shield you from later claims of knowing misappropriation. Also, evaluate your own contractors and partners. If you share secrets with a vendor, they need a confidentiality agreement too.
Trade secret liability is a serious threat to any business that relies on proprietary information. The law gives trade secrets strong protection, but it also imposes strong duties. Understand those duties, take proactive steps to protect your secrets, and respect the secrets of others. That dual approach will keep your company on the right side of the law and out of court.
