Read almost any article or post about protecting trade secrets in a large organization and it will emphasize the importance of securing written agreements, having thorough policies on confidentiality and ownership, limiting access to sensitive information through passwords, encryption and other means, and numerous other safeguards to secure a company’s trade secrets. However, one important element that is sometimes mentioned but rarely emphasized for the protection of trade secrets for a large company is the need for annual or, better yet, semi-annual audits of those agreements and policies.
A trade secret audit is nothing more than thoroughly double-checking your files in an organized fashion to make sure that your paperwork, agreements and policies are in order. Audits are important in three respects for a large company. First, they ensure that management, legal and human resources administrators detect any problems with agreements that may have slipped through the cracks. There are too many cases that have arisen in which a company has failed to get a signed agreement, or found an agreement that is with an affiliate or subsidiary rather than the parent company as the actual employer, or uncovered some other deficiency or enforceability issue that leads to added cost, unnecessary defenses or, in the worst case, the inability to enforce the agreement. For example, a recent case in New York, IBM v. Johnson, 629 F. Supp. 2d 321 (S.D.N.Y. 2009), reinforces the importance of following through and ensuring that agreements are signed appropriately by an employee. In that case, the failure to get an executive to sign the non-compete on the correct line (he deliberately signed on the wrong signature line to avoid committing to the non-compete) led to the district court’s refusal to enforce that agreement. Likewise, if a vendor, supplier or contractor has not returned a signed copy of a non-disclosure agreement, the audit should identify that mistake. In short, an audit allows a large organization to preempt or reduce problems.
Secondly, the process of auditing not only leads to the detection or preemption of problems or mistakes in a large company but it should lead to improved internal procedures or methods for securing sensitive information and better coordination between departments. In the best cases, it leads to a new dialogue internally between a company’s departments or divisions, or with outside counsel, about additional measures that can be done to streamline or better those processes. It may lead to new procedures in “exit interviews” to ensure that all confidential information is retrieved at the close of the relationship. It may cause the client to forward its agreement to their outside counsel to see if it can be improved or upgraded. It may lead to policies or procedures to better monitor “troubled” employees who most frequently turn up in trade secret disputes. As David Almeling’s groundbreaking article has noted, 93% of all trade secret disputes arise out of relationships in which the parties know one another. Audits enable you to identify and minimize the peril that arise out of those relationships.
Finally, should litigation ultimately result, audits enable a client to “build a case” about the reasonableness of the safeguards that it has undertaken. Courts have taken an increasingly tougher and skeptical view of trade secret claims and a challenge to the reasonableness of the plaintiff’s safeguards remains the easiest and cleanest mode of attack. In CMBB LLC v. Lockwood Manufacturing, 628 F. Supp.2d 881 (N.D. Ill. 2009), the district court dismissed a trade secrets case because of what it perceived to be the company’s lackadaisical approach to managing its trade secrets — i.e., no written agreements, policies that failed to safeguard information, failure to retrieve laptops or confidential upon termination, etc. In contrast, an audit shows that the client is proactive and vigilant and better enables that client to defect any criticisms of the actions or safeguards that it has taken.
Sun Tzu cautioned, “if you are ignorant both of your enemy and yourself, you are certain to be in peril.” If you are part of a large company with multiple departments or divisions, audits allow you to better understand your organization and identify your problem employees and partners, and therefore reduce and hopefully eliminate that peril.