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What Trade Secrets Mean for Your Career in IT

Businesses are trying to protect themselves with their intellectual property. States are trying to ensure economic growth and support start-up enterprises. Engineers, developers, and designers are caught in the crossfire with their careers and economic security at risk.

In 2006, China decided to build seven giant wind farms to combat its impending energy crisis. These farms would produce as much energy as 10 nuclear power plants. Sinovel Wind Group, a Chinese company, won almost half of the contracts issued for the creation and maintenance of the wind turbines.

There was just one problem. Sinovel lacked the expertise to develop the software for the turbines. So, they struck a deal with American Superconductor (AMSC): Sinovel would manufacture the turbines, and AMSC would rig the turbines with the software and electronic control systems.

In March 2011, Sinovel abruptly began turning away shipments of AMSC electrical components. With no explanation, the company also stopped placing new orders with AMSC despite a $700,000 contract for future orders. Then in June 2011, AMSC engineers investigating a Chinese turbine that had malfunctioned made a surprising discovery: The turbine had electronic components running non-AMSC software. The software, however, used AMSC proprietary source code.

In fact, Sinovel had recently recruited Dejan Karabasevic, a senior AMSC software developer based in Austria, tempting him with a $1.7 million contract. Karabasevic arrived in Beijing not only with his high level expertise in the turbine software, but with large batches of AMSC’s proprietary source code. He patched them together and handed them over to his new employer. With the code in hand, Sinovel could cut AMSC out of the lucrative Chinese market, and it could compete with AMSC for foreign contracts.

Karabasevic’s actions were clearly illegal, and he received a 12-month jail sentence when he reemerged in Austria. However, had he not stolen the code, would he have been wrong to jump ship, carrying his intimate knowledge of turbine software to Sinovel? Would he have been liable for misappropriation of trade secrets?

And for that matter, how liable are you when you move to a new company? Shouldn’t you be able to leverage your hard-earned work experience and expertise to move up the ladder? What rights do IT companies have to restrict your career in order to protect their trade secrets?

If you jump into the Tardis and travel back to 1970, the answer is a simple: “Not much.” You can safely step out into a serene landscape with a few large buildings in view: IBM, Ma Bell, and Eastman Kodak. But rematerialize in the present day, and duck! You’re in the midst of a raging battle between large corporations, federal and state governments, and start-ups, and some of the weapons are aimed at you.

To answer the question today, we need to take a look how the trade secret war started, why developers and other tech staff are caught in the crossfire, and how exactly these weapons work.

How the War Started

Intellectual property is protected by patent, copyright, and trade secret law: patents for inventions, copyrights for original work, and trade secrets for – well, all sorts of things. As defined by U.S. law, trade secrets are protected information that produces economic value when it is not publically known. Manufacturing processes, soft drink formulas, instruments, and proprietary software can all qualify as trade secrets.

These are much broader in definition than either copyrights or patents. Trade secrets also enjoy wider protections. For example:

  • Patents and copyrights have a shelf-life. U.S patents generally have a 20 year term limit; copyrights run from the life of the author plus 70 years, with variations here and there. Trade secrets are protected indefinitely.
  • Patent holders must make their invention public knowledge. Once that knowledge is shared, courts can declare a patent invalid and thus remove the patent holder’s monopoly over the invention’s use.
  • Trade secrets are protected both by tort law and by federal criminal law, presenting greater risk to offenders.

The result is that more technology is protected by trade secret law than by patents or copyrights.

The U.S. Constitution guarantees patent and copyright protection, but trade secrets are more amorphous in their definition and treatment under U.S. law. State-level common law emerged to handle trade secrets. Inthe landmark cases of Erie v. Tompkins (1938) and Kewanee Oil v. Bicron (1974), the Supreme Court ruled in favor of state, as opposed to federal, jurisdiction over this civil issue.

In 1979, in response to mounting pressure from established businesses, the Uniform Law Commission published the Uniform Trade Secrets Acts (UTSA) to encourage states to adopt uniform policies. States began to enact their own version of UTSA.

Meanwhile, in 1996, Congress passed the Economic Espionage Act (EEA) turning the misappropriation of trade secrets into a federal crime.

By doing so, state and federal governments enabled well-established businesses to safeguard their R&D investment. Yet, in the midst of the burgeoning telecommunications and IT revolution, start-ups can drive economic growth. As a result, when well-established businesses pushed too far, both state and federal governments pushed back.

Why You Are Stuck in the Crossfire

To date, 48 states have adopted their own versions of UTSA. While these laws vary from state-to-state, they all provide remedies for the misappropriation of trade secrets, such as injunction relief and damages. In doing so, these laws define what constitutes “misappropriation” and what can be considered a “trade secret.”

And this is where you come in.

To gain legal recognition that a trade secret is in fact a trade secret, a company needs to prove in court not only that it benefits economically from keeping its secret secret, but that it has itself taken steps to keep the secret secret. One of the main ways companies do this is by instituting policies to prevent its employees from divulging the secret. Such employee policies include HR training, non-disclosure agreements, and non-compete clauses.

Now, some of these policies are entirely innocuous and even beneficial. Most employees want both to advance their careers and to make a meaningful contribution to their organization or company. So, providing training on what is and is not confidential information and how that information can be safeguarded is key – for both the welfare of the company and the employee.

Non-disclosure agreements are also a vital, ethical means of protecting trade secrets. Yes, they can be too restrictive. Apple prohibited iPhone developers from talking about their work with anyone outside their project team, even after the iPhone software was released. The company, however, eased up on the terms of the agreements after the developers complained. And arguably the benefits from ensuring fair economic competition outweigh the costs of a few overly restrictive policies.

It’s only the last of these common employee policies, the non-compete clause, and its closeted fraternal twin, the anti-poaching pact, that can stifle the economy and inflict heavy casualties among IT and other professionals.

The Weapons: Non-compete Clauses and Anti-Poaching Pacts

Non-compete clauses (NCC) are provisions in an employment contract that prohibit employees from creating or joining a company that competes with their current employer. Usually the clause is set to expire within one year of the date the employee terminates or is terminated from their company. The provision prevents employees from exploiting confidential information, such as customer lists.

Unfortunately, NCCs can come at a high cost. MIT recently released a study showing that the NCCs force approximately one-third of engineers (IT professionals included) to leave their industry. It makes sense; who can afford to wait a year between jobs? However, as a consequence, not only do skilled professionals like you fail to move up the ladder, but the economy loses the expertise you acquired on the job and does not get to reinvest it.

Furthermore, start-ups desperate to recruit skilled employees have to wait six months, a year, two years for an NCC to expire – time they can’t afford.

That’s why some states have entered the battle field. New Hampshire recently voided NCCs. Minnesota, New Jersey, and Massachusetts legislatures are considering doing the same. California never allowed them in the first place.

These moves, however, have not stopped companies from engaging in anti-poaching pacts: agreements between competing companies not to recruit each other’s employees. On the surface, these pacts might seem like a reasonable way for companies to protect trade secrets. In practice, however, it limits salary options and restricts job mobility.

In 2010, the federal government stepped into the fray when the Department of Justice provided evidence of an anti-poaching pact among Apple, Google, Intel, Lucasfilm, Intuit, and Pixar. In October, 2013, a federal district court granted class action certification to the lawsuit, allowing 64,000 employees to file suit against the companies.

The battle has heated up in the past few years. The number of NCC lawsuits is rising steeply. Engineering departments are now advising new graduates on how to negotiate contracts containing NCCs.

Stephen Hawking now says time travel is only unidirectional – into the future. So, you can’t go back to 1970. But even if you could, would you want to? Wouldn’t you rather keep your eyes open, figure out how to disarm a weapon pointing at you, and find out what happens next?

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Comments

  1. I have been quite lucky. Whilst I have had a number of roles that came with a non-compete contract, I have always ended up switching industries whenever I have switched roles: I have worked for a scientific instruments manufacturer, a biometrics startup, an established computer security firm, in defence, finance, advertising and the automotive industry. Each industry has a different culture, and different problems to solve, but skills transfer across surprisingly well.

  2. Here in Quebec the laws are different. Non-competes must be limited to a geographic area and must be limited to a certain time. In other words, any non-compete that has the world as its boundaries and is unlimited in time is invalid.

    The Geographic area, if I’m no mistaken, must not be bigger than 200 square KMs in size and the time cannot be more than 2 years. Most people don’t know that and most of the signed non-competes in Quebec have zero effect.

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