A case recently decided by the Massachusetts Superior Court held that a company has no recourse against an independent contractor who made off with the company’s trade secrets, as the company did not have the contractor sign a confidentiality agreement. The case is C.R.T.R., Inc. vs. Jimmy Lao, et. al. and can be found here. The contractor at issue was a nephew of an individual who had entered into a Memorandum of Understanding to purchase the company. So the company was in the midst of a business succession transaction; yet still it did not take measures to protect itself from a person who was affiliated with the potential acquiror.
The lessens to be learned from the court’s holding:
In order for a company to protect its trade secrets (i.e., confidential information), it must take active measures of protection. This includes obtaining confidentiality and non-use agreements from all persons who come into contact, or who may come into contact, with the company’s trade secrets. This includes employees, contractors, joint venture partners, prospective partners, etc. Again, employees AND independent contractors! (among others)
One of the reasons you want to be thorough about protecting your trade secrets, is that the issue will come up in a due diligence investigation by any potential acquiror. You want your business to be optimized for that purchase and sale transaction, whenever it comes up. If you don’t have signed confidentiality agreements with all pertinent parties, you have a hole in your protection. Is it a gaping hole? Who knows? But your acquiror is entitled to imagine the worst. Certainly, a failure with a relative of a potential acquiror – someone who wants to be in your business – has the most potential to be a gaping hole. This failure to optimize is the kind of thing that can only work against you in your proposed business succession plan.
I have a straightforward form of “Proprietary Rights Agreement” that covers confidentiality and non-use, ownership of developments, non-solicitation and anti-piracy, and non-competition. An agreement like this needs to be standard operating procedure – standard documentation – when entering into business relations with anyone who will have or may have access to your trade secrets.