Trade Secrets: A Conversation with Business Litigation Attorney Neal Weinrich

In today’s world, business owners face increasing challenges in protecting their company’s assets. The headaches business owners deal with can include anything from cyberattacks, natural disasters, theft of money, inventory theft, or worse, theft of trade secrets.

What is a trade secret? A trade secret can be any proprietary information (e.g., customer lists, business plans, software, formulas) that is unique to a business and often positions the company with a competitive advantage. Access to trade secrets is usually limited to trusted employees who need to know the secrets to perform their duties. A classic example of a trade secret is the secret formula of Coca-Cola.

The theft of trade secrets can lead to severe concerns if companies do not take the proper precautions to protect them. Acting quickly once a problem is recognized is paramount in protecting secret information. Having trade secrets stolen can lead to loss of customers, increased competition, and damage to the business’s reputation.

In the conversation below, Moore Colson Restructuring and Dispute Advisory Manager Rachel Kinzer interviews Neal Weinrich, Shareholder at Berman Fink Van Horn P.C., about challenges, dos and don’ts, and how businesses should respond to learning of a theft of trade secrets. Rachel and Neal walk us through some of the steps companies can implement to protect their business, the expected challenges of litigation, and how forensic accountants can help quantify any related losses.

Note: The following conversation has been edited for length and clarity.

Rachel Kinzer

So today, we want to talk about trade secrets from both the legal and forensic accounting sides. And the first question I want to talk through is one of the most relevant for a business. What can a business do to help protect its secrets from the front end?

Neal Weinrich

There are lots of things companies can do to protect trade secrets, and when it comes to trade secret protection, companies need to remember that you should, “never let perfect be the enemy of the good.” It's important to do what you can and to realize that you may not be able to do it perfectly. But you want to take sufficient steps, so if you ever have an employee that leaves and takes information, you're able to show a court that the information that they took is something that you treated like a trade secret. Legally, only reasonable measures to maintain the secrecy of the information are required, not perfect measures.

The small dental practice in rural Georgia or the medium-sized business in Atlanta are not going to have the Coca-Cola formula in a vault under lock and key and millions of dollars of security. But they can do things in the various courses of their business to create a culture around making sure employees are educated about what information is important to the business, using agreements with employees and contractors, and making sure B2B contracts have non-disclosure provisions that protect trade secrets and confidential information being shared, and then regularly training employees on the importance of protecting sensitive company information.

Other items to consider from a technology standpoint include making sure that only employees that need-to-know have access to the most sensitive information that is a trade secret. If all 100 employees at a company have access to the customer list that has all the key data when only certain of those employees are the ones that need it, it may become more difficult, if there's ever a dispute, for a company to say all of this was highly sensitive information. Well, if it was so sensitive, why did every employee at your company have access to it? And of course, security measures, making sure servers and networks are secure, implementing password authentication, labeling documents either physically or electronically as confidential or trade secret, etc.

Rachel Kinzer

Moore Colson works with many smaller to mid-size companies. You had mentioned the local dental practice in Georgia. That’s a prime example of someone that we would be working with. A lot of these smaller businesses, like a dental practice, the owners are the dentists, and they're great dentists, but they don’t always have time to think about the different sides of running the business. And so, just identifying what the trade secrets are and what is key to their business plan is often helpful. Once they have that in mind, they can think of ways to implement internal controls and security measures to protect that.

This leads me to my next question. You mentioned a company can’t always be 100% perfect at protecting their trade secrets. Let's say a company finds out a trade secret was stolen. What would be your first piece of advice? What should a business do if they find that their trade secrets have been stolen?

Neal Weinrich

The first step is you take a pause and reach out to your trusted advisors, such as Moore Colson and outside counsel, and get quick guidance on what to do.

Trade secret cases are typically fast moving because the goal is to contain the trade secrets and get a court to order them to be returned or to order the misappropriator to stop using and stop disclosing them. If you don't act quickly, sometimes the toothpaste is just out of the tube, and you can't put it back in. Once a trade secret is out in public, it's no longer a trade secret.

A lot of times that dentist is not going to be able to know, “Did this more junior dentist in the practice walk out with paper patient files? Did they export a patient list?” Outside lawyers are going to be able to do an assessment of exactly what happened, to get a forensic vendor involved to do an analysis of this person's laptop. The forensic analysis may show that one day before the dentist walked in your office to tender the resignation, he was in the patient portal at midnight downloading a bunch of files. You might be able to see the low-hanging fruit if an email was sent where the patient list or the customer list was attached.

A lot of the evidence that comes up in these kinds of cases is detailed electronic forensic evidence where you need an outside professional, working with your legal team to figure out exactly what happened. Nine out of 10 times in these departing employee cases, where you already know the employee is breaching some obligation, the forensic analysis will reveal more evidence of nefarious activity and more proof that trade secrets were taken and misappropriated. That's going to put your legal team in a better position to go and convince a court to give you relief.

Rachel Kinzer

Thinking about this from an accounting perspective, for Moore Colson, we're generally brought in later after a lawsuit has been filed and the litigation process has begun. A couple of the common challenges for us often include trying to figure out, “What do we even have from a documentation standpoint? What do we have that we can use to help establish our objective opinions if we're trying to help figure out the value of what was stolen?” Or, going back to our dental practice, “How was the dental practice harmed?”

We often have to start from zero because a lot of times, as I mentioned, smaller businesses are often focused on just running their business, and the accounting and administrative functions tend to come in second. And it makes sense because you don't have a dental practice unless you’re helping patients. They’re not thinking, “Oh, in case my trade secrets are stolen, I better make sure my QuickBooks is up to date.”

One of the Partners at Moore Colson often says that forensic accounting is trying to put together a puzzle, but you don't know what the picture looks like, and you only have 80% of your pieces. And that's where we come in. We don’t generally know the exact value of the stolen trade secrets or the damage caused by the misappropriator, but we can often rely on the accounting records, interviews, and documents produced throughout discovery to develop a reasonable estimate.

It's a challenge, but something that businesses can keep in mind is, do they have their accounting records up to date, and what can they make accessible to the professionals they brought in to help?

Neal Weinrich

Yeah, and another good thing for companies to be thinking about when they have this situation is bringing your team on earlier in the process, right when there has been some harm, and there's definitely going to be some quantifiable loss that is going to increase until a court injunction is in place.

To build on your metaphor, the lawyer is probably building the puzzle, and you probably get a call from the lawyer where they say, “Hey, we need this puzzle complete in 45 days, and we want you to finish this corner over here. Here's a few pieces; let me know if there's some other pieces that you need.”

Rachel Kinzer

I have a question related to a situation we certainly would never want one of our clients to find themselves in. Let's say our dental practice realizes that their new dentist, who just joined the group, has been using trade secrets that they brought over from their prior office. What should our client do if they realize they have trade secrets that were stolen and are being used in their business?

Neal Weinrich

The main thing is do the right thing. We tell clients to own up to it and address it and make crystal clear that the information can't be used anymore. And then do what needs to be done to remediate or sanitize the company’s systems. If it's shared drives, servers, emails, first taking steps to make sure that if information migrated to the company systems, the information's been properly preserved as relevant evidence. Even if that means to some degree that you're owning up to the fact that something that shouldn’t have happened did happen, “Hey, this happened. We didn't ask this person to bring information. We didn't know that they brought information. As soon as we learned of it, we put a stop to it. We made sure that information is off our systems. We have no interest in having or using your information going forward.”

In the last 15 to 20 years, trade secret disputes have increased exponentially. When I was first starting out, we were sometimes defending cases based on the argument that, “This isn't a trade secret. I'm entitled to keep it.” And the reality is, whether something is or isn't a trade secret, judges often think that company property should stay at one company and not move to another company. While the argument that information isn’t a trade secret can still be made, what judges are often going to do is to say to return it; you shouldn't have it; it needs to be given back. Usually when companies do the right thing, that's going to result in matters being amicably resolved without having to pay lawyers like me lots of money or involving forensic firms like your team to come in and help. Disputes can be very time-consuming and expensive. Be transparent and own the mistake, even if it was really the employee’s mistake and not the company’s, and live up to it.

Rachel Kinzer

I think that’s spot on. I know we touched on this point already, but if there's anything we didn't highlight, I'd be keen to hear your thoughts from a high level. What kind of challenges would you say our dental practice client would experience once they realize that they have their trade secrets stolen? What kind of challenges should they anticipate through this process of pursuing litigation?

Neal Weinrich

A big challenge is sifting the wheat from the chaff. A lot of times you see plaintiffs in these cases dealing with a situation where an employee copied 1000’s of files to a hard drive. The plaintiff is quickly putting together their complaint. The allegation is that all that information is a trade secret, but in reality, it is rare that every piece of information a company has is going to rise to the level of a trade secret. So, one of the challenges is being precise and targeted in terms of what is the trade secret and being realistic about what isn’t.

The other challenge is finding the evidence to establish that the trade secret was actually used. In these cases, there's often clear evidence that a trade secret was misappropriated. But the defendant is going to claim, “Oh, I never used it. I may have copied that stuff to a hard drive because I thought I was entitled to take it. But that hard drive just sat in the office in my basement, and I never used it.” These cases, you have to prosecute them very aggressively to get the evidence on the other side that shows, often through inferences, that the information was used.

Through pushing for discovery and forensic evidence in the case, you can perform the analysis of the company laptop that the defendant was issued by his new employer or examine other devices used by the employee. And, lo and behold, the forensics show that very thumb drive was popped into that new employer’s computer, and that the customer list file was accessed. Maybe separately, there's evidence that within a day or two of that file being accessed on that computer, there's entries in the individual defendant’s call log where he's initiating a call with a customer from that proprietary client list.

You may not always have clear, direct evidence that something in that file was used. But when you piece it all together, a judge or jury is likely to draw the inference that they took the information with the intent to use it, and the chronology and sequence show that they likely did use it.

As we've already talked about, establishing and coming up with a way to prove damages is another challenge. A lot of times, if customers are lost, it may be a reasonably straightforward calculation. What's the profit that we lost from that customer? If no customers are lost, you may have unjust enrichment. Another way of saying, “What's the benefit they're getting from the use of the trade secret that they misappropriated?” Do they get a head start because, as opposed to taking 18 months to ramp up the business, they were able to get it to market in three months because they stole the trade secret?

That's where getting experts like your team involved early can be helpful to work through how to calculate damages. You can, if you have the right team, be successful in establishing a damages recovery in the right trade secret case.

Rachel Kinzer

I've seen instances where diligent attorneys were able to get discovery responses from the customers who were included on a misappropriated customer list. The customers on that list were contacted by the salesperson who left his initial company and went to a new company. And that salesperson reached back out to the customers after joining their new company. The discovery responses from these customers showed that “John Smith” emailed the customers to recruit them as a customer at his new company, which points to the importance of companies having diligent attorneys like you and the rest of your team at Berman Fink Van Horn. They can be beneficial to not only build a well-supported legal argument, but they can also help make the process of a lawsuit less painful.

Going through litigation can be very challenging. In a scenario where perhaps a trusted employee left his company after 20 years and took trade secrets into a new role with a competitor - that can be an emotional process for a small business to not only lose a long-term trusted employee but also their trade secrets and possibly long-time customers. When we think about the components of the fraud triangle, opportunity is one of the components. Long-term employees, who are trusted by the owners, often have a lot of opportunity to misappropriate from their employer.

It makes everybody's job easier to have good professionals because we ultimately want to serve our clients well and, if applicable, help to restore the business to a position as if nothing happened.

Neal Weinrich

Absolutely. And I do think that these cases tend to have a lot of emotion, and it can be very personal. Not every trade secret case needs to truly be a bet-the-company case. Some certainly are, but it’s important to have good professionals supporting you and behind you that are helping you make a decision as to what's best for the business, what's the right remedy, whether the investment in legal fees for the case is justified, and what makes sense strategically on the particular facts.

Rachel Kinzer

Neal, thank you so much for taking the time today to talk. I really enjoyed it.

If you think your business may be dealing with a theft of trade secrets, the Moore Colson Restructuring and Dispute Advisory Practice Area can help. Contact us today for guidance from our forensic accounting experts.

Disclaimer: The content of this conversation is meant for informational purposes only, and the details within do not constitute legal advice.