Steal trade secrets, go to jail 06-10-01
- By Julie Crane, California Attorney at Law

Worried about employees stealing company secrets? Especially with all the layoffs going on now, some employees may be tempted to steal company confidential information to go in to business for themselves, or to ensure they will be hired elsewhere. It's important to let employees know how costly this could be. As two recent cases show, stealing confidential information doesn't lead to secure futures but to fines and jail.

In 1995, Cadence Design Systems, Inc., filed a civil trade secrets and copyright infringement lawsuit claiming that some of its former employees had stolen its source code to start their new business, Avant. Securities fraud class actions were filed by shareholders, and a criminal action also was brought. In addition to other evidence, experts found that error messages in Avante's code matched error messages in Cadence's.

Avant settled the class actions for $47 million and on May 22, 2001, pled no contest to charges of stealing trade secrets. As a result of the plea agreement, the company will pay $27 million, plus restitution. The individuals will pay $8 million in fines and serve time in jail ranging from one to six years.

Stealing source code is one thing. Client lists aren't trade secrets, but in a recent case, the New Jersey Supreme Court sided with an employer who had filed suit against two former employees for stealing client lists and customer data. The employees decided to leave their employer and open a competing business. They secretly gathered client information including names, telephone numbers and data on specific accounts. The employees resigned on Saturday, and sent solicitation letters to their former clients on Sunday. In less than three weeks, all of the clients had gone with the new firm.

The employer filed suit claiming, among other things, that the client data was confidential and proprietary information. The court agreed. Although the client data may not have technically been a trade secret, it was legally protected since it was provided by the employer in the course of employment and for the sole purpose of serving clients. The court found the former employees had breached their duty of loyalty and competed unfairly because they had taken affirmative steps to harm their employer's business so as to better compete against it.

Cite for New Jersey case: . Lamorte Burns & Co., Inc. v. Walters, --- N.J. ----, --- A.2d ----, 2001 WL 502464 N.J. May 14, 2001

What You Should Do

• Inform employees that information provided by the employer is legally protected;
• Ensure security precautions are in place to protect such information from disclosure to anyone who does not have a need-to-know;
• Periodically review security precautions to ensure they are effective;
• Report any violations to HR or Legal.

Information here is correct at the time it is posted. Case decisions cited here may be reversed. Please do not rely on this information without consulting an attorney first.