Employers take many steps to try to prevent the loss of trade secrets. You ask employees to sign nondisclosure agreements, implement security systems and train your workforce on how to keep information confidential. Despite your best efforts, a breach sometimes occurs and your trade secrets end up in a competitor’s hands. In a new case, an employer tried a novel approach to recoup damages after losing trade secret information. We’ll tell you how it turned out.
Insurance Claim Denied for Stolen Trade Secrets
After an Avery Dennison Corp. employee sold trade secrets to a competitor, Avery filed a claim under its insurance policy with Allendale Mutual Insurance. Avery pointed to special provisions in the policy for crime-related loss or damage to covered property caused by employee dishonesty. The policy defined covered property to include money, securities and other tangible property with intrinsic value.
Allendale Mutual Insurance denied Avery’s claim, saying that trade secrets weren’t covered property because they weren’t tangible. Avery then took the insurer to court over the claim denial.
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Trade Secrets Not Covered
Now the Ninth Circuit Court of Appeals has thrown out the case. According to the court, tangible property is something that can be touched, smelled or seen. The court rejected Avery’s argument that the trade secrets were embodied in a tangible form on paper. According to the court, Avery wasn’t claiming the value of some sheets of paper but rather the value of its trade secrets.
The court also refused to read the insurance policy according to Avery’s expectations of what should be covered. The court pointed out that “tangible property” isn’t an ambiguous term. What’s more, Allendale produced evidence that no insurer wrote crime policies covering theft or disclosure of trade secrets and that Avery didn’t purchase the policy to protect trade secrets. Further, Avery was informed by its broker that the policy didn’t cover trade secrets.
Recovering for Trade Secret Loss
In light of this ruling, it’s still best for you to try to prevent trade secret loss in the first place. Be sure to require employees to sign nondisclosure agreements so that you can take the employee to court if there’s a disclosure. Clearly mark any documentation or disks containing trade secrets as confidential and for internal use only. Keep sensitive information secure and only available to those employees who need to have it.
If you want more protection than this, you might try to negotiate with your insurance company to include language in your policy specifying that theft or disclosure of trade secrets will be covered.