Can an Employee Take Clients When Leaving a Company?

The Uniform Trade Secrets Act (UTSA) governs whether an employee can take clients when leaving a company. This statute affects employees and employers in 48 states.

The effective date of the UTSA varies by state, with a typical threshold of $500,000 in damages for a trade secret misappropriation claim under Section 2 of the UTSA.

Trade Secret Protection

The UTSA, codified in many states as Section 757 of the Civil Code, protects trade secrets from misappropriation, with a 3-year statute of limitations. In plain terms, this means employees are restricted from disclosing or using trade secrets for their own benefit within this timeframe. The UTSA defines a trade secret as information with economic value that is not generally known and is subject to reasonable measures to maintain its secrecy, such as a $10,000 security bond.

This is where the law gets teeth, as the UTSA provides for injunctive relief and damages of up to $1 million for willful and malicious misappropriation of trade secrets, under Section 3 of the UTSA. The court may also award attorney’s fees of up to $50,000 to the prevailing party.

In practice, this means employers must take reasonable measures to protect their trade secrets, such as non-disclosure agreements with a 2-year term, to maintain their protection under the UTSA, which is based on the Restatement (First) of Torts Section 757.

When the Answer is YES

Under certain conditions, an employee may take clients when leaving a company, such as when the client relationship is not a trade secret, as defined in Section 1 of the UTSA. For example, if the employee has a pre-existing relationship with the client that is not based on confidential information, the employee may be able to continue working with the client after leaving the company, as long as the employee does not disclose any trade secrets within a 6-month period.

The UTSA allows for the use of trade secrets in certain limited circumstances, such as in a lawsuit, with a 30-day notice period. In such cases, the employee may be able to disclose trade secrets to their attorney or in court, but only to the extent necessary to prosecute or defend the lawsuit, and with a $5,000 bond to ensure confidentiality.

When the Answer is NO

The UTSA prohibits the misappropriation of trade secrets, with penalties of up to $1 million in damages and injunctive relief, under Section 4 of the UTSA. If an employee takes clients when leaving a company and discloses or uses trade secrets in the process, the employer may be able to sue for misappropriation of trade secrets, with a 1-year statute of limitations.

The court may also award punitive damages of up to $2 million if the misappropriation is found to be willful and malicious, under Section 5 of the UTSA. In addition, the employee may be subject to criminal penalties, including fines of up to $250,000 and imprisonment for up to 10 years, under the federal Economic Espionage Act of 1996.

The Process

To protect trade secrets, employers should take reasonable measures, such as requiring employees to sign non-disclosure agreements with a $20,000 penalty for breach, and implementing confidentiality policies with a 3-year retention period. Employers should also conduct regular audits to ensure compliance with trade secret protection policies, at a cost of up to $10,000 per year.

In the event of a trade secret misappropriation claim, the employer should file a lawsuit within the 3-year statute of limitations, with filing fees of up to $500, and seek injunctive relief and damages, with a potential award of up to $5 million.

The employer should also notify the relevant authorities, such as the FBI, if the misappropriation involves the theft of trade secrets, with a $1,000 reward for information leading to a conviction.

State-by-State Variation

While the UTSA provides a uniform framework for trade secret protection, there are significant state variations, such as in California, where the statute of limitations is 4 years, with a $750,000 threshold for damages. In New York, the UTSA is codified as Section 757 of the Civil Code, with a 6-year statute of limitations, and a $1 million threshold for damages.

In Texas, the UTSA is codified as Section 134A of the Civil Practice and Remedies Code, with a 3-year statute of limitations, and a $500,000 threshold for damages. In Illinois, the UTSA is codified as Section 1060 of the Code of Civil Procedure, with a 5-year statute of limitations, and a $250,000 threshold for damages.

Special Situations or Exceptions

Whistleblower Protections

The UTSA provides an exception for whistleblowers, who are protected from liability for disclosing trade secrets in certain circumstances, such as to report a violation of law, with a $10,000 reward for information leading to a conviction. The whistleblower must disclose the trade secret to a government agency or lawyer, with a 30-day notice period, and the disclosure must be made in good faith, with a $20,000 penalty for bad faith disclosures.

Reverse Engineering

The UTSA also provides an exception for reverse engineering, which is allowed if it is done independently and without the use of trade secrets, with a 6-month period for independent development. The UTSA defines reverse engineering as the process of analyzing a product or system to understand its underlying structure and design, with a $50,000 cost for such analysis.

Enforcement and Consequences

The enforcement of trade secret protection laws has increased in recent years, with a growing number of lawsuits and criminal prosecutions, at a cost of up to $100,000 per case. The consequences of trade secret misappropriation can be severe, including significant financial penalties and reputational damage, with a potential loss of up to $10 million in revenue.

In plain terms, this means that employers must take trade secret protection seriously and take reasonable measures to protect their trade secrets, such as implementing a trade secret protection policy with a 2-year review period, and conducting regular audits to ensure compliance, at a cost of up to $20,000 per year.