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Trade Secrets: Tips for Manufacturers When Hiring an Employee with Knowledge of a Competitor's Trade Secrets

The recent plight of Hewlett-Packard's former CEO Mark Hurd has been headline news, due to alleged improprieties arising out of his social affairs. The saga continues. Hewlett-Packard's competitor Oracle promptly hired Hurd. Even though Hurd did not have a non-compete agreement, Hewlett-Packard has now sued Oracle, claiming that Hurd misappropriated the company's trade secrets and would inevitably disclose them to Oracle. While the somewhat scandalous set of circumstances reads like a corporate soap opera, the trade secret scenario is not uncommon to manufacturers here in the Midwest. You are interested in hiring someone because you value his or her skills and experiences. But, the prospective employee previously worked for a rival - and may have had access to your competitor's trade secrets. You have confirmed that the person has no non-compete obligations. So, if you make the hire, is your company going to get sued for trade secret misappropriation?

Guidance from the Indiana Supreme Court 

Fortunately, the Indiana Supreme Court provides some guidance to manufacturers on how to minimize their exposure to such claims. In its 2004 decision Infinity Products, Inc. v. Quandt, the Court ruled that an employer will not be held liable for misappropriation committed by its employee simply because of the employment relationship (known as "vicarious liability"). The Court found that employers will only be liable if they directly participate in the misappropriation. This means an employer must know, or have reason to know, that an employee has acquired another's trade secrets by improper means.

What constitutes employer knowledge? 

When does an employer know, or have reason to know, that an employee is misappropriating another's trade secrets? While there is no definitive answer to this question, the facts in the Quandt case provide some insight.

Herbert Quandt was a salesman for a manufacturing company that used confidential, customer-specific information and pricing formulas to make sales pitches. Quandt was terminated by that employer, and he took various confidential materials with him when he left. He then met with the CEO of a rival manufacturer to discuss a job position - doing essentially the same type of sales work. The two men had never met before. The CEO asked, and Quandt confirmed, that he was not bound by any non-compete agreement. During their meeting, the two did not discuss any of Quandt's former company's customers, but did discuss his experience, connections and success - Quandt had built up a million dollar book of business in his previous job.

The CEO hired Quandt to develop new sales. He did not provide Quandt with an existing customer list, as he was expected to generate business from new customers. Quandt did this by contacting customers of his former employer - using their buyers' direct-dial phone numbers. During these calls, he utilized the trade secrets and pricing formulas he had taken from his former employer (i.e., not the pricing formulas of his new employer) to develop pricing quotes for his new company - resulting in prices that were mere pennies below those offered by his former employer. While the CEO knew that Quandt was contacting customers of his former employer, he did not know about Quandt's use of the rival's trade secret information. Quandt's former employer sued him and his new employer for misappropriation of trade secrets.

The Indiana Supreme Court held that only Quandt was liable for the misappropriation. While conceding that the case was a close one, the Court concluded that the evidence did not establish that the new company knew or should have known that Quandt had misappropriated any trade secrets.

Lessons from the Quandt case

The Quandt case offers several lessons to companies considering hiring former employees of competitors. First, when hiring the employee of a competitor, be diligent, insistent and clear that you do not want to discuss the trade secrets or other confidential information belonging to your competition. Second, get a non-disclosure agreement in writing. When hiring the new employee, ask the person to sign an agreement not to disclose to you and to not use any trade secrets acquired while employed by another company. Third, make sure the employee is not bound by any non-compete agreement. Finally, minimize any substantive communications with the prospective employee until after they he or she has left their former employer.

Indiana's insulation of employers from indirect liability is somewhat unique. Many other states hold employers vicariously liable for trade secret misappropriation by their employees, even if they have no idea that these actions are occurring. You should be mindful that there are other pitfalls to consider when hiring someone who used to be employed by your competition, including claims of tortious interference with contract or business relationships, and civil conspiracy claims alleging inducement of breaches of duties, of loyalty and good faith.

In addition to refraining from participating in the misappropriation of trade secrets, it is imperative that you be vigilant and proceed cautiously, armed with proper knowledge of the legal issues and rights.

  • Partner

    James is a trial lawyer concentrating his practice on the litigation of intellectual property disputes and business disputes including: patent, copyright, trademark, and trade complex dress infringement; misappropriation ...



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