Integrity Requires Protecting the Trade Secrets of Others

In the zeal to protect their trade secrets, companies often neglect the other half of the equation: How to prevent their own employees from using proprietary data from other companies.

As the battle between Detroit-based General Motors Co. and Germany-based Volkswagen AG demonstrates, this too can be a costly issue. GM is accusing former executive Inaki Lopez of taking reams of proprietary documents and information to his new job at Volkswagen. GM claims it stands to lose millions of dollars if a competitor is allowed to benefit from this information. But Volkswagen could lose as well. If the courts determine it had knowledge that the information was proprietary, it could be fined millions of dollars.

In another case, Diametrics Medical Inc., a Minneapolis-based medical-equipment manufacturer, was forced to abort a $30 million initial public offering after Pittsburgh-based PPG Industries Inc. filed a lawsuit alleging theft of trade secrets and patent infringement. The suit accused Diametrics’ two founders, who formerly worked as a researcher and consultant to PPG, of using proprietary information to develop a new blood gas analyzer. Diametrics denied the charges, but said the accusation tainted the deal.

Alan Unikel, a Chicago-based attorney and editor of The Intellectual Property Newsletter, says that companies need to realize that misappropriating trade secrets can come back to haunt them, as they have for these companies. The best approach is for HR to deal with the issue while interviewing new employees. “You’ve got to nip it in the bud at the outset,” he says.

Typically, Unikel advises HR personnel to ask potential employees if they have any restrictive covenants barring them from competing against their current or former employer. If an employee has a copy of any such document, the recruiter should make a copy of it and pass it on quickly to the legal department before any hiring decision is made.

That’s the procedure followed by Mead Data Corp., an information retrieval company in Dayton, Ohio. At times the agreement is an issue, but it doesn’t always affect the work an employee will be doing at Mead. “You’ve got to be even-handed,” says Nancy Nash, legal counsel for the information firm’s HR department. “That way people expect you’ll do the same things to protect your own secrets.”

Talent Tree Professionals, which runs 130 temporary placement offices throughout the United States, won’t hire anyone for a full-time position who has signed a restrictive covenant or agreement. However, David Seaver, Talent Tree’s vice president of HR, notes that occasionally, rival firms will contact the company to get the agreement waived. Sometimes, a compromise can be worked out.

At Pioneer Hi-Bred International, a seedmaker in Des Moines, Iowa, a human resources representative talks with newly hired scientists to make sure that the organization isn’t inadvertently getting any proprietary information from them. “If they’ve been in academia, they may not be thinking that things need to be protected,” says Pat Sweeney, patent counsel for Pioneer. “Whoever is doing the hiring has to be aware of this kind of thing.”

Where problems often arise is when an organization is strict about its own trade secrets, but acquisitive when it comes to getting at others’ proprietary information. “A company may have a trade-secret policy and then they’ll hire someone away [from a competitor] and do exactly the thing they tell their employees not to respond to,” says Mike Garelick, head of the compensation and human resources practice at consulting firm Towers Perrin in Chicago.

Indeed, this is what hurt MAI Systems in Irvine, California, when it sued an employee for stealing trade secrets. The company said an ex-employee used knowledge of proprietary customer lists and service manuals to go after MAI customers. The employee countered that when he had come on board at MAI, management encouraged him to get customer lists from new employees.

This do-as-I-say-not-as-I-do approach sets up a “double bind for people in the organization,” Garelick says. “It requires companies to take a delicate look at the ethical considerations of how they want to operate.”