Nearly every business relies on confidential information for a competitive advantage. Famous examples include secret formulas, like the recipes for Coca-Cola and Kentucky Fried Chicken. Other examples include valuable algorithms, processes, data, and practices kept reasonably secret by all different types of businesses. If information is kept secret and gains economic value from its secrecy, a trade secret exists, and its owner has the legal right protect it.
In certain industries, a company’s entire business model may depend on the protection of trade secrets. Take the staffing industry for example, an industry that sources candidates to fill job openings. Well-known staffing companies include Allegis Group and Randstad, with divisions that specialize in particular areas such as law, health, and information technology. Databases containing client and candidate information are crucial to a staffing company’s success. This blog post will explain the concept of trade secrets in the staffing industry, and offer advice as to how employers can best protect their trade secrets.
Trade Secret Basics
A valid trade secret has two criteria. A valid trade secret must: 1) derive commercial value from being secret and 2) be subject to reasonable secrecy. Therefore, any type of valuable information kept reasonably secret qualifies as a trade secret. Trade secrets do not require formal registration and are protected for as long as they are kept secret.
An owner of a trade secret has the right to prohibit others from trade secret misappropriation. Trade secret misappropriation occurs when one obtains the trade secret by improper means, including espionage, theft, and coercion. To remedy misappropriation, a plaintiff can recover damages if their trade secret is revealed, or improperly used even if the secret is never actually revealed.
Staffing and Trade Secrets
When I worked in the staffing industry prior to law school, I was responsible for finding candidates to fill a variety of roles for our clients. Oftentimes, staffing companies store information about their clients and candidates in online databases which may qualify as trade secrets. Such information might include candidate strengths and qualifications or a list of job openings that clients are seeking to fill.
The extent to which candidate and client information is a trade secret heavily depends on reasonable secrecy. For example, it is unlikely that a list of client names and phone numbers is a trade secret. Why? A simple Google search could reveal this information and companies often publicly advertise their job openings. Similarly, a candidate list is unlikely to be trade secret, because candidates often post their resumes on public websites and might indicate their availability on their LinkedIn page.
In contrast, a client list that includes private, valuable information such as pay rates, hiring personnel, or specific interview questions could be a trade secret. Therefore, if a rogue former employee revealed this protected information to a competitor, the original employer could sue both the employee and the competitor for trade secret misappropriation.
A Recent Example
On February 7, 2023, DEK Industrial Services LLC filed a federal trade secret misappropriation lawsuit against a former employee and her new employer, rival staffing company Force Solutions. DEK alleged that the former employee downloaded and distributed DEK’s trade secrets. This included proprietary data files, names of employees and clients, placement records, performance reviews, wages, and project locations/assignments. DEK sought an injunction to prevent Force from using this confidential information to profit.
Based on the details in the complaint, it appears that DEK’s information meets the criteria of a trade secret. First, placement records and wage data have commercial value from being secret. Such data reflects how much money clients are willing to pay and how much money candidates are willing to accept, which significantly impacts DEK’s business model. Second, DEK likely kept knowledge of this information restricted to only certain employees, and DEK did not make this information publicly available.
Assuming the trade secrets are valid, DEK has a strong claim for trade secret misappropriation. The former employee allegedly downloaded the confidential files and forwarded them to her personal email account for Force to use. Even if this act does not constitute criminal theft, DEK’s complaint likely presents the elements necessary for trade secret misappropriation.
Put it in Writing
In DEK’s situation, filing a claim for trade secret misappropriation makes sense. But, when trade secret misappropriation is not as clear-cut, contracts are key for employers. Noncompete clauses, contractual provisions that prevent an employee from joining a competitor for a period of time, are useful. DEK covered its bases by requiring the former employee to sign a noncompete agreement before she left for Force. This particular agreement prevented the former employee from joining a staffing competitor for at least one year after she left DEK. So, even if a court finds that the former employee did not misappropriate DEK’s trade secrets, DEK may have a different claim for breach of contract.
It is important to note, however, that the Federal Trade Commission recently proposed a ban on noncompete clauses. The proposal argues that noncompete clauses are a form of unfair competition. It asserts that noncompete clauses prevent workers from leaving jobs, decrease competition, and lower wages. Employers should closely monitor this proposed ban because it might rescind existing noncompete clauses as well as ban future ones.
Employers should be mindful of how their employment contracts protect trade secrets. Trade secret misappropriation is an appropriate remedy if a former employee exposes an employer’s trade secret. Nevertheless, contractual language that prohibits a new employee from bringing in trade secrets of a third-party helps further protect the new employer from accidental misappropriation. Additionally, the new employer should contractually prohibit a new employee from misappropriating its trade secrets. Clear contractual language is an effective way for an employer to ensure that its trade secrets will be protected without risking a court’s interpretation. When in doubt, put it in writing!
Loyola University Chicago School of Law, JD 2024