Another important aspect of intellectual property (“IP”) due diligence is evaluating how the target company has managed its relationships with technologists, and whether misappropriation claims could possibly arise from those relationships. Requesting and reviewing documents that memorialize the terms and conditions under which the target company vets prospective technologists is a crucial step when evaluating the legal risks posed by these relationships. An equally important step is to interview as many of the technologists themselves as possible to identify the work they’ve done for the target company and what, if anything, they brought with them from prior employers. Legal risks can loom large when the target company mismanages these personnel relationships.
In California, the Uniform Trade Secrets Act creates liability for misappropriation of trade secrets. Misappropriation means acquiring another person’s trade secrets through improper means. The prohibited acts range from outright theft, to breach of fiduciary duty by key employees, to breach of confidentiality provisions in contracts, to wrongful disclosure, to using a former employer’s trade secrets in a new business enterprise. The law in California imposes liability on both intentional and innocent acquirers of trade secrets. A person found liable for misappropriating trade secrets is subject to equitable remedies, which include injunctions and restraining orders, and legal remedies, which include damages for monetary losses suffered by the plaintiff and recovery of defendant’s profits. If the plaintiff proves the misappropriation was willful and malicious, it can receive punitive damages and attorneys fees.
It is important to conduct thorough due diligence to avoid these problems. For instance, many technology companies hire new technologists without vetting the information they have brought from their former employers. It is quite common for technologists to bring trade secrets owned by their former employers to their new employers in violation of a non-disclosure agreement entered into with the former employer. If any of the technologists introduce trade secrets of their former employer to the new employer, then everyone who receives the information is contaminated and potentially liable to the owner of the trade secrets. If any of the technologists introduce technology that infringes on a former employer’s intellectual property rights (i.e., patent or copyright), the new employer is contaminated and potentially liable for infringement.
When the target company has hired an entire group of technologists from another company, misappropriation claims and unfair competition claims are ripe to occur. It is important to review the non-disclosure and proprietary information and invention assignment agreements the technologists executed when they joined the target company. This is a basic legal instrument that surprisingly is frequently overlooked in the hiring process.
Review the trade secret protection protocols and policies used by the target company to avoid contamination. For instance, evaluate the physical security procedures (i.e., vaults, etc.) the target company uses to protect documents and tangible things that constitute proprietary company information. Analyze how the target company controls access to its facilities and special areas within its facilities. Evaluate how the target company employs technology (i.e., user names and passwords, finger print, retinal display, etc.) to allow and prohibit access to its proprietary information. Review the non-disclosure and other confidentiality agreements the target company has entered into with employees and third parties. Check to see if the target company has imprinted legends on all documents that contain trade secrets.
Finally, if possible, push hard to interview the technologists, identify the former employers, discuss the nature of their work for those employers, and review any information they may have brought with them to the target company. An ounce of prevention is worth a pound of cure.
Finkel Law Group, with offices in San Francisco and Walnut Creek, has assisted many technology company’s and investors conduct due diligence on the technologists of a target company in an acquisition or strategic investment to determine the risk of misappropriation of infringement. When you need intelligent, insightful, conscientious and cost-effective legal counsel to assist you with an intellectual property transaction or investment you may be contemplating, please contact us at (415) 252-9600, or info@finkellawgroup.com to speak with one of our attorneys about your matter.