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HR Takes Steps To Protect Trade Secrets

June 1, 1994
Related Topics: Miscellaneous Legal Issues, Workplace Violence, Policies and Procedures, Safety and Workplace Violence, Featured Article
When employee Eric Francis quit his job in 1990, MAI Systems paid little attention. Francis was one of several customer-service representatives at the Irvine, California-based computer company, and turnover in the department wasn't unusual. Following an uneventful exit interview with human resources officials, Francis left to start a job with MAI rival, Peak Computer, also in Irvine.

It might have ended there. But when Francis' new employer began taking away MAI's business, management took notice. After some checking, MAI learned that Francis was using inside knowledge of MAI's customer lists to make sales. Company officials also suspected he might be relying on MAI's customer specification and repair manuals. Could he do that? Not according to the company's legal department.

In March 1992, MAI sued Francis for theft of trade secrets. The company alleged that the ex-employee took manuals and other technical information that he knew to be proprietary. Francis claimed that the company routinely had left such information with customers and that he only was using knowledge about the industry. MAI ultimately got a temporary restraining order to stop him from selling to its clients, but only after losing 80 customers and spending thousands of dollars in legal fees. "This was clearly a violation that cost us," says Elliott Stein, associate general counsel for MAI.

The plight of MAI isn't an isolated incident—nor is it one confined to the computer business or other high-tech industries. In today's hyper-competitive, copycat global economy, protecting such trade secrets as formulas, processes, customer lists, ideas developed at work and other intellectual property (see "Glossary of Terms") has become a major concern for employers.

There are many reasons why. For one, today's work force is mobile. On top of that, U.S. firms face increasingly competitive pressures as the recession lingers and budgets remain tight. At the same time, corporate downsizing and cutbacks of the past three years have unleashed a flock of professionals back into the job market. In many cases, experienced employees have had little choice but to go to work for a competitor or begin consulting in their field. If they haven't been educated about what are protected trade secrets (and sometimes even if they have), it isn't unusual to find them using proprietary knowledge or information from their former jobs. It's hard to put something as intangible as a formula in someone's head under lock and key. "The question is, what do you do with people who don't spend an entire career with your company?" says Toni Simonetti, a communications manager for Detroit-based General Motors Co., a victim in the trade-secrets war. "How much of what they know is proprietary? How much of what's in a person's head belongs to them? I don't think you'll find an easy answer."

Despite the difficulty, a growing number of employers—from hairstyling salons to manufacturing firms, stock brokerages to bakeries—are looking for new ways to protect what gives them an advantage, which is the possession and use of knowledge. Traditionally, this responsibility has fallen to corporate legal departments or outside attorneys. However, a handful of organizations have realized that safeguarding trade secrets goes beyond stopgap legal measures.

"It's starting to be recognized as a classic HR problem," says Mike Garelick, head of the compensation and human resources practice at consulting firm Towers Perrin in Chicago. He believes that HR managers can play a significant role in the protection of intellectual property. Why? The issue of safeguarding trade secrets is, at heart, a personnel issue, he maintains. "Competitive advantage is built around knowledge, and knowledge is generated by people. It's important to manage not only the knowledge, but also the people who are creating it," he says.

In many ways the role HR departments can play in a corporate campaign to eliminate trade-secret theft is similar to HR's involvement with wrongful termination cases. Where the legal department handles an employee lawsuit and may explain the fine points of the law, HR personnel are responsible for making sure that an employer documented the reasons for firing an individual and handled the termination according to company policy.

The HR department also attempts to help create an environment in which employees feel that their work is valued and that they're treated fairly. In the same vein, says Garelick, HR can ensure that employees are educated about what information is proprietary and that security measures are followed. HR staff also can follow up with employees who are departing to remind them of responsibilities and ensure that they aren't taking information or property with them. Finally, HR can help set up the reward and compensation systems to give valuable employees the recognition for their achievements, reducing their need to look for this elsewhere.

Security begins with awareness.
First and foremost, HR personnel must familiarize themselves with their companies' trade secrets: It's hard to protect something if nobody knows it needs protecting. That sounds like a simple concept, but when it comes to trade secrets, it's one many corporate managers don't understand, says Alan Unikel, an employment attorney in Chicago and editor of the Intellectual Property Newsletter. "As a general rule, many companies don't have a good idea of what their trade secrets are, and they don't really recognize them," he says. As a result, the security measures to make sure this sensitive information doesn't fall into competitive hands are typically lax if they exist at all.

It doesn't help that the law surrounding trade secrets is murky. Definitions of what constitutes a trade secret, or what an organization should be protecting, can vary by industry and company. Examples of trade secrets include everything from notes in the margin of an employee manual to a procedure for tying a fishing lure. As technology has raced ahead and the nature of production has changed, the law has been slow to catch up. Although as many as 39 states have adopted some form of the proposed Uniform Trade Secrets Act, there's no federal law regulating what is and what isn't protected. There are only general guidelines.

For instance, for something to be considered a trade secret, a company has to show that the information isn't known in the industry, that the company has made efforts to keep it confidential and that the information provides the company some sort of competitive edge. "Many companies think something is a trade secret just because it's confidential," says Unikel. "It takes more than that."

Once the human resources department has learned what formulas, customer lists, product specification or processes give it an edge, security measures often are obvious. Robert Naeve, an employment attorney who has worked on both sides of trade-secret cases, recommends to his clients that they limit access to proprietary material on a need-to-know basis. Customer lists or employee phone books can include dummy entries so that if they're stolen they'll be identifiable. Human resources personnel and other managers should set up access codes to computers and other data-storage areas so that only authorized persons can get into proprietary files. At Mead Data Corp., an information retrieval company in Dayton, Ohio, for example, employees are required to swipe badges to get into restricted areas. The HR department also has stringent policies about how to mark and distribute documents.

In some companies, formulas often are locked up, limited to one or two people and revealed on a need-to-know basis only. An example is Park City, Utah-based Mrs. Fields Inc., at which the purchasing of ingredients for the company's cookies is handled separately and a special ingredients packet is sent mixed to stores so that no one can take the recipe.

Human resources professionals also should create policies about removing company property from the office. Upon termination, employees should be required to return all proprietary information and computer systems. Unikel recommends that a supervisor make up a list of what an employee has and then have the employee sign it indicating that he or she has returned everything.

Although these concepts sound basic, a surprising number of companies take chances in the security area, say attorneys. At MAI, for example, customer-service representatives did leave repair manuals with customers, so it was harder for the company to argue that this information was a trade secret. Naeve says that he advises many clients to make written manuals proprietary by marking them as such. "It's a simple idea," he says. "But you'd be amazed at the stuff that's published that companies don't label as confidential."

Human nature also can have a way of working against security measures. As people get to know one another, for example, they may trade computer passwords, or let unauthorized persons have access to restricted areas. "The problem is that individual workers are just careless," says James Lamont, a security consultant in Chicago. At one U.S. government agency in Washington, D.C., Lamont was able to get into an unauthorized room simply by fumbling around in his wallet, as if he were looking for an access card to open the door. An employee who saw him looking helpless unlocked the door with her card and motioned him in. "She obviously thought that I belonged there," he says. "But I might have been there to steal something."

As important as security is, it's also important to strike a balance between security and getting the job done. Some companies that have the best intentions have defeated the purpose by having so much security that it hinders production, says Garelick. "Sometimes what companies do to handle trade secrets interferes with innovation and creativity," he says.

This is precisely what happened at one large East Coast computer company with which Garelick worked. The company had extensive policies and procedures regarding trade secrets. Projects generally were broken up so that only one group knew one piece and another group knew another. By policy, communication between the groups was restricted. The result: The company was slow to develop products and slow to adapt and respond to changes in the market. Its financial performance suffered. "My suspicion is that this company had better breaks between organizational units than the CIA," says Garelick. "Except it wasn't as creative as it had been, and it was losing flexibility. They'd done such a good job at protecting their secrets that the secrets weren't worth that much anymore."

HR personnel can control use of legal agreements.
One security measure that's becoming increasingly common doesn't limit an employee's access to information until he or she leaves the company. These are the legal agreements that some employers now are requiring new hires to sign. Typically called non-compete agreements or non-disclosure agreements, they're essentially a written promise that an employee won't use any proprietary information. "These are pretty standard," says Bob Romanchek, a compensation consultant with Hewitt Associates in Lincolnshire, Illinois. "No matter how much communication and education you have [about trade secrets], having something in writing is important."

General Motors began requiring its senior-level executives to sign these agreements shortly after the well-publicized case last June against the company's former purchasing executive, J. Ignacio Lopez de Arriortua (aka Inaki Lopez). GM accused Lopez of taking millions of dollars worth of proprietary information—including cartons of confidential data about pricing and new product designs—to his new employer, German-based Volkswagen AG. GM also accused him of pushing up strategy meetings before he left so that he could gather even more data for the competitor. Lopez, who had been instrumental in repositioning the automaker, has denied the charges.

However the case eventually is resolved, attorneys say it could end up costing both companies a great deal of money. GM's top managers and HR officials hope that the use of non-compete agreements will help prevent a recurrence of this kind of expensive headache.

The advantage of such agreements is that they provide a record that an employee has been told that information is a trade secret. Mead has been requiring certain employees to sign non-compete/ non-disclosure agreements for almost a decade. The basic agreements stipulate that the employee has a duty to the employer not to disclose trade secrets or something he or she learned at the company. The employee also is barred from doing work for a competitor while employed at the company, and sometimes for a period of years afterwards, according to Nancy Nash, legal counsel in human resources at Mead. The damage this would cause the firm and penalties for violating the agreement are included. Sometimes, for research-and-development staffers in particular, the company adds a third provision to the agreement, which bars an employee from taking and using any invention he or she created at the company for six months after the person leaves Mead for a competitor.

There are several drawbacks to agreements, however, as Nash and other attorneys readily acknowledge. First, courts in many states have found these agreements unenforceable. In some cases, it's been determined that they can limit future employment of the worker. Often employees forget signing them, or don't want to sign them because that may hurt their chances of getting another job in the industry.

Still, Naeve and other human resources experts agree that these agreements can act as a first line of defense. "They're more of a threat than they are anything else," he says.

Companies that require employees to sign non-compete agreements should be ready to explain the agreement to new hires. At Mead, new technical employees, engineers and other workers in development areas are given an orientation and educational program about trade secrets. The company also holds periodic legal forums to remind employees of the necessity to protect proprietary information.

Some organizations, such as Fluor Daniel Inc., an engineering and construction firm in Irvine, California, require employees to recertify and review the agreements on an annual basis as a reminder. Experts say that human resources also should follow up with employees at the time of termination to ensure that they remember signing the agreements. Talent Tree Professionals, for example, which like many temporary-help firms has been in trade-secret battles with former sales people who take customer lists with them, sends a letter to employees when they leave, reminding them of their obligations, says David Seaver, vice president of human resources at the Houston-based agency.

Mead's HR staff gives employees copies of their agreements at the exit interviews and also makes sure that they understand their obligations regarding trade secrets. The departing workers also are asked to sign acknowledgement forms that state that they understand the terms of the original agreement and will be bound by it.

According to Nash, Mead only has had to pursue legal action and enforce a non-compete agreement once. That happened two years ago when someone attempted to use proprietary information about customers after he left. Because they had the documentation showing that the employee knew what information was protected, the company was able to get a temporary restraining order and a preliminary injunction to keep the ex-employee from using the trade secrets at his new job. "I think most people believe [the company] when they sign these agreements, and they don't challenge them," says Nash.

At the same time, Nash emphasizes that merely having an employee sign these agreements isn't fail-safe. As MAI learned, a former employee still can do plenty of damage before any legal action can be taken.

Training provides understanding of trade secrets and protection devices.
The best insurance against trade-secret theft is to combine these agreements with a strong training and awareness program. Too often, says Unikel, this isn't done. Most workers who take proprietary information do so inadvertently—the employees simply don't understand that the information is protected. "Many times, we recommend that companies adopt policies, but they seem to get a low priority until the companies have a big suit like General Motors," says Unikel.

Garelick agrees that this is an area in which too many organizations fall short. "What's often clear when I go into companies is that some information may be important from a managerial point of view, but the organization hasn't done a good job of communicating that to employees," he says.

At one software company, for example, an employee who worked on updating products went to a trade association meeting and told extensive war stories to competitors and the press about the development process. He talked about what didn't work and what did. "If you had wanted a detailed case study on [the company's] process, you couldn't have done any better," Garelick says.

Later, the employee was reprimanded for his indiscretion. Because the company improperly explained to him about the importance of keeping trade secrets secret, however, he walked away thinking he had gotten in trouble simply for talking to the press. He had no idea that the information was part of what gave the company a competitive advantage.

For this reason, managers at Mead explain to their employees that talking about their work at seminars is dangerous. The company also maintains strict control over what employees are allowed to publish. This often is an issue because many of the organization's researchers come from academia and are used to writing about their work. "We have to let them know that they can't tell the world about their latest gee-whiz discovery because it's a trade secret," Nash says.

Conveying why trade secrets are important to the firm may be the single most important step an HR department can take, says Pat Sweeney, patent counsel for Pioneer Hi-Bred International, a Des Moines, Iowa-based biotechnology firm at which engineers seed for such plants as sorghum, sunflowers, wheat and soybeans. "If I were going to tell an HR manager what his or her role was, I would say it's to help make employees keenly aware of the great value in trade secrets," Sweeney says.

She should know. Two years ago, a competitor got hold of some of the company's proprietary seed. And, although it won a $46 million settlement against the competitor, these days the organization doesn't take any chances. Human resources managers explain to employees that their jobs are dependent on certain information remaining within the company and require them to sign non-disclosure agreements.

Also, Pioneer recently held a session for its receptionists reminding them of the importance of protecting trade secrets. The seminar, given by the company's legal and human resources departments, covered what intellectual property is and why it's important to the company. The reason that the company chose these employees to participate was because receptionists control the flow of people and some material in and out of the company, says Sweeney. "They could allow a non-employee into part of the system that's sensitive, and that person could wander around at will," she says.

According to Sweeney, the employees responded well to the seminar. One of the questions they were most curious about was how someone who was trying to appropriate information would try to do it. Pioneer was careful to be realistic in its expectations, recognizing that it was asking receptionists to be friendly and helpful and yet act as security. "That's kind of a hard cross," said Sweeney.

Create loyalty and retention through rewards and recognition.
Asking employees to protect a company's trade secrets requires a payoff for them. Companies must look hard at their reward and compensation systems to see that they're properly recognizing employees for holding up their part of the bargain. Increasingly, Garelick says, human resources personnel consult with him about such issues as how to treat, reward and retain employees—specifically because a departing worker has taken trade secrets to a new employer. "Some of the main issues surrounding trade secrets have to do with management style and management process," he says.

Questions HR should be asking include: Are we rewarding people in a way that's meaningful to them? Are we recognizing individual achievements? "Sometimes all it takes is a letter from the company president commending someone for a job well done to make someone feel loyalty to the company," says John Hermann, an Irvine, California-based human resources consultant.

Often, however, it takes more than that. At Fluor, where engineers design projects, management realizes that rewarding performance goes beyond simply paying high salaries, says Mark Krause, director of human resources. "You have to build an environment in which employees clearly can see that they can have their innovativeness recognized." For this reason, Fluor managers have instituted such forums for recognition as monthly recognition days, at which employees are verbally thanked during a department meeting; company-paid lunches; and spot-bonus programs, at which a producer is given a cash award for a particular achievement. The company also has adopted a worker-friendly atmosphere of flexible hours and generous benefits.

Creating the right environment may go beyond blanket policies for the entire company. One high-technology company with which Garelick works had one particular employee who, in addition to doing his job, was proficent with software and computers and tinkered with developing new approaches. At one point, he invented a modification to some equipment that increased productivity. To reward him, management restructured his job so that he could work on his regular duties 20 hours a week, and then they gave him a budget of $5,000 a month and told him he could spend the other 20 hours each week inventing and troubleshooting. "The company got tremendous mileage out of that," Garelick says. "The person was motivated and did even more for the firm."

Minnesota Mining and Manufacturing Co. (3M) is another firm that has accrued benefits from setting up alternative programs to reward and encourage innovation. At the Minneapolis-based company, known for such products as Scotch Tape™ and Post-it™ Notes, research and development employees who have ideas for new products or applications are invited to present their plans to a management committee and apply for a grant. If the projects are approved, the company gives the employees a budget and the time to work on them.

Another alternative is to give employees who work on new products stock in the company so that they may realize any gains the product brings. Employers also should look at how compensation and bonuses are structured to see that they act both as a retention device for top talent and encourage the protection of trade secrets. Romanchek of Hewitt Associates has helped several companies set up reward systems that recognize performance. Options he suggests include:

  • Offering supplemental retirement agreements that condition the payment of benefits on not competing or not revealing trade secrets. The same thing can be done with severance agreements in the event of a layoff. If an employee doesn't comply, he or she risks forfeiting his or her benefits. Stock-option plans also can be set up this way. "Restricted stock is the traditional retention device," says Romanchek
  • Rewards or bonuses for performance or innovation can be spread out during a longer period to give employees an incentive for staying with the company. GM, for example, spreads out bonuses over a three- to five-year period. If an executive leaves before the time is up, he or she may lose part of his or her compensation. The GM plan also is linked to stock so that the employee has a financial stake in the company's performance. Bonuses can be linked to the protection of trade secrets just as they're linked to management-by-objectives goals
  • Compensation need not be based solely on output. HR might set up bonus plans to recognize the fact that someone came up with 10 new ideas. Or the company might provide a researcher with additional staff to determine whether a potential product has value. "Rewards don't have to be focused on the success of a product," Romanchek says. "I see no reason why you couldn't build rewards for creativity into the process. If employees are happy somewhere, they're less likely to be lured away solely by more money."

Programs designed to manage careers indirectly affect trade-secret spreading.
It's just as important for employers to pay attention to career development and show employees where they can go within the company as it is to compensate them fairly. Micron Technology Inc. in Boise, Idaho, began developing a career-development program in 1991 to better retain employees in a competitive market. The company wasn't only concerned with losing trade secrets, but also the intellectual capital its employees had built up.

The program that HR and management developed is called "Reaching High Performance." It helps orient new hires to the company's corporate culture. It starts with a one-day course during which the company mission is conveyed, and new employees are encouraged to contribute immediately. Subsequent installments of the 15-hour course deal with career development and help employees map out a five-year plan. It also shows them what skills they will need to reach their goals.

The response? "People love it," says Karen Bridges, coordinator of instructional services. "I've had people come up to me in the hallway and say, 'I got this promotion because of the RHP class.'"

Although protecting trade secrets wasn't a primary goal of the program, it did increase retention, and the firm hasn't been involved in any trade-secret disputes.

Therein lies the challenge in defining HR's role in protecting trade secrets. It's difficult—if not nearly impossible—to pinpoint what programs are preventing trade secrets from getting out. Fairfield, Connecticut-based General Electric Co., for example, which had a competitor steal its diamond formula, says it's hard to isolate programs that are specifically designed to help safeguard trade secrets. "We have ethical standards and company policies that are reviewed regularly with employees," says GE communications director Bruce Bunch. "But we don't have a lot of new and innovative things aimed at this particular part of behavior."

GE does have programs that allow individuals to design their own jobs and have more responsibility in decision making. The company also offers cash and other incentives for productivity. Yet, notes Bunch, if employees want to steal, it's hard to set up any policy to prevent that.

Other HR professionals agree. However, they also emphasize that this fact shouldn't stop employers from learning how to manage the "knowledge workers." Although the law on what is and isn't a trade secret still is evolving, the fact that people and the knowledge they possess are a company's most important resource isn't. Managers need to be taught how to handle people in flatter, leaner, more knowledge-powered organizations. And everyone is going to have to start to value intellectual capital, even if it can't be seen on a balance sheet. That means more career development, more recognition and emphasis on what truly gives value. Happy employees are less likely to want to do a company damage.

This was illustrated in the blockbuster Jurassic Park. In the movie, a computer programmer feels he isn't paid enough or recognized for the system he set up. So he steals the park's trade secrets—dinosaur embryos—and sells them to a competitor. This act leads to the end of Jurassic Park and devastates the seller's employer.

To professionals on the frontline like Pioneer's Sweeney, it's an apt reminder. "What's important to remember," she says, "is that it only takes one desensitized employee to lose a trade secret."

Personnel Journal, June 1994, Vol. 73, No. 6, pp. 98-110.

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