Can a Workforce IP Training Program Limit Liability Under the Uniform Trade Secrets Act?

When a lower-level employee uses a former employer's trade secrets after taking a new job, the plaintiff often sues the new employer itself and demands exemplary damages under the Uniform Trade Secrets Act ('UTSA') ' even if the new employer was unaware of, and disapproves of, the employee's conduct. Taking a page from the law of employment discrimination, we believe that companies that provide intellectual property training for their workforce can use the fact of such training during litigation to avoid exemplary damages for the solitary wrongdoing of non-executive-level employees ' and perhaps avoid vicarious liability altogether. Companies, especially technology startups, can reduce trade secret litigation and liability risks by implementing such programs ' programs which today are very rare, even in Silicon Valley.

Trade secret lawsuits sometimes target founders and other high-level executives, and in those cases issues of vicarious liability and responsibility for treble damages are less controversial. But other lawsuits arise because a salesperson uses secret customer information from a former employer to make a sale, or a junior engineer uses secret code from a prior job as part of a software project. Management is often totally unaware of such acts and requires each new hire to sign an employment agreement containing a covenant not to use a former employer's trade secrets.

When the plaintiff nonetheless sues the employer (sometimes without even suing the employee individually) and demands treble damages under the UTSA, the question arises whether an employer is liable in the first place for the solitary acts of the rank and file, much less for exemplary damages based on 'willful and malicious' conduct. As we will conclude below, the law is not clear, but implementing an IP training program could very likely work to bar exemplary damages and perhaps limit vicarious liability as well.

Vicarious Liability Under the UTSA

Trade secret misappropriation is an intentional tort. The 40-plus jurisdictions that have enacted the UTSA codified that intent requirement with language providing for liability when the defendant 'knows or had reason to know' that it was engaging in trade secret misappropriation. But the UTSA does not expressly provide for vicarious liability, and state courts have recently split on whether an employer is vicariously liable for an employee's misappropriation.

Indiana has ruled that the UTSA does not contemplate vicarious liability, based on its text. See Infinity Prods., Inc. v. Quandt, 810 N.E.2d 1028 (Ind. 2004). By contrast, federal courts applying Virginia law have held that respondeat superior does indeed apply under the UTSA. See Microstrategy, Inc. v. Business Objects, S.A., 331 F. Supp. 2d 396, 418 (E.D. Va. 2004); Newport News Indus. v. Dynamic Testing, Inc., 130 F. Supp. 2d 745 (E.D. Va. 2001).

Elsewhere, Minnesota courts have also addressed the question of vicarious liability for trade secret misappropriation, although there is no citable opinion on the issue. An appellate court ruled that vicarious liability is available under the UTSA. See Hagen v. Burmeister & Assoc., Inc., 1999 WL 31130 (Minn. Ct. App. 1999) (unciteable). The Minnesota Supreme Court accepted without ruling on the issue that vicarious liability is available, but then decided the case on other grounds. See Hagen v. Burnmeister & Assoc., Inc., 633 N.W.2d 497, 505 (Minn. 2001). In turn, a non-UTSA jurisdiction, New York, also recently applied the doctrine of respondeat superior in a trade secret case. See Rosenberg, Minc & Armstrong, L.P. v. Mallilo & Grossman, L.P., 2005 NY Slip Op. 25146 (2005).

Exemplary Damages Under the UTSA

In turn, defendants can be liable for treble damages where trade secret misappropriation is 'willful and malicious.' Whether exemplary damages could be awarded against a company for the acts of lower-level employees turns in part on whether a given jurisdiction accepts respondeat superior in trade secret cases. But even if respondeat superior does apply, the next question in litigation would be whether the employer could be held vicariously liable for treble damages if the employee's actions, but not those of company management, were 'willful and malicious.' There appears to be little or no case law under the UTSA providing an in-depth analysis of this question.

Given this uncertainty, proactive companies may wonder what can be done to minimize the risk of exemplary damages for trade secret misappropriation unknown to the company's officers and directors. We believe that sexual harassment case law offers a useful analogy.

The Employment Discrimination Analogy

The laws of employment discrimination and trade secrecy differ in many respects, most obviously in that acts of harassment are not within the scope of employment, but a trade secret misappropriation might be. But both share the problem of actions by employees, unknown to management, which can subject the employer to liability. More important, developments in sexual harassment jurisprudence provide a useful analogy for how employers might limit their liability in trade secret cases.

In sexual harassment cases, plaintiffs can sue the employer for the actions of a supervisor ' actions that management may strongly disapprove of. As a result, courts have developed rules that limit liability for employers who implement meaningful workforce harassment and discrimination training policies.

Specifically, courts have ruled that in federal sexual harassment cases, employers who adopt an anti-harassment policy and make efforts to disseminate that policy among the workforce can raise an affirmative defense to vicarious liability for a harassment claim against a supervisor. See generally Kohler v. Inter-Tel Techs., 244 F.3d 1167 (9th Cir. 2001); Crocco v. Advance Stores, Inc., 421 F. Supp. 2d 485 (D. Conn. 2006).

Implementing and Using an Employee IP Training Program

Following this analogy and modifying it for trade secret purposes, we believe that if a company were to implement a workforce IP training program, and if it were later sued for trade secret misappropriation for the acts of a non-executive-level employee, the company might use the program as evidence in litigation to defeat a claim of vicarious liability ' and very likely to defeat a demand for exemplary damages. This might be raised as an affirmative defense ' and litigants should do so in answering a complaint for trade secret misappropriation ' but might also be offered to simply defeat a plaintiff's argument that the defendant acted intentionally to begin with. In litigation, the defendant could disclose its policies, its dissemination of the policies among the workforce, and point to the sexual harassment case law to guide a court when a plaintiff seeks vicarious liability and treble damages against the employer.

The cost and burden of implementing such a program is minimal compared with the high cost of trade secret litigation. Moreover, while the question of vicarious liability for trade secret misappropriation is not yet clear in most UTSA jurisdictions, companies implementing a workforce IP training program can best mitigate the risk that their jurisdiction will rule in favor of respondeat superior. Even then, a training program would very likely be effective against an exemplary damages claim, and might provide an affirmative defense to vicarious liability.

Of course, a meaningful IP training program must be implemented. A good program would explain to employees, such as salespeople and engineers, what types of information they can lawfully use, and what information they should avoid. Boilerplate language in employment agreements and brief statements in employee handbooks typically lack the specificity needed to guide employees who may not realize what types of acts and information are encompassed by the trade secret laws. A detailed guidebook made available to all employees or a live presentation during a workforce or departmental meeting would more likely satisfy a court that might be skeptical that the employer truly provided meaningful IP training.

Conclusion

It is surprising that so few companies ' especially technology companies ' have implemented IP training programs for their employees. Trade secret lawsuits against employers for the acts of employees are commonplace and expensive, yet in many cases, lower-level employees ' without the knowledge or consent of their superiors ' committed the alleged wrongful acts. Given current industry custom, the mere absence of such a program should not be grounds for exemplary damages. But companies seeking to be proactive and lower their litigation risks should look to the law of employment discrimination, enact workforce IP training programs, and be prepared to use the programs in litigation as a defense to the still-developing questions of vicarious liability and exemplary damages.

Tait Graves is an associate at Wilson Sonsini Goodrich & Rosati in San Francisco. Jason Williams is a member of the Yale Law School class of 2008.

When a lower-level employee uses a former employer's trade secrets after taking a new job, the plaintiff often sues the new employer itself and demands exemplary damages under the Uniform Trade Secrets Act ('UTSA') ' even if the new employer was unaware of, and disapproves of, the employee's conduct. Taking a page from the law of employment discrimination, we believe that companies that provide intellectual property training for their workforce can use the fact of such training during litigation to avoid exemplary damages for the solitary wrongdoing of non-executive-level employees ' and perhaps avoid vicarious liability altogether. Companies, especially technology startups, can reduce trade secret litigation and liability risks by implementing such programs ' programs which today are very rare, even in Silicon Valley.

Trade secret lawsuits sometimes target founders and other high-level executives, and in those cases issues of vicarious liability and responsibility for treble damages are less controversial. But other lawsuits arise because a salesperson uses secret customer information from a former employer to make a sale, or a junior engineer uses secret code from a prior job as part of a software project. Management is often totally unaware of such acts and requires each new hire to sign an employment agreement containing a covenant not to use a former employer's trade secrets.

When the plaintiff nonetheless sues the employer (sometimes without even suing the employee individually) and demands treble damages under the UTSA, the question arises whether an employer is liable in the first place for the solitary acts of the rank and file, much less for exemplary damages based on 'willful and malicious' conduct. As we will conclude below, the law is not clear, but implementing an IP training program could very likely work to bar exemplary damages and perhaps limit vicarious liability as well.

Vicarious Liability Under the UTSA

Trade secret misappropriation is an intentional tort. The 40-plus jurisdictions that have enacted the UTSA codified that intent requirement with language providing for liability when the defendant 'knows or had reason to know' that it was engaging in trade secret misappropriation. But the UTSA does not expressly provide for vicarious liability, and state courts have recently split on whether an employer is vicariously liable for an employee's misappropriation.

Indiana has ruled that the UTSA does not contemplate vicarious liability, based on its text. See Infinity Prods., Inc. v. Quandt , 810 N.E.2d 1028 (Ind. 2004). By contrast, federal courts applying Virginia law have held that respondeat superior does indeed apply under the UTSA. See Microstrategy, Inc. v. Business Objects, S.A. , 331 F. Supp. 2d 396, 418 (E.D. Va. 2004); Newport News Indus. v. Dynamic Testing, Inc. , 130 F. Supp. 2d 745 (E.D. Va. 2001).

Elsewhere, Minnesota courts have also addressed the question of vicarious liability for trade secret misappropriation, although there is no citable opinion on the issue. An appellate court ruled that vicarious liability is available under the UTSA. See Hagen v. Burmeister & Assoc., Inc., 1999 WL 31130 (Minn. Ct. App. 1999) (unciteable). The Minnesota Supreme Court accepted without ruling on the issue that vicarious liability is available, but then decided the case on other grounds. See Hagen v. Burnmeister & Assoc., Inc ., 633 N.W.2d 497, 505 (Minn. 2001). In turn, a non-UTSA jurisdiction, New York, also recently applied the doctrine of respondeat superior in a trade secret case. See Rosenberg, Minc & Armstrong, L.P. v. Mallilo & Grossman, L.P. , 2005 NY Slip Op. 25146 (2005).

Exemplary Damages Under the UTSA

In turn, defendants can be liable for treble damages where trade secret misappropriation is 'willful and malicious.' Whether exemplary damages could be awarded against a company for the acts of lower-level employees turns in part on whether a given jurisdiction accepts respondeat superior in trade secret cases. But even if respondeat superior does apply, the next question in litigation would be whether the employer could be held vicariously liable for treble damages if the employee's actions, but not those of company management, were 'willful and malicious.' There appears to be little or no case law under the UTSA providing an in-depth analysis of this question.

Given this uncertainty, proactive companies may wonder what can be done to minimize the risk of exemplary damages for trade secret misappropriation unknown to the company's officers and directors. We believe that sexual harassment case law offers a useful analogy.

The Employment Discrimination Analogy

The laws of employment discrimination and trade secrecy differ in many respects, most obviously in that acts of harassment are not within the scope of employment, but a trade secret misappropriation might be. But both share the problem of actions by employees, unknown to management, which can subject the employer to liability. More important, developments in sexual harassment jurisprudence provide a useful analogy for how employers might limit their liability in trade secret cases.

In sexual harassment cases, plaintiffs can sue the employer for the actions of a supervisor ' actions that management may strongly disapprove of. As a result, courts have developed rules that limit liability for employers who implement meaningful workforce harassment and discrimination training policies.

Specifically, courts have ruled that in federal sexual harassment cases, employers who adopt an anti-harassment policy and make efforts to disseminate that policy among the workforce can raise an affirmative defense to vicarious liability for a harassment claim against a supervisor. See generally Kohler v. Inter-Tel Techs ., 244 F.3d 1167 (9th Cir. 2001); Crocco v. Advance Stores, Inc ., 421 F. Supp. 2d 485 (D. Conn. 2006).

Implementing and Using an Employee IP Training Program

Following this analogy and modifying it for trade secret purposes, we believe that if a company were to implement a workforce IP training program, and if it were later sued for trade secret misappropriation for the acts of a non-executive-level employee, the company might use the program as evidence in litigation to defeat a claim of vicarious liability ' and very likely to defeat a demand for exemplary damages. This might be raised as an affirmative defense ' and litigants should do so in answering a complaint for trade secret misappropriation ' but might also be offered to simply defeat a plaintiff's argument that the defendant acted intentionally to begin with. In litigation, the defendant could disclose its policies, its dissemination of the policies among the workforce, and point to the sexual harassment case law to guide a court when a plaintiff seeks vicarious liability and treble damages against the employer.

The cost and burden of implementing such a program is minimal compared with the high cost of trade secret litigation. Moreover, while the question of vicarious liability for trade secret misappropriation is not yet clear in most UTSA jurisdictions, companies implementing a workforce IP training program can best mitigate the risk that their jurisdiction will rule in favor of respondeat superior. Even then, a training program would very likely be effective against an exemplary damages claim, and might provide an affirmative defense to vicarious liability.

Of course, a meaningful IP training program must be implemented. A good program would explain to employees, such as salespeople and engineers, what types of information they can lawfully use, and what information they should avoid. Boilerplate language in employment agreements and brief statements in employee handbooks typically lack the specificity needed to guide employees who may not realize what types of acts and information are encompassed by the trade secret laws. A detailed guidebook made available to all employees or a live presentation during a workforce or departmental meeting would more likely satisfy a court that might be skeptical that the employer truly provided meaningful IP training.

Conclusion

It is surprising that so few companies ' especially technology companies ' have implemented IP training programs for their employees. Trade secret lawsuits against employers for the acts of employees are commonplace and expensive, yet in many cases, lower-level employees ' without the knowledge or consent of their superiors ' committed the alleged wrongful acts. Given current industry custom, the mere absence of such a program should not be grounds for exemplary damages. But companies seeking to be proactive and lower their litigation risks should look to the law of employment discrimination, enact workforce IP training programs, and be prepared to use the programs in litigation as a defense to the still-developing questions of vicarious liability and exemplary damages.

Tait Graves is an associate at Wilson Sonsini Goodrich & Rosati in San Francisco. Jason Williams is a member of the Yale Law School class of 2008.