Did an Ex-Employee Steal Your Clients, Data, IP or Trade Secrets?

Trade secrets

Under Minnesota law, employers have rights when a former employee takes client lists, customer info, computer data, intellectual property, and trade secrets.

The Minnesota “Uniform Trade Secrets Act” gives significant rights to employers to protect confidential information and trade secrets. The Act is Codified in Minn. Stat. Ann. § 325C.

What is a Trade Secret?

A Trade Secret is information, including a formula, pattern, compilation, program, device, method, technique, or process that has independent economic value, whether the value is actual or potential, that is not readily ascertainable by proper means by another person who would obtain economic value from the information. Minn. Stat. Ann. § 325C.01. In order to preserve information as a “Trade Secret” reasonable efforts must be made to maintain its secrecy. Id.

Put simply, a Trade Secret has three elements:

  1. information,
  2. that derives economic value from not being known by the public, and
  3. reasonable measures to keep it a secret.

What is “Independent Economic Value”?

This may include the value received by the business customers on your list give, the potential loss of business if your customer list were in a competitors hands, research findings (even if the results were meaningless, in a competitors hands it would save them money).

What May Constitute “Reasonable Measures” to Maintaining Secrecy?

  • locking doors
  • using passwords
  • confidentiality “blocks” on documents
  • clean desk policies
  • employee badge policies
  • employment agreements

A Few Common Examples of Potential Trade Secrets:

  • a hair salon’s customer list
  • a food delivery service’s customer info
  • a recipe for a bakeries pastries
  • a drink recipe (coca-cola)
  • an algorithm to an internet search engine (google)

Types of Confidential Information or Trade Secrets may Take on Many Names, Including:

  • customer lists
  • customer database
  • customer data
  • customer account information
  • client lists
  • client data
  • intellectual property (IP)
  • trade secrets

What Constitutes “Misappropriation” of a Trade Secret?

Misappropriation of a trade secret includes:

  1. Acquisition of a trade secret of another person by a person who knows or has reason to know the acquisition was improper; or
  2. Disclosure or use of a trade secret of another without consent by a person who
    • Improperly acquired the knowledge, or
    • At the time of disclosure or use knew that the discloser’s or user’s knowledge of the trade secret was:
      • Derived from improper means
      • Acquired under a duty to maintain its secrecy
      • Derived from a person who owed a duty to the person seeking relief
    • Before a material change of the discloser’s or user’s position knew or should have known that it was a trade secret and knowledge of it had been acquired by accident or mistake (Minn. Stat. Ann. § 325C.01).

“Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. See Minn. Stat. § 325C.01.

Put simply, misappropriation occurs when a person either:

  1. acquires a trade secretly improperly,
  2. discloses or uses a trade secret without consent that was gained by improper means, under a duty to maintain its secrecy, or owed a duty to the person seeking relief, or
  3. disclosure or use of a trade secret by a person who before materially changing their position knew(or should have) the trade secret was acquired by accident or mistake.

Is There a Difference between Taking, Soliciting, Stealing, or Poaching?

The simple answer is no. Taking, stealing, soliciting, and poaching when in reference to a trade secret are always going to be unlawful. They may have slightly different actions and results, but they are all unlawful. When the allegation is simply a violation of the Duty of Loyalty the lines blur slightly depending on the facts. Courts have held that solicitation prior to the end of employment may be okay, but the amount of solicitation is a major factor. If you are an employee it is best to err on the side of caution because the ruling against you may be severe.

What is Wrongfully Appropriating or Misappropriating?

Wrongfully appropriating, more commonly stated as “misappropriation” typically occurs when a person uses or discloses confidential information or a trade secret. Generally, this results in harm to the company from which it was taken. Perhaps the most common misappropriation occurs when a former employee takes a customer list and uses the list to bring customers elsewhere.

Can the Employee’s New Employer be Liable to the Old Employer for Benefiting from the Employee’s Illegal Activity?

Yes, if a new employer has knowledge or should have knowledge of the employee’s misappropriation then the new employer may be responsible under vicarious liability. See Hagen v. Burmeister & Associates, Inc., 633 N.W.2d 497, 505 (Minn. 2001).

Duty of Loyalty

The Duty of Loyalty prohibits an employee from competing against an employer while employed. However, they have a right to prepare to enter into competition. See Sanitary Farm Dairies, Inc. v. Wolf, 261 Minn. 166, 112 N.W.2d 42 (1961).

Is it Illegal to Quit and Approach a Former Employer’s Customers?

Yes and no, this answer depends on several factors.

First, the employee would want to make sure they are not in violation of a contractual agreement or the Minnesota Uniform Trade Secrets Act. If an employee has no agreement not to compete and they are not taking a trade secret (such as a customer list), once they have quit they would most likely be free to approach and solicit former employer’s customers.

Second, they also must make sure they do not violate their Duty of Loyalty. The Duty of Loyalty prohibits an employee from competing against their employer. This typically is extinguished the moment an employee leaves the employment of the employer, thus being free to approach former employer’s customers.

How Employers Can Strengthen Their Rights: Non-Compete and Non-Solicitation Agreements

What is a Non-Compete Agreement?

A non-compete agreement is a contract between an employee and an employer where the employee agrees not to enter into competition with the employer after termination of employment. Typically a non-compete agreement must be ancillary to the employment contract. It must be reasonable supported by consideration.

What is an Example of a Non-Compete Agreement?

Covenant Not To Compete. (a) [employee name] agrees not to compete with [company name] in the practice of [type of business or service] while working for [company name] and for a period of [number and measure of time (e.g., “six months” or “10 years”)] after termination of employment within a radius of [number] miles of [company name and location].
(b) For purposes of this covenant not to compete, competition is defined as soliciting or accepting employment by, or rendering professional services to, any person or organization that is or was a client of [company name] during the term of [employee name]’s work with [company name].

What is a Non-Solicitation Agreement?

A non-solicitation agreement is a contract entered into that prohibits the solicitation or communication with former employees and customers.

What is an Example of a Non-Solicitation Agreement?

Non-Solicitation of Clients

You agree that you will not, without the prior written consent of the Employer, at any time during your employment with the Employer or for a period of 2 years from the termination of your employment however caused (whether your employment is terminated by you or the Employer and whether with or without cause or in breach of this Agreement), either individually or through any company controlled by you and either on your own behalf or on behalf of any person competing or endeavouring to compete with the Employer, directly or indirectly solicit, endeavour to solicit or gain the custom of, canvass or interfere with any person who is a client of the Employer as at the date of termination of your employment or use your personal knowledge of or influence over any such client to or for your own benefit or that of any other person competing with the Employer.

Non-Solicitation of Employees

You agree that you will not, without the prior written consent of the Employer, at any time during your employment with the Employer or for a period of 2 years from the date of termination of your employment however caused (whether your employment is terminated by you or the Employer and whether with or without cause or in breach of this Agreement), either individually or through any company controlled by you and either on your behalf or on behalf of any other person competing or endeavouring to compete with the Employer, directly or indirectly solicit for employment, or endeavour to employ or to retain as an independent contractor or agent, any person who is an employee of the Employer as of the date of termination of your employment or was an employee of the Employer at any time during 2 years prior to the termination of your employment.

Why are Non-Compete and Non-Solicitation Agreements Helpful to an Employer if the Employer can already Sue the Employee for Stealing Confidential Client Information, Customer Data, or Related Intellectual Property?

These agreements are helpful for a variety of reasons. First, it gives you the benefit of having an added legal remedy in the case of a former employee stealing trade secrets, breach of contract. Second, a contractual agreement allows you to specifically outline what is a trade secret and what an employee may not due, thus minimizing the arguments a former employee can make in court regarding his/her conduct. Third, a breach of contract argument is typically a stronger and easier case to prove then a violation of the Minnesota Uniform Trade Secrets Act.

How Can a Strong Employee Handbook Help an Employer Prevent Theft of Company Clients and Information?

A strong employee handbook serves a purpose similarly to specific non-compete/solicitation agreements in an employment contract. A strong handbook allows the employer to state with particularity what is considered confidential and/or a trade secret. Further, it may give guidance as to what may not be released. Ultimately, it limits the arguments the former employee may make regarding the violation of Minnesota’s Uniform Trade Secrets Act. It will be hard for an employee to contradict a handbook specifically stating a customer list is confidential and not to be released and that their actions were lawful.

Written by Jason Priebe