Out Of Tune: Trade Secret Theft And Employment Law Case Study

Three Ward and Smith attorneys shared practical insights and strategies for responding to the theft of trade secrets, by sharing the example of a key employee at an auto-tuning company who was recruited by a smaller competitor.

The interactive case study was featured in Ward and Smith's annual In-House Counsel Seminar as a means of illuminating essential concepts related to employment agreements, protection of trade secrets, crisis response plans, and avoiding unnecessary litigation.

Addressing some compelling hypothetical scenarios, the attorneys and participants discussed how Cam Sonic Engineering, a fictional leader in the audio technology space, should respond to its Director of Tech Support. Hayden, being recruited by industry disruptor Baxter Precision Audio (also fictional), evaluating the sketchy tunes the scenario produced related to corporate espionage, restrictive covenants, and the potential impacts of litigation.

The discussion featured insights from Ken Gray and Emily Massey, both North Carolina Board Certified Specialists in Employment Law, and Gavin Parsons, a litigation attorney.

Setting the Stage

Hayden is a remote employee for Cam Sonic, which delivers industry-leading auto-tuning solutions. He signed multiple agreements when he was initially hired by the company 10 years ago, and he signed new restrictive covenants when he was promoted in January of 2024.

Each table of audience members read from a packet of information describing the story of Hayden, who left Cam Sonic for Baxter as his career had reached a ceiling. He provided Leo, Head of Sales for Baxter, with a copy of his most recent agreement and the restrictive covenants, but they did not seem concerned.

Hayden also sent approximately 50 emails from his Cam Sonic work computer to his personal account. His justification was he developed most of the information prior to his tenure with Cam Sonic, as well as during off-duty time. Hayden did admit, however, that he incorporated his personal work into the technology he created at Cam Sonic.

The emails contained source code for a new "Mariah" feature and a "Bluegrass Explosion" setting, giving everyone an opportunity to experience having an authentic hillbilly twang. Although the new features only work on Cam Sonic equipment and cannot be duplicated, Hayden removed all of the references to Cam Sonic in the code and did not mention that to his new boss at Baxter.

Trade Secrets

"There is definitely a trade secret issue here, but it's somewhat murky because Hayden blended ideas he had on his own time with technology he created for the company," advised Parsons.

The best strategy is to avoid the situation. "You need to be clear on the front end about what your employees can do...ownership of a trade secret is different than a copyright," noted Parsons.

Spelling out the terms beforehand can help to avoid costly litigation. "Having an employment agreement that explains who owns the intellectual property means you have a contract you can enforce," explained Massey.

An audience member wondered if a lack of action from a company related to the theft of trade secrets could, for practical purposes, constitute a waiver of IP rights. "The question boils down to whether the company took reasonable measures to protect their trade secrets, and the laws can vary state to state, so there is a significant lack of clarity. The bottom line is it's just a bad situation to be in," said Parsons.

The bar for defining a trade secret can be difficult to clear. "If you have a provision in your employment agreement or an NDA that says confidential information cannot be taken outside the company, that's a lot easier bar for me," mentioned Parsons. "Basically, it is just a simpler process to argue that someone breached a contract instead of going through the rigmarole of establishing a trade secret."

Another audience member asked whether it would matter if Sonic had work-for-hire language in their employment agreements. "If there was explicit language stating that creating IP is something that the employee was hired to do, it could offer some additional protection for the employer," added Parsons.

Since Hayden removed source code, there is another potential claim. "Cam Sonic may have a DMCA claim against the employee. And the beauty of that is there's statutory damages per occurrence, and there is no need to have a copyright registration," advised Parsons.

Hiring Outside the Lines

Leo communicates directly with Hayden instead of going through the HR department at Baxter. As the head of sales at Baxter (not the character from the Lethal Weapon movie franchise), Leo takes matters into his own hands by meeting with Hayden and informing HR when the deal is done. Taking Hayden at his word, Leo uploads the stolen information from Hayden to the Baxter computer system.

"Because of this, a reasonably decent argument could be made for a Temporary Restraining Order and a trade secret case," explained Parsons.

"And since Leo was a manager, he should've known better," added Massey.

Trial by Fire

The SNAFU created by Hayden and Leo now reaches Natalie, the GC at Baxter. Although Natalie previously worked in the legal department at a Fortune 500 company and as a business attorney at a law firm, this is her first role as General Counsel for a company.

Natalie is worried about a demand letter she received from an in-house attorney at Cam Sonic, claiming Baxter hired Hayden even though the company was aware he had a noncompete agreement. The letter includes many other allegations about confidential information that appear to be boilerplate.

HR does not have a copy of Hayden's noncompete agreement. The offer letter provided to Hayden includes language requiring the offeree to "disclose to Baxter any and all agreements relating to prior employment that may limit your ability to be lawfully employed...that Baxter will not tolerate the disclosure of confidential information...and employment is conditioned upon not engaging in any activities that conflict with your obligations to your former employer."

Natalie thinks she is safe based on this clause and some insights she found after Googling the legality of noncompete agreements. "We call this a nasty gram or a cease and desist letter," joked Gray. "But it is serious because you have to determine what information the company may have and whether the letter merits a response."

Responding is usually the most advisable strategy. "You want to communicate that you do not let your employees violate restrictive covenants and that they've been instructed not to provide proprietary information," explained Gray. "More than 50 percent of the time, when companies don't respond, things get escalated."

As a function of the interactive role play, the audience was asked to provide a solution for Natalie. The consensus was that Leo and Hayden should likely be fired.

Trust but Verify

"There's really no right answer for this," noted Massey, "and the reason we created this scenario is that I see this in my practice all the time."

"People don't want to look bad and people want to trust their new employees...it's not uncommon for companies to make costly litigation decisions based on someone's word," noted Parsons.

Having a forensic analysis performed can prevent the company from hitting a sour note. "You also want to take any cease and desist or TRO that you receive very seriously," said Parsons.

The in-house IT department is typically the preferred resource for conducting the forensic analysis. "The bottom line is you need to get to the bottom of this as fast as possible," explained Parsons.

It is a commonly held belief that language similar to the offer letter for Hayden provides some degree of protection. "The thing is, many new employees don't go through HR, since it may be someone's friend or a former colleague. People don't want to do a forensic analysis because they don't want the new person to think they don't trust them," said Massey.

In many cases, however, a forensic analysis uncovers the theft of proprietary information. "I see this every day," added Massey. "The bottom line is that a forensic analysis is almost always a good idea, because it helps you assess your risk and determine how to respond."

Although the verbiage in the offer letter is acceptable and using something similar is generally advisable, doing so can actually make things worse if not actually followed by the company. "If you have a policy in writing, it can make it even more clear when there is a violation. Basically, if you're not going to follow the rules, don't put them in writing," commented Gray.

Bustah Beatz

Fast forward a year and Baxter is thrilled because the utilization of the Mariah setting has allowed the company to earn credit for assisting in producing a new holiday album from the international superstar Bustah Beatz. A spoiler for the party dropped, however, after it was reported that streaming services received a tip that the album featured stolen technology involved in a lawsuit.

Bustah Beatz went straight to social media to update her fans and blamed Baxter. "The first step is to get the crisis response team together and ensure that everyone is reading from the same sheet of music," advised Pres Davenport, a partner and Business Development Director at Eckel and Vaughan Strategic Communications. "Second, you want to establish your lead vocals...make sure that someone is authorized to make decisions."

The next phase involves assessing the situation and reviewing any pre-drafted statements that have been created. "Hopefully, you've prepared for a variety of circumstances that can go wrong," noted Davenport. "What we would do is update the statement based on the facts, monitor, and then adjust the messaging as the crisis evolves. This is like jazz because there is a structure, but you're adapting to the reality as it changes."

Massey recommends engaging with a law firm such as Ward and Smith prior to contacting a PR firm: "This way, you have attorney-client privilege. It can be easy to forget this in the teeth of a crisis."

Strategic Response

Beyond handling the PR crisis, it is important to assess individual liability versus liability of the company. Often times this means advising employees to hire their own attorney instead of using the same attorney(s) as the company. "This is a balancing act, because if the company is paying for that, it can actually strengthen a tortious interference claim," commented Gray.

Although it may be more costly, Parsons advises hiring separate counsel for the employees. "You should also put your insurance carriers on notice, because you could potentially get some of your defense paid for," said Parsons.

Having a plan in place and a retainer with a law firm can help to mitigate risk in the event of a crisis. "It is a good idea to have a relationship in place with a law firm, which has a relationship with a PR firm, but there's also a lot of value in having a separate relationship with a PR consultant so that you can stay ahead of these issues," added Massey.

"Aside from helping you build your crisis response plan, a PR firm can work with you to audit your communications and respond to a variety of situations," concluded Gray.

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