Employee Theft is Rampant

Employee theft has become a rampant problem.  Several our of clients have had employees steal customer lists, designs, website content, and other intellectual property.  Other clients have been embezzled. Thieving employees have become more sophisticated in looking for ways to access confidential information.

Once the theft has happened, it is almost impossible to undo the damage.  I have seen cases of substantial embezzlement of money not investigated by the police.  Intellectual property theft is never prosecuted.  IP theft is also difficult to litigate.  Trade secret theft is difficult to prove since proving something is a trade secret is difficult.  Trademarks and copyrights must be registered before they are infringed to effectively bring suit. Non-disclosure agreements and confidentiality agreements are often not enforceable.

Business owners must be very proactive today.  Some suggestions to business owners regarding their intellectual property:

1.  Assume your workers (employees, consultants, contractors) are going to rip you off.  Sooner or later, one of your workers is going to try to take confidential information or steal from you.

2.  Have all persons who work for you sign carefully drafted, detailed non-disclosure agreements, consulting contracts and employment contracts.  Do not make them over broad but tailor them to your business and IP that you have.

3.  Make an assessment of your IP. What do information, content, formulas, customer lists, etc. do you have? Look at where it is stored and who has access to it. How is it controlled?

4.  Make and implement and IP Protection Plan.  Your plan should include:

     a. Labeling trade secrets as such (e.g. putting a watermark labelled "Trade Secret of XYZ, Inc." on such information).
      b. Revising NDA's and other contracts to specify information that is confidential and not to be disclosed.  And, ensuring that such contracts are enforceable.  If such a contract is too restrictive, a court will find it violates California's anti-noncompete laws.
      c.  IP security.  Make sure that any sensitive information, designs, etc. are kept under lock and key (if tangible).  If in digital form, ensure that it can only be accessed by persons given permission - and they must have a password and username.
      d.  Assign and change usernames and passwords.  Assign usernames and passwords to workers for computer networks and email accounts.  Do not allow them to choose them or the ability to change usernames or passwords.  Change usernames and password frequently.
      e.  Strong computer use policy.  Have a clearly stated computer policy that prohibits the use of computers and email accounts for personal use.  There is no reason, in the age of smart phones, that employees will have any need to use work computers and email accounts for personal use.  There is no reason for a work email account to contain personal contact information. Strictly prohibit workers from giving their usernames and passwords to anyone else, including a fellow worker.

5.  Obtain IP registrations.  If a business has a large amount of content, particularly on a website, it should obtain copyright registrations.  Trademarks should be protected by trademark registrations.  Inventions that can be protected by patents should be unless the cost is prohibitive or not cost effective.

The above steps do not take into account employee theft of tangible property or embezzlement of company money. To prevent theft of tangible property, place controls on the use and possession of such property and follow up.  To prevent embezzlement, regularly review the books of the company and hire outside accountants to audit the financial records.  Do not allow anyone to have unfettered access to financial records or bank accounts.  Be familiar with the vendors of your company and what they charge.

The above steps and others will take time and money to implement.  Consultation with IT professionals, accounts and attorneys is also necessary.  However, it will be well worth it prevent the theft of valuable assets.

Stolen notebooks = $23 million judgment

An employee quit his job and took a couple of binders of documents with him to his new job at a competing company.  This is a very common scenario; employees taking information or unique content with them when they leave a job.  They think that no one will know or care. 

However, the outcome proved disastrous for the employee and his new employer.  More than 10 years later, the employee and his new employer were hit with a judgment of more than $23 million dollars for copyright infringement. 

I tell my clients that copyright law is very strong and can provide powerful remedies for the owners of copyrights.  A recently published Federal case illustrates the strength of the U.S. Copyright Act and why one shouldn't steal documents or use misappropriated documents from another company.

In William A. Graham Co. v. Haughy, a Federal appellate court upheld an award of damages of more than $19 million and more than $4.6 million in pre-judgment interest for copyright infringement.   The infringement in this case was for the theft and use of two binders of documents that had been prepared by the plaintiff in the case - an insurance brokerage.  The binders were used by the plaintiff's agents to sell insurance products. 

An employee left the plaintiff's employment and took with him copies of the documents in the binders.  He gave the documents to his new employer, a competing insurance brokerage.  The new employer gave copies of the documents to its agents and used them for more than a decade before the plaintiff discovered the theft and use. 

The plaintiff sued the competing company and its former employer.  Although there is a statute of limitations for copyright infringement, it does start to run until the copyright owner discovers, or should have discovered, the infringement.  The plaintiff sought profits earned by the defendants that were attributable to the use of the documents in selling insurance products.  This is a form of infringement called indirect infringement.  The plaintiff wasn't seeking damages for the value of the documents themselves but the profits that were attributable to their use.

A jury found that the documents helped the defendants to attain tens of millions of dollars in profits in selling insurance.  The jury found that the portion of those profits attributable to the use of the documents was more than $19 million and added pre-judgment interest of $4.6 million.

The lessons:  register your copyrights for all the documents, art and content that you create, and don't steal or use stolen property!