Understanding Your Business Liability in Trade Secret Theft Cases
Dec. 31, 2024
Trade secrets are a critical asset for many businesses, offering a competitive edge and contributing to long-term success. However, if those secrets are misappropriated, the financial and reputational damage can be severe. McCarter | East PLLC is here to provide clients in Murfreesboro, Tennessee, with business law counsel they can rely on.
As a business owner, understanding your liability in trade secret theft cases is crucial to protect your intellectual property and mitigate potential risks. In Tennessee, business law provides avenues for businesses to safeguard their trade secrets and seek legal recourse if those secrets are stolen or disclosed without authorization.
What Are Trade Secrets and Why Do They Matter?
Before exploring liability, it’s important to understand what qualifies as a trade secret. Under both state and federal law, a trade secret is defined as information that derives independent economic value from not being generally known to the public, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
This can include formulas, processes, business strategies, customer lists, or any other proprietary information that gives a business a competitive advantage. For example, if your business develops a new software application, your code could be considered a trade secret.
Likewise, a recipe or manufacturing process that your company uses to create a product could be a valuable trade secret. Businesses depend on the secrecy of such information to maintain their market position, and losing access to it—whether due to theft or accidental disclosure—can disrupt operations and result in substantial losses.
Tennessee Business Law and Trade Secrets
In Tennessee, the Uniform Trade Secrets Act (UTSA) governs trade secret protection. This statute allows businesses to take legal action against anyone who misappropriates their trade secrets.
The UTSA is designed to protect businesses from wrongful acquisition, disclosure, or use of their trade secrets. Tennessee’s adoption of the UTSA aligns state law with the federal Defend Trade Secrets Act (DTSA) of 2016.
While both laws offer similar protections, there are some key differences in how they apply to trade secret theft, particularly in terms of damages and remedies.
In Tennessee, businesses can pursue claims for actual damages, as well as for punitive damages if the theft is deemed willful and malicious. When it comes to liability in trade secret theft, businesses may be at risk from several different angles.
Defining Business Liability in Trade Secret Theft
Liability can arise from the actions of employees, contractors, or even competitors. The following sections break down these potential sources of liability and what you need to know to minimize your exposure.
Employee Theft or Misuse of Trade Secrets
Employees often have access to sensitive business information, making them a potential source of liability if they misuse or steal trade secrets.
Tennessee business law provides businesses with the right to take legal action if an employee discloses proprietary information without authorization, especially if it results in harm to the company. Employers have a duty to protect their trade secrets through careful hiring practices, clear confidentiality agreements, and ongoing training.
If an employee leaves your business and takes trade secrets with them to a competitor, your company could face significant challenges, particularly if that employee signed a non-disclosure agreement (NDA) or non-compete clause. Steps to limit liability from employee theft are as follows:
Implement confidentiality agreements for all employees with access to proprietary information.
Conduct thorough background checks on new hires, especially for positions that require access to sensitive data.
Use data security measures, such as encryption and access control, to limit access to confidential information.
Educate employees regularly on the importance of safeguarding trade secrets and the consequences of theft.
If trade secrets are stolen by an employee and that employee violates a confidentiality agreement, your business may be entitled to both compensatory and punitive damages under Tennessee’s UTSA.
Theft by Contractors or Third Parties
Another significant source of liability arises from contractors or third-party service providers who have access to your company’s trade secrets. While these individuals or companies may not be direct employees, they may still be privy to sensitive information.
If a contractor misappropriates your trade secrets, your business could face legal repercussions, especially if the third party acts negligently or intentionally to steal proprietary information. To prevent this, businesses often require third parties to sign confidentiality agreements or non-disclosure agreements before sharing sensitive data.
However, even with these agreements, it can be difficult to fully prevent unauthorized disclosure or theft. That’s why it’s crucial to establish a clear contractual relationship and make sure that third parties are aware of the consequences of violating confidentiality. Steps to mitigate liability from contractors and third parties include:
Draft strong confidentiality clauses in contracts with third parties.
Require third-party contractors to acknowledge their responsibility to protect trade secrets.
Regularly audit third-party vendors to verify that they’re complying with confidentiality obligations.
Competitors who obtain your trade secrets—whether through illegal means or by enticing employees to disclose confidential information—can also create liability issues.
Competitor Misappropriation of Trade Secrets
If a competitor wrongfully acquires your trade secrets, your business may be entitled to seek damages for the harm caused.
Under Tennessee law, misappropriation of trade secrets includes both unlawful acquisition and wrongful disclosure or use of that information. It’s also important to recognize that competitive businesses may actively engage in corporate espionage or use unethical tactics to obtain valuable trade secrets.
This could include hiring away key employees who have access to proprietary information, or using social engineering to trick employees into disclosing confidential data. Steps to prevent competitor misappropriation are as follows:
Carefully screen any employees who will have access to sensitive information.
Monitor employees’ departure processes to prevent unauthorized disclosure of trade secrets.
Use non-compete agreements for key employees, when possible, to limit their ability to work for direct competitors.
In Tennessee, businesses that are victims of trade secret theft have a range of legal options to pursue remedies.
Key Legal Remedies for Trade Secret Theft
In Tennessee, businesses that are victims of trade secret theft have a range of legal options to pursue remedies. The UTSA allows for both civil and criminal remedies, and in some cases, businesses may be able to recover substantial damages.
Actual Damages and Profits
The most common remedy for trade secret theft is the recovery of actual damages. These damages represent the financial loss your business has suffered as a result of the theft. This might include lost profits or the cost to reverse the damage caused by the unauthorized disclosure or use of your trade secrets.
Additionally, if the defendant has profited from the misappropriation, you may also be entitled to recover the defendant’s profits that directly resulted from the theft.
Punitive Damages
If the theft is deemed willful and malicious, Tennessee business law allows for the possibility of punitive damages. These are designed to punish the wrongdoer and deter future misconduct. Punitive damages are typically awarded when a defendant’s actions are egregious and demonstrate a disregard for the rights of others.
Injunctive Relief
An injunction is a court order that prevents the defendant from continuing the use or disclosure of trade secrets. This remedy is often sought in the early stages of a case when a business is trying to stop ongoing harm.
Criminal Prosecution
In some instances, trade secret theft can lead to criminal charges under federal or state law. Criminal penalties for trade secret theft may include fines and imprisonment, depending on the severity of the offense. While criminal cases are typically initiated by government authorities, businesses can play an active role by reporting suspected theft to law enforcement.
Avoiding Liability Through Proper Protection and Prevention
While legal remedies are available, the best way to handle trade secret theft is to prevent it from happening in the first place. The more proactive a business is in protecting its proprietary information, the less likely it will be exposed to potential liability. Practical steps to protect your trade secrets include:
Implement and enforce confidentiality agreements with all employees, contractors, and business partners.
Use secure methods to store and share sensitive data, including encryption and access control systems.
Restrict access to trade secrets on a need-to-know basis, limiting exposure to only those who require the information to do their jobs.
Regularly review and update your security measures to address new risks or vulnerabilities.
Trade secret theft presents significant risks for businesses, especially if the theft occurs from employees, contractors, or competitors. In Tennessee, businesses have legal recourse through the Uniform Trade Secrets Act, which offers protections against misappropriation and provides remedies like actual damages, punitive damages, and injunctive relief.
However, business owners must take proactive steps to protect their trade secrets to avoid liability. This includes implementing confidentiality agreements, utilizing strong data security measures, and making sure that employees and contractors understand the importance of safeguarding proprietary information.
By taking these actions, businesses can minimize the likelihood of theft and reduce their exposure to potential legal and financial consequences. The most important step, however, is partnering with a reputable business law attorney for legal counsel.
Request Support From Our Firm Today
When you’re looking to work with an experienced business law attorney, we’re here to help. We’re currently located in Murfreesboro, Tennessee, and our office is conveniently positioned only a few blocks from the courthouse. Reach out to McCarter | East PLLC today for more information