Protecting trade secrets is a big concern for any company. It is even more important for companies in Colorado. Why? Because Colorado has an outdated non-compete statute that unnecessarily elevates the importance of trade secrets for employers who seek to protect themselves from unfair competition.
Colorado's non-compete statute places unusual limits on when a company can use a non-compete or non-solicitation agreement. The statute provides that such agreements are presumptively void unless they fall into one of four categories; i.e., contracts:
- related to the sale of a business;
- to recover employee training costs;
- with "executive and management personnel" or their staff; or
- necessary to protect trade secrets.
This means that unless a company is asking its executives or management personnel (or their staff) to sign a restrictive covenant, enforceability is going to come down to whether the contract is needed to protect the company's trade secrets. The implications of this are significant.
Many companies need to protect more than just their trade secrets. For example, many companies can be harmed by former sales employees who seek to exploit customer relationships (i.e., goodwill) acquired during their employment. If you hire an employee and pay her to cultivate relationships with your clients, you may have trouble enforcing a customer non-solicitation agreement unless you prove it is necessary to protect a trade secret.
Similarly, if you invest in training an employee, there may be little you can do to prevent your competitors from reaping the rewards of your investment; unless your trade secrets are at issue.
Starting to spot a theme here? The bottom line: Most Colorado companies will have difficulty protecting themselves from unfair competition at the hands of their sales team or other rank and file employees unless their trade secret house is in order.
Given the heightened importance in Colorado, how does a company prepare to protect its trade secrets? Three steps: Identify your trade secrets; implement policies and procedures; and require confidentiality agreements when appropriate.
Step No. 1: Identify your trade secrets. Sounds simple, right? A good place to start is the Colorado Uniform Trade Secrets Act. Under CUTSA, a trade secret is information that is both secret and valuable. The statute provides examples of information that may qualify for trade secret protection, such as scientific or technical information, client lists, processes, improvements, or financial information; but trade secret protection is not automatic. To be a trade secret, the owner must take steps to keep the information secret. Hence the first step: identify the information you want to keep secret.
Step No.2: Implementing policies and procedures. Now that you know what you want to keep secret, it is time to think about how you will do so. Do you:
- Restrict trade secret access on a need-to-know basis?
- Label your trade secrets "confidential and proprietary"?
- Have written policies/procedures addressing the use/handling of trade secrets signed annually by all employees?
- Require employees to use regularly updated "smart" passwords?
- Utilize electronic controls that prevent uploading information from your computers to the cloud or a thumb drives?
- Encrypt your trade secrets when transmitting them electronically?
- Train your employees about handling trade secrets?
- Immediately disable departing employee remote access?
These are just a few measures that may bolster the odds of successfully protecting your trade secrets both in and out of the courtroom.
Step No.3: Require confidentiality agreements from everyone with access to your secrets. Many businesses utilize employee confidentiality agreements, but do you require such agreements from everyone with access to your trade secrets? For instance, do you share any of your trade secret information with clients? Or allow visitors to access areas of your worksite where trade secrets may readily be observed (e.g., a factory floor)? If you must allow someone to access your trade secrets, require them to agree not to use or disclose the information except for the limited purpose described in the agreement.
Like all businesses, Colorado companies have a keen interest in protecting their confidential information that provides an edge in the marketplace. But if you go the extra mile, you may establish trade secret status for your information, and gain the added benefit of being able to use restrictive covenants to contractually prevent unfair competition at the hands of departing employees.
Originally published in the Denver Business Journal
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
