How Startups Can Minimize Risk in the Area of Trade Secrets

By Bella Liu.

How can startups minimize their legal risks while advancing their technologies and growing their teams? This past Wednesday, Charles Tait Graves came to Bakar Bio Labs to help our tenants do just that. Graves, a partner in litigation and a trade secret law specialist for our affiliate Wilson Sonsini, shared tips and practices that entrepreneurs can implement to protect their budding companies from costly and potentially existential lawsuits.

In essence: “Trade secret lawsuits allege that Company A hired employees from Company B, and those employees either took trade secrets with them, or they’re using trade secrets at the new job,” Graves said.

“Any nonpublic item of business information that could be valuable to a competitor is a trade secret,” Graves said. “Business details, product roadmaps, financial information, customer information, if it’s not public and if it would be useful for a competitor, it can be a trade secret. It doesn’t have to be strictly scientific and technical information.”

The all-encompassing nature of this definition, Graves says, is why entrepreneurs have to be careful: “Trade secret law is broad and dangerous, not simply because it covers so much, but also because it’s an easier area of law to violate.” The “danger” comes from the fact that trade secret misappropriation lawsuits (which Graves likens to patent infringements) can be “frightfully expensive — and disproportionately so.”

“If you’re the smaller company being sued, and the company suing you has much deeper pockets, they have a much better ability to fund litigation that can last for years,” Graves said. “Sometimes startups get crushed in litigation. They just can’t afford it.”

“This stuff can be deadly, all for small mistakes,” Graves continued. “Awful little things that if we just pay more attention, we can really reduce the risk.”

With that in mind, Graves discussed measures startups can take to minimize their risk of getting sued. From having all hires sign NDAs and monitoring what’s posted to social media, to corroborating memorized information with public documents, there’s a lot startups can do to get ahead of legal risks.

But the largest, most common risk factor for trade secret misappropriation lawsuits? Hiring people from other companies.

“The number one way that startup companies get sued for trade secrets is that they hire people who still have — in their phones, their Gmail, their Dropbox, their Slack, USB sticks — materials and files from their old jobs,” Graves said. “In today’s environment, people just accumulate a lot of files and materials on their phones and home computers. Lawyers don’t make a distinction between whether you’re intentionally stealing or not, they don’t care. They’re going to make the worst case scenario out of it, and they’re going to attack on that basis. That is why this is so dangerous.”

As such, Graves advises having all new hires contractually clear their old files, as well as designating a so-called “trade secret liaison” who knows exactly what information can be publicly disclosed.

“I promise you: implement these steps at your companies, and you will radically reduce your risk of a lawsuit, and you will also help impress future investors,” Graves said. “You don’t want to be one of the companies that has to be told by investors, ‘Do all these things as a condition of investment.’ You want to show up and say, ‘We’ve already done all this.’”