Former employees who make off with your trade secrets can spell disaster for your business. Once confidential information is in a competitor’s hands, the damage is done and may be impossible to reverse. Now a case involving Fremont-based Avant! Corp.—which had to pay huge fines and whose top executives are off to jail—provides a dramatic example of the high cost of trade-secret theft. We’ll tell you what happened and offer practical steps to keep your trade secrets from being stolen.
Computer Engineers Form New Company
Four computer engineers left San Jose-based Cadence Design Systems Inc., a software maker for the semi-conductor industry, to start a competing company, Avant! Corp. But several years later Cadence cried foul, charging that Avant! founders and other former Cadence employees who joined Avant! stole more than 45,000 lines of Cadence software codes—and used them to create a competing product that ousted Cadence from its leadership position in its market niche.
Criminal Charges Filed
The FBI launched a criminal investigation into the piracy charges, raiding Avant! headquarters and seizing files, computers and hard drives. And Cadence filed a civil suit demanding millions of dollars in damages for the misappropriated trade secrets and seeking an injunction to prevent the sale of Avant! products containing pirated code.
Avant! founders denied any wrongdoing. Founder Stephen Wuu said he thought the source code was in the public domain. But backup tapes from his computer reportedly showed he personally removed copyright statements from the Cadence code and replaced them with Avant! copyright notices.
Huge Fines And Restitution Ordered
After years of legal wrangling, a Silicon Valley judge has ordered Avant! to pay $27 million in fines and $195 million in restitution to Cadence. Plus, six Avant! executives and employees received jail terms ranging up to six years. Avant! CEO Gerald Hsu was fined $2.7 million. While Avant! considers an appeal, it still faces Cadence’s civil suit for damages in which Avant! could have to pay hundreds of millions more, less the restitution damages it paid in the criminal case. Plus, the company reportedly settled two shareholder suits for $47.5 million. Another pending lawsuit attacks the company’s board of directors for breach of fiduciary duty in not suing Hsu and others who have cost Avant! more than a quarter-billion dollars.
Minimizing Risks From Departing Workers
Here are five practical strategies that can help you prevent theft of your trade secrets:
- Use confidentiality agreements. Require employees to sign an agreement not to disclose your trade secrets or other confidential information. You can include an anti-raiding provision in your confidentiality agreements to block former employees for a limited time from trying to lure your workers into joining them at a competitor’s business.
- Keep information confidential. Protect your sensitive information by marking documents as “confidential” and limiting access on a need-to-know basis.
- Consider assignment of inventions. You can require new hires to sign an agreement giving you the rights to inventions they develop during their employment.
- Conduct exit interviews. When meeting with departing employees, ask them to sign a statement that they haven’t taken confidential documents or computer files or disclosed your trade secrets. Remind them of their duty not to reveal confidential information to a new employer.
- Put new employers on notice. If a former employee who had access to your trade secrets goes to work for a competitor in a similar job, notify the new employer in writing that the employee signed a confidentiality agreement and that you will take legal action, if necessary, to protect your trade secrets. Suggest, as a precaution, that the new employee be assigned to work on projects unrelated to their former job.
Avoid Being A Lawsuit Target
Finally, note that new hires who bring trade secrets with them could make you the target of a competitor’s lawsuit. Ask applicants whether they’ve signed a nondisclosure contract with a prior employer that could affect you. If you hire the applicant anyway, go on record as warning them not to use confidential information acquired on a previous job.
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