Don’t Let IP Walk Out the Door

In the last year, medtech engineers and executives have been leaving their companies for new opportunities more than ever before. Record job changes in the medical technology industry has increased the risk of intellectual property (IP) theft and trade secret misappropriation by departing employees. In many cases, departing employees are leaving to work for a competing company. The loss of a key employee is difficult enough, but the problem can be compounded if that employee improperly uses his former employer’s confidential information at a competitor.

This column provides examples of how medtech companies are losing IP rights and practical steps to protect company IP assets.

Protecting IP

Instances of IP and trade secrets misappropriation have become commonplace in recent years. Some studies estimate that U.S. companies lose between 1% and 3% of GDP to trade secret theft, accounting for hundreds of billions of dollars per year in losses.¹ The damages caused by trade secret misappropriation to a company can be extreme. For example, in 2022, a jury awarded a technology company more than $2 billion in damages in a trade secret misappropriation case. Legal fees associated with trade secret misappropriation can amount to millions of dollars in large cases.²

One example of trade secret theft in medtech occurred in 2019, in which a California engineer admitted to copying documents from two companies that developed cardiac and vascular treatment products. The documents, which contained technical information and trade secrets, were copied onto the engineer’s personal computer. The engineer planned to use the stolen technology to launch a new medical device company in China, but was arrested as he prepared to board a plane.

In another example, a blood analyzer manufacturer accused an engineer of taking trade secrets to a competitor. The company claimed the engineer developed hardware and software for measuring blood samples for indicia of nonspecific inflammation, but resigned and sent several documents to his personal email account. The engineer then started working for a competitor, took over responsibility for the competitor’s most advanced diagnostic product development projects, and allegedly helped the competitor launch rapid blood sample analyzer technology. Only upon launch of the competing product did the company realize its former employee misappropriated confidential information.

Since trade secrets are not public, misappropriation can be difficult to detect. It can take years for a victim to realize a competitor is misusing its trade secrets or at the very worst, the victim may never realize its IP has been misappropriated.

There are a few practical steps medtech companies can take to limit the risk of trade secret misappropriation and ensure they can prevent further harm through legal action.

What Are Trade Secrets?

Trade secrets and other confidential business information enjoy significant legal protections under state and U.S. federal law. The laws are broad and protect “all forms and types of financial, business, scientific, technical, economic, or engineering information.” To qualify for trade secret protection, the information must derive “independent economic value...from not being generally known...and not being readily ascertainable through proper means.” Also, the secret information’s owner must have taken “reasonable measures to keep [the] information secret.”³

Beyond that, there are few formal requirements for protecting information as a trade secret compared to other IP protections. Data, “know how,” source code, product specifications and drawings, manufacturing optimizations, client lists, and business strategies are all information categories that routinely qualify for trade secret protection, as long as the information is not generally known, and its owner took reasonable measures to ensure secrecy. Unlike patent protection, trade secret owners need not pre-register the secret to qualify for protection, and they don’t need be novel, reduced to practice, or non-obvious to qualify for protection.

Qualifying for Trade Secret Protection

Trade secret law requires “reasonable measures” to protect the data’s secrecy. Thus, medtech companies must ensure their confidential information is protected. A well-managed plan to protect confidential information from misappropriation will reduce the number of potential claims while also helping a company successfully seek a court injunction against violators.
The following are a few trade secret protection methods medtech companies can implement now:

• Require Robust Non-Disclosure Agreements (NDA). Any employee, vendor, or potential business partner who can access confidential information should be subject to a strong NDA. Copies of fully executed NDAs should be maintained in appropriate personnel files and with the legal department’s contract management system. Employee confidentiality expectations should also be outlined in offer letters and employee handbooks. One study of judicial opinions found that courts are 25 times more likely to rule in favor of an employer in a trade secret lawsuit where the employer had an NDA or confidentiality agreement in place with employees.⁴
• Use Noncompete Agreements. Many states permit employers to use noncompete agreements to protect their confidential business information from showing up elsewhere. Such agreements prevent departing employees from working for competing entities, usually for a limited time period and within a specific geographic area. Noncompete agreements can prevent misappropriation because enforcement does not generally require the former employer to prove misappropriation of any specific confidential information. Noncompete agreement requirements vary by state.
• Limit Access to Confidential Information. Courts frequently examine how widely information was disseminated in determining whether it should be protected. The tighter the “circle of trust,” the more likely a court will determine the information qualifies for protection. Modern file sharing systems allow for easy control of permissions for documents or workspaces. Management should ensure that document permissions are limited only to those with a need to review the information. It can be difficult to create a one-size-fits-all policy for access to confidential information in advance, so consider appointing an individual to resolve access issues as they arise.
• Double Down on Training. Confidential information policies are only as good as the employees who implement them. Creating and maintaining a culture of respect for the company’s confidential information can be a powerful tool to prevent misappropriation. Implement regular trainings on the importance of maintaining confidentiality. In the event of misappropriation, frequent trainings are good evidence of “reasonable measures” to protect the information.
• Leverage IT Resources. Technology can help prevent misappropriation. Some vendors offer automated tools that report incidents of unusual or suspicious network activity in real time. For particularly sensitive information, employers should implement individualized watermarking, access logging, and other electronic security features.
• Conduct Exit Interviews with Departing Employees. Well-managed programs for protecting confidential information include routine exit interviews of departing employees. Exit interviews allow companies to review confidentiality obligations with departing workers, ensure employees have returned all company property, and obtain certifications from workers of their compliance. The exit interview process, including documentation that employees were asked to return all company property, is an important step in ensuring information does not leave the company and to support a later claim of misappropriation (if necessary).
• Impose Restrictions on Vendors and Partners. Trade secret owners often must share confidential information with third parties like vendors or business partners. Those partners should be subject to an NDA, and possibly be required to protect the information upon receipt.
• Document Efforts. Victims of misappropriation can obtain court-ordered injunctions against the use of information and damages to remedy economic harm. However, those protections rely on lawsuits against infringers, and lawsuits need evidence to succeed. For example, NDAs and confidentiality agreements should be maintained in an easy-to-find system, employee confidentiality trainings should include written materials, employee access logs should be preserved, and decisions about remote access to confidential information by individual employees should be noted.

These simple prophylactic measures can help medtech companies reduce the risk of IP and trade secret misappropriation by departing employees.

Conclusion

In a competitive and dynamic labor market, medtech companies need to make sure their valuable IP and trade secrets do not leave the company with a departing employee. Protecting key information gives organizations a greater chance of legally enforcing its IP rights. 

References

1. bit.ly/mpoIP01
2. American Intellectual Property Law Association 2021 Report of the Economic Survey.
3. 18 U.S.C. § 1839(3)
4. bit.ly/3Cpdq2i

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Gregory S. Bombard is a Shareholder at international law firm Greenberg Traurig. Bombard represents medtech, biotech, life sciences, and technology companies in disputes over trade secrets, patents, licenses, and other IP issues. He can be reached at gregory.bombard@gtlaw.com.

David J. Dykeman is a registered patent attorney with 25 years of experience in IP law and is co-chair of Greenberg Traurig’s Global Life Sciences & Medical Technology Group. Dykeman’s practice focuses on securing worldwide IP protection and related business strategy for high-tech clients, with particular experience in medical devices, digital health, robotics, wearables, life sciences, and information technology. He can be reached at dykemand@gtlaw.com.