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Guarding Valuable IP Against Insider Theft During Layoffs

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2023 has seen dozens of companies issue layoffs, and some predictions call for even more through the end of the year. Aside from a potential loss of institutional memory, companies undergoing a reduction in force also open themselves up to another threat: trade secret theft. Walter Pfeffer and Harman Deol of Littler offer their tips for keeping intellectual property safe before, during and after layoffs.

With 61% of business leaders reporting that their companies will likely see layoffs in 2023, the reductions in force we’ve seen this spring may be only the tip of the iceberg. Given that the vast majority of trade secret theft is committed by those within the business — 85% according to one study, supported by the fact that 70% of trade secret cases also include a claim for breach of contract — few will be surprised to see a sharp rise in trade secret misappropriation accompanying these reductions in force. While protecting key confidential and trade secret information is always a balancing act between best practices and the realities of a functioning business, here are some steps that may help companies avoid harm when employees depart.

Restrict Access During Employment

Employees cannot take trade secret information if they do not have access to it. Of course, no business can simply lock away its trade secrets and still function. In order for those trade secrets to offer value, some employees must be able to access and use them. Nonetheless, employers can reduce their risk by implementing IT protocols that permit access to key documents by only those employees who need it.

Monitor for Misappropriation

IT departments can often set up systems capable of monitoring for warning signs of misappropriation and logging activity for future review. Examples of a warning sign might include downloading numerous files at the same time, accessing company file repositories at unusual hours, connecting to non-work email and cloud storage sites, plugging in non-work external storage devices and running anti-forensic software designed to cover the user’s electronic trail. As always, these protocols will need to be balanced against the need to stay flexible and permit employees to access data necessary for their jobs, but such monitoring can be a useful tool in identifying potential misappropriation before documents go out the door and for determining what happened and minimizing damage when they do.

Educate Employees

Many employees end up retaining trade secret information out of ignorance rather than malice — they simply do not realize that they are not permitted to keep the documents they worked on. It may not be possible to educate employees in the middle of a reduction in force, but measures like yearly training sessions, consistently instituting disciplinary action for failure to maintain confidentiality and including discussions of confidential information requirements in exit interviews can reduce the threat of unknowing misappropriation.

Update Contracts Regularly

Laws and regulations involving trade secrets and unfair competition are constantly changing, as shown by the FTC’s new rulemaking efforts and the National Labor Relation Board’s recent McLaren decision. While forceful, one-sided provisions may seem powerful, the adroit compliance professional recognizes that an unenforceable contract is often worse than no contract at all because it can open the company to additional liability. To ensure that contracts offer as much protection as possible without running afoul of changes in the law, employers should review their employment contracts regularly.

Remove Access on Termination

Where feasible, reductions in force should be planned so that terminated employees’ access to company documents, including locally saved materials and cloud systems, is cut off immediately upon the announcement of their termination. Companies with sophisticated IT capabilities can institute regular remote backups of employee computers so that the computers of affected employees can be remotely locked at the time of termination without losing any data (including potential evidence of pre-termination misappropriation).

Conduct Exit Interviews

Exit interviews can be a source of intelligence for addressing misappropriation risk, as they may permit employers to determine which employees’ pre-termination activities may warrant additional review, which employees may be heading to competitors and which employees or business units may not have observed the company’s information protection policies previously. Interviews can also provide an employer with a final chance to educate employees with regard to their continuing obligations to the company.

Consider Severance Agreements

While severance agreements are not appropriate for all situations, they can be a useful tool for incentivizing employee cooperation after termination. In the trade secret context, a severance agreement can require the exiting employee to search physical and electronic file repositories for any company documents, return those to the company and permanently destroy any copies. A severance agreement can also provide a final opportunity to update the employee’s duties with regard to confidential information and unfair competition, especially if the company’s employment documents have not been recently refreshed.

Preserve Evidence

When employees leave, businesses may feel pressure to repurpose their devices and eliminate their accounts — the purpose of layoffs is to reduce overhead, after all. But a small investment in preserving these repositories for a period of time can often be the difference between suspecting trade secret misappropriation and being able to prove it. Not all businesses will be able to do so. It is worth taking the time to determine whether there are cost-effective ways to temporarily preserve the information repositories of ex-employees, which could run the gamut from creating forensic images of the devices to simply storing laptops in a locked cabinet.

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