Are Trade Secret Police Patrolling Your Company?Linda Himelstein
Roger Farah should have known that his decision to leave Federated Department Stores Inc. for a top slot at rival R.H. Macy & Co. would spell trouble. As the merchandising-division chairman, Farah is critical to a company struggling to stay ahead of the competition. Federated figured Farah's expertise was so vital that it slapped him with a lawsuit on Aug. 7. Its big worry: that crucial business plans and other proprietary information would be useless if Farah went to work for Macy.
The Farah brawl, to say nothing of General Motors Corp.'s highly publicized accusations of industrial espionage against its former purchasing czar, Jose Ignacio Lopez de Arriortua, point up a messy but critical problem for corporations. With ever more outsiders being hired on, how can companies keep employees--former and current--from absconding with the company jewels?
The first lesson these days is to be prepared. Whether it's preventing the rank and file from stealing product formulas or getting CEOs to sign contracts barring them from sharing marketing plans with rivals, more and more companies are following their lawyers' advice to take stock of assets--and follow up with steps to protect them. "There was a time when companies were too proud to make employees sign covenants not to compete," says Arthur Schwab, a lawyer who specializes in trade-secret issues. "But after they got burned, they realized it was good to have protections."
INTANGIBLES. Some companies have been taking precautions for years. General Dynamics Corp., for one, routinely requires job seekers to sign contracts restricting their use of its data and technology as a condition of employment.
How well do such agreements work? They can be relatively easy to enforce when they cover specific technologies or secret formulas. Some 39 states have laws defining a trade secret and when it's considered stolen. But the law gets murkier when a dispute erupts over a company's "intangible" property--say, a plan detailing where women's hemlines will be next season. Says Stanley Lieberstein, an intellectual-property expert: "Companies must make a distinction between the ordinary skills an employee can acquire on the job and take with him, vs. what constitutes the proprietary rights of the employer."
It's a fine point that lies at the heart of the Farah suit. To protect its secrets, Federated wants to enforce a "no compete" provison in Farah's employment contract. If it succeeds, Farah will be barred from working for a competitor for two years after the contract expires--or until June 30, 1996. Federated claims it wants to keep Farah from revealing everything from how much private-label merchandise it produces to its expansion plans.
To keep Farah mum, the company asked an Ohio court to stop him from even negotiating with Macy until after his contract expired--a request the court temporarily granted. But on Aug. 11, Federated backed off, opting instead for a trial on whether Farah can go to Macy. For its part, Macy says it only wants Farah's expertise: "We're looking to Roger for his intelligence," says a source close to the company. "We have absolutely no interest in and no need for any confidential information." Farah has denied any wrongdoing; Federated won't comment.
The Farah flap is similar to the fight between Procter & Gamble Co. and Clorox Co. On July 8, Neil DeFeo, the former top global planner for P&G's detergent business, left to become group vice-president for U.S. operations at Clorox. P&G accuses DeFeo of breaching a written contract and of seeking out sensitive information just before his departure about its bleach and household-cleaner markets--which compete head-on with Clorox. In a statement, P&G Counsel James J. Johnson calls DeFeo's actions "the most serious breach we've seen of an employee's contractual agreement."
DeFeo denied the allegations. He issued a statement when he was sued, noting that he was "disappointed and shocked" at P&G's allegations. Clorox countersued to invalidate DeFeo's contract. It says "discussions are ongoing" to resolve the dispute.
NO STANDARD. The question many companies are asking themselves: Are most noncompete agreements worth the paper they're written on? The answer: It depends. There is no uniform standard for handling such tussles. Rather, courts will scrutinize whether the agreements are reasonable in their duration and scope and whether they unnecessarily keep an employee from earning a living. "Noncompete agreements are like fingerprints," says Jonathan Marshall, a trade-secret expert. "They look the same from a distance, but you realize that no two are alike."
Whether they have a good case or not, a number of companies are finding that going to court is the best weapon against potential defectors. The suits send a message to employees and rivals alike that predatory maneuvers won't be tolerated. "Companies need to cultivate a reputation of being tough, but fair," says Marshall. "They definitely don't want to be looked upon as patsies." For a growing number of companies, nurturing a tough-guy image has become just another cost of doing business. And in the end, who really benefits? The lawyers--as usual.
PROTECTING THE COMPANY JEWELS GUARD DOCUMENTS Restrict access to sensitive documents and mark them "confidential" GET IT IN WRITING Spell out exactly what belongs to the company and what belongs to the employee, preferably before the employee starts work KEEP CONTRACTS SPECIFIC Have employees with access to confidential information sign contracts promising not to disclose the data or work for a rival soon after quitting GO TO COURT If all else fails, be ready to sue DATA: BUSINESS WEEK