Goodwin Insights
for the CA Employer
November 17, 2017

Take Caution When Onboarding and Exiting Employees to Protect Proprietary Information

The start of every new year – when annual bonuses have been paid out and fresh budgets allow for additional headcount—is a good time for employees to look for new opportunities. For employers, employee mobility is when most disputes involving trade secret misappropriation, disclosure of confidential and sensitive business information, and breach of restrictive covenants can occur. Although most prudent employers have adopted rudimentary practices, such as requiring new hires to sign a proprietary information agreement prohibiting the disclosure of confidential and trade secrets, diligence with the onboarding and exit process can lower both litigation risk and the threat to a company’s intellectual property.

Exiting an Employee

Ensure that the employee’s proprietary information agreement is up to date

Before the employee separates, make sure you have a signed copy of the company’s proprietary information agreement. When an employer suspects that its confidential information has been retained or, worse, is being used, the first thing external counsel will ask for is to see a copy of the employee’s signed agreement. Enforcement of contractual obligations is usually the most straightforward route to recover the proprietary information. If a signed agreement cannot be located when it becomes necessary to enforce it, options are rather limited. Be extra careful of employees who (a) may have been hired at a company’s early stage before such agreements were rolled out or (b) may have signed a form agreement many years ago or while that employee worked in another state that contains impermissible or outdate provisions. For example, an employee hired outside of California who then transfers to work for the company in the Bay Area might have a proprietary agreement that bars the employee from soliciting the company’s customers for a reasonable period. That type of provision is valid in most states, but California considers such restrictions to be unlawful restraints on trade, which could render the entire agreement void. Simply put, if the departing employee has not signed the company’s most recent form, having the employee sign a new agreement would be prudent – preferably before their last day while you have their cooperation.

Conduct an exit interview

Exit interviews should not be a rote exercise. Take the time to provide the departing employee with a copy of their proprietary information agreement and review their post-employment obligations together. This is your chance to ask the employee about their future plans to assess whether the company’s proprietary information might be in jeopardy. If they are evasive, dishonest about their plans, or are leaving for a competitor, contact Goodwin if further safeguards should be taken.

Ensure that the employee has returned all materials and information

Simply going through a checklist to ensure the return of the employee’s badge, keycard, company-issued laptop and mobile device is woefully deficient. There are a variety of ways an employee can inadvertently retain company property and information. Ask questions that could jog the employee’s recollection of whether they possess additional company property outside of the office, such as if they took home any materials for weekend work, forwarded files to their personal email accounts or have a thumb drive loaded with company information. If the employee is keeping the mobile device they used for company business, have the employee reset the mobile device in your presence to ensure company email and files are removed.

In the age of cloud storage, asking the departing employee whether they have a DropBox or Google Docs account is critical, as is removing access from any company-sponsored accounts. Employees increasingly use cloud storage services, which provide the ability to access documents from anywhere, to work remotely or to easily share files with a working group. Employees then forget to delete these files when they resign and then discover they have access to them at their new job. Lack of diligence in this regard not only needlessly tempts the former employee to use the information to succeed in their new role, but it also erodes the company’s claim that this information has a sensitive business value. By having employees disclose any cloud storage service they have used, you can ensure that company-related files have been deleted or their access rights have been cut off.

For suspicious or sensitive departures, investigate and preserve evidence

Sometimes digging a little deeper is warranted, such as when the former employee joins a competitor, starts their own venture in the same industry, lures away your customers, becomes evasive about their future plans, or returns a device that has been completely wiped. When suspicion is justified, take the time to investigate to protect the company’s intellectual property and competitive advantage.

Goodwin can provide directions to your IT department so that the employee’s computer and email can be reviewed for evidence that the employee may have recently engaged in any activity suggesting theft of information. If a thumb drive was inserted into the computer in the days before it was returned, determine the type and quantity of data saved to it. If the employee sent emails with files attached to their personal email account, determine if these were personal emails or company-related.

Even without “smoking gun” evidence, consider whether to instruct IT to preserve the employee’s email account and make a copy of their laptop’s hard-drive. It may not become apparent that a former employee was a bad actor for several months, and by then the former employee’s email account has been deleted and their laptop reformatted and reissued to another employee. Loss of this evidence will hamstring the company’s ability to investigate.

If there is evidence of nefarious activity, loop in Goodwin to expand the investigation to include a computer forensic expert, interviewing co-workers and seeking assurances from the former employee.

Bringing on a New Hire

Ask the candidate to disclose any restrictive covenants

During the interview process, ask the candidate for a copy of any agreements with their current employer with nondisclosure, nonsolicitation, or noncompetition obligations that could be impacted by their departure. Not only does this signal you respect the proprietary information and contractual rights of the candidate’s current employer, but it also allows you to assess whether hiring the candidate could lead to costly litigation.

Relying on candidates to interpret the scope and enforceability of these contracts is risky, as is making a blanket assumption that as a California employer, you may disregard any noncompetition obligations of an out-of-state candidate.

With an understanding of the candidate’s contractual obligations, you can mitigate risk. A candidate with an employee nonsolicitation obligation can be walled off from the recruiting process when it involves the candidate’s former co-workers. Modification of the position, such as having the candidate work on a different product or business than what he worked on in his last job, could allay the former employer’s fears that their proprietary information may be compromised.

Counsel the candidate on what they can bring over from their last job

When a new hire is joining from a competitor, know that the former employer will be monitoring the situation closely. Counsel the new hire on the company’s policy respecting the proprietary information of the former employers and instruct them on what type of materials or information they may bring over.  Allow the employee to ask questions about the information they plan on bringing over and state clearly that you do not wish for them to use or disclose confidential information from prior employers in their work for you.

Again, be wary of the Trojan horse of cloud storage services. A new employee that accesses their DropBox account may unwittingly upload proprietary information and files from their former employer onto your systems. Down the road, in the course of litigation, the presence of this information will create a presumption of misappropriation that will be difficult to explain. Asking the new employee what cloud storage services they use, or what devices they have that automatically synch with other devices or services, will allow you to ensure that your business and products are not tainted with the former employer’s proprietary information.

Ensure that the employee signs the company’s proprietary information agreement

Most proprietary information agreements include provisions requiring employees to refrain from using or disclosing the proprietary information of their former employer and acknowledging that they are not in possession of such information. Such a provision is useful to assuage the former employer and as a deterrent, but more importantly it can be a useful defense against claims of tortious interference with a contract, conspiracy, or misappropriation of trade secrets. Asking a candidate to make these acknowledgements will often flush out any dubious activity and will allow you to take the appropriate prophylactic measures.