Did an Ex-Employee Steal Your Clients, Data, IP or Trade Secrets?

What is a Trade Secret?

A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process, that meets two requirements. First, it must derive independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. Second, it must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Minn. Stat. § 325C.01, subd. 5.

Both requirements must be satisfied. Economic value alone is not enough: if you do not take reasonable steps to keep the information secret, it does not qualify as a trade secret. In order to preserve information as a trade secret, reasonable efforts must be made to maintain its secrecy.

Put simply, a trade secret has three elements:

1. information,
2. that derives economic value from not being known by the public, and
3. reasonable measures to keep it a secret.

You do not lose protection simply because you never expressly labeled the information a trade secret. The existence of a trade secret is not negated merely because an employee acquired it without express or specific notice that it is a trade secret, as long as, under all the circumstances, the employee knows or has reason to know that you intend or expect the secrecy of that type of information to be maintained. Minn. Stat. § 325C.01, subd. 5.

What is “Independent Economic Value”?

This may include the value received by the business customers on your list give, the potential loss of business if your customer list were in a competitors hands, research findings (even if the results were meaningless, in a competitors hands it would save them money).

What May Constitute “Reasonable Measures” to Maintaining Secrecy?

• locking doors
• using passwords
• confidentiality “blocks” on documents
• clean desk policies
• employee badge policies
• employment agreements

A Few Common Examples of Potential Trade Secrets:

• a hair salon’s customer list
• a food delivery service’s customer info
• a recipe for a bakeries pastries
• a drink recipe (coca-cola)
• an algorithm to an internet search engine (google)

Types of Confidential Information or Trade Secrets may Take on Many Names, Including:

• customer lists
• customer database
• customer data
• customer account information
• client lists
• client data
• intellectual property (IP)
• trade secrets

What Constitutes “Misappropriation” of a Trade Secret?

Misappropriation of a trade secret reaches two paths. The first is acquisition: acquiring a trade secret of another when you know or have reason to know that it was acquired by improper means. Minn. Stat. § 325C.01, subd. 3(i). The second is wrongful disclosure or use:

1. Acquisition of a trade secret of another by a person who knows or has reason to know the acquisition was improper; or
2. Disclosure or use of a trade secret of another without consent by a person who
   • Improperly acquired the knowledge, or
   • At the time of disclosure or use knew or had reason to know that the discloser’s or user’s knowledge of the trade secret was:
     • Derived from improper means
     • Acquired under a duty to maintain its secrecy
     • Derived from a person who owed a duty to the person seeking relief
   • Before a material change of the discloser’s or user’s position knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake. Minn. Stat. § 325C.01, subd. 3.

“Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. Minn. Stat. § 325C.01, subd. 2.

Put simply, misappropriation occurs when a person either:

1. acquires a trade secret improperly,
2. discloses or uses a trade secret without consent that was gained by improper means, under a duty to maintain its secrecy, or from a person who owed a duty to the person seeking relief, or
3. discloses or uses a trade secret that, before materially changing their position, the person knew or had reason to know was acquired by accident or mistake.

What Remedies Does the Act Provide?

The Act gives concrete teeth to these rights. Actual or threatened misappropriation may be enjoined, so you can ask a court to stop the misuse before or as it happens. Minn. Stat. § 325C.02. You may also recover damages for both your actual loss and the unjust enrichment that is not captured by your actual loss, and for willful and malicious misappropriation a court may award exemplary damages up to twice the compensatory award. Minn. Stat. § 325C.03.

Is There a Difference between Taking, Soliciting, Stealing, or Poaching?

The labels matter less than the conduct. Taking, stealing, soliciting, and poaching a trade secret may describe slightly different actions, but they are unlawful in the same circumstances: when the conduct involves improper means or a breach of a duty to keep the information secret. When the allegation is simply a violation of the Duty of Loyalty the lines blur slightly depending on the facts. Courts have recognized that some solicitation before the end of employment can cross the line, but there is no precise line between prohibited “solicitation” and permissible “preparation,” so the wrong is a matter of degree judged on all the circumstances. Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304-05 (Minn. Ct. App. 1987). If you are an employee it is best to err on the side of caution because the amount of solicitation is a major factor and a ruling against you may be severe.

What is Wrongfully Appropriating or Misappropriating?

Wrongfully appropriating, more commonly stated as “misappropriation,” typically occurs when a person uses or discloses confidential information or a trade secret. Generally, this results in harm to the company from which it was taken. Perhaps the most common misappropriation occurs when a former employee takes a customer list and uses the list to bring customers elsewhere.

Can the Employee’s New Employer be Liable to the Old Employer for the Employee’s Misappropriation?

Possibly, but not on the basis you might expect, and the leading Minnesota case shows how hard this is to prove. A new employer’s liability here does not turn on whether the new employer knew about the misappropriation. This is vicarious liability under respondeat superior, which the Minnesota Supreme Court has said is “not based on fault of the employer.” A new employer is vicariously liable only if the employee acted within the scope of employment, which requires that (1) the misappropriation was related to the employee’s duties, and (2) it occurred within work-related limits of time and place. The first element turns on foreseeability, which does not require that the employer actually foresee the particular act and is commonly shown by proof that the type of misconduct is a well-known hazard of the industry.

In Hagen v. Burmeister & Associates, Inc., the court assumed without deciding that an employer can be vicariously liable for an employee’s Uniform Trade Secrets Act violation, and then held the new employer was not vicariously liable because the plaintiff introduced no evidence that misappropriation of trade secrets is a well-known hazard of the insurance industry. 633 N.W.2d 497, 504-05 (Minn. 2001). The knew-or-had-reason-to-know standard you may have heard of governs direct liability under the Act’s definition of misappropriation, not this vicarious liability.

Duty of Loyalty

The Duty of Loyalty prohibits an employee from competing against an employer, or soliciting the employer’s customers, while still employed. An employee does have the right to prepare to enter into competition. Sanitary Farm Dairies, Inc. v. Wolf, 261 Minn. 166, 112 N.W.2d 42 (1961).

There is a real line here between preparing and competing. While still employed, an employee may take steps to insure continuity in his livelihood in anticipation of resigning, and may even purchase a rival business, but he cannot feather his own nest at the employer’s expense while still on the payroll by soliciting the employer’s customers for a competing venture. Sanitary Farm Dairies, Inc. v. Wolf, 261 Minn. 166, 112 N.W.2d 42 (1961).

Because the competing interests pull in both directions, there is no precise line between prohibited “solicitation” and permissible “preparation,” and the actionable wrong is a matter of degree to be determined on all the circumstances of the case. Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304-05 (Minn. Ct. App. 1987). Two practical points follow. Even passively participating when the customer initiates the contact can breach the duty, so an employee is not safe merely because the customer reached out first. And the duty reaches prospective business from an existing customer even where the employer holds no signed contract for that specific work yet.

Is it Illegal to Quit and Approach a Former Employer’s Customers?

The answer depends on several factors, and Minnesota’s 2023 change to noncompete law makes the analysis more precise than a simple “do you have a noncompete” question.

Whether a departing employee is free to solicit former customers depends on more than the absence of a noncompete. A still-valid nonsolicitation agreement can bar it, and a customer list that qualifies as a trade secret cannot be taken or used by improper means. Nonsolicitation and confidentiality agreements are excluded from the statutory definition of a covenant not to compete, so the 2023 ban on noncompetes does not void them. Minn. Stat. § 181.988, subd. 1(a). Lawful post-departure solicitation also requires the absence of trade-secret misappropriation, because a trade secret cannot be acquired or used by improper means. Minn. Stat. § 325C.01, subd. 3.

A customer list is not automatically off-limits: it is protected only if it qualifies as a trade secret, meaning it derives independent economic value from not being generally known and is the subject of reasonable efforts to keep it secret; a readily ascertainable or loosely guarded list is not a trade secret. Minn. Stat. § 325C.01, subd. 5. Only its acquisition or use by improper means or in breach of a duty of secrecy is actionable. Minn. Stat. § 325C.01, subd. 3.

An employee must also make sure not to violate the duty of loyalty. That duty prohibits an employee from soliciting the employer’s customers or otherwise competing while still employed, and it generally ends the moment the employment ends. Rehabilitation Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. Ct. App. 1987). Once employment ends, and absent a separate constraint such as an enforceable nonsolicitation covenant or an obligation not to misappropriate the employer’s trade secrets, a former employee is generally free to approach and solicit the former employer’s customers.

How Employers Can Strengthen Their Rights: Confidentiality and Non-Solicitation Agreements

Minnesota law no longer treats employee noncompete agreements as a generally enforceable tool. An employer that wants to protect its interests should rely on the instruments the noncompete ban leaves in place: nondisclosure and confidentiality agreements, trade-secret protections, and nonsolicitation agreements.

What is a Noncompete Agreement?

In Minnesota, a “covenant not to compete” is an agreement between an employee and an employer that restricts the employee, after termination of the employment, from performing work for another employer for a specified period of time, in a specified geographical area, or in a capacity that is similar to the employee’s work for the contracting employer. Minn. Stat. § 181.988, subd. 1(a).

Minnesota Now Voids Employee Noncompete Agreements

Minnesota has changed the law on noncompete agreements. A covenant not to compete contained in a contract or agreement is void and unenforceable, no matter how reasonable it is or whether it is supported by consideration. Minn. Stat. § 181.988, subd. 2(a). The ban is effective July 1, 2023, and applies to contracts and agreements entered into on or after that date; it does not reach agreements entered into before then, which remain governed by the law in effect when they were made. 2023 Minn. Laws ch. 53, art. 6, § 1.

The ban is broad but has two narrow exceptions. A covenant not to compete is still valid and enforceable if it is agreed upon during the sale of a business, or in anticipation of the dissolution of a business. Minn. Stat. § 181.988, subd. 2(b). The stakes of ignoring the ban are real: in addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing rights under this section reasonable attorney fees, so trying to enforce a void noncompete can leave you paying the employee’s lawyer. Minn. Stat. § 181.988, subd. 2(d). You also cannot escape the ban for a Minnesota-based employee through an out-of-state choice-of-law or forum-selection clause. Minn. Stat. § 181.988, subd. 3.

What is an Example of a Noncompete Agreement?

The clause below illustrates what a covenant not to compete looks like. Because employee noncompetes entered into on or after July 1, 2023 are now void and unenforceable, a clause like this no longer protects a Minnesota employer against a departing employee (the sale-of-business and dissolution exceptions aside), and it is shown here for reference only.

Covenant Not To Compete. (a) [employee name] agrees not to compete with [company name] in the practice of [type of business or service] while working for [company name] and for a period of [number and measure of time (e.g., “six months” or “10 years”)] after termination of employment within a radius of [number] miles of [company name and location].
(b) For purposes of this covenant not to compete, competition is defined as soliciting or accepting employment by, or rendering professional services to, any person or organization that is or was a client of [company name] during the term of [employee name]’s work with [company name].

What Can You Still Use After the Noncompete Ban?

Even though employee noncompetes are now void, the statute expressly excludes several protective tools from the ban. A covenant not to compete does not include a nondisclosure agreement, or an agreement designed to protect trade secrets or confidential information. It also does not include a nonsolicitation agreement, or an agreement restricting the ability to use client or contact lists, or to solicit the employer’s customers. Minn. Stat. § 181.988, subd. 1(a). These tools remain enforceable, so you are not left without protective options.

What is a Non-Solicitation Agreement?

A non-solicitation agreement is a contract that restricts a departing employee from soliciting the employer’s customers or employees, or from using the employer’s client or contact lists, after the employment ends. Under Minnesota law it is treated as distinct from a covenant not to compete and is not made void by the 2023 statute banning noncompetes, so it remains enforceable even though employee noncompetes are now void. Minn. Stat. § 181.988, subd. 1(a).

What is an Example of a Non-Solicitation Agreement?

Non-Solicitation of Clients

You agree that you will not, without the prior written consent of the Employer, at any time during your employment with the Employer or for a period of 2 years from the termination of your employment however caused (whether your employment is terminated by you or the Employer and whether with or without cause or in breach of this Agreement), either individually or through any company controlled by you and either on your own behalf or on behalf of any person competing or endeavouring to compete with the Employer, directly or indirectly solicit, endeavour to solicit or gain the custom of, canvass or interfere with any person who is a client of the Employer as at the date of termination of your employment or use your personal knowledge of or influence over any such client to or for your own benefit or that of any other person competing with the Employer.

Non-Solicitation of Employees

You agree that you will not, without the prior written consent of the Employer, at any time during your employment with the Employer or for a period of 2 years from the date of termination of your employment however caused (whether your employment is terminated by you or the Employer and whether with or without cause or in breach of this Agreement), either individually or through any company controlled by you and either on your behalf or on behalf of any other person competing or endeavouring to compete with the Employer, directly or indirectly solicit for employment, or endeavour to employ or to retain as an independent contractor or agent, any person who is an employee of the Employer as of the date of termination of your employment or was an employee of the Employer at any time during 2 years prior to the termination of your employment.

Why are Confidentiality and Non-Solicitation Agreements Helpful if the Employer can already Sue the Employee for Stealing Confidential Client Information, Customer Data, or Related Intellectual Property?

These agreements are helpful for a variety of reasons. First, because an employee noncompete entered into on or after July 1, 2023 is void, the added breach-of-contract remedy against a departing employee who misuses information now comes from the instruments the statute leaves enforceable, a confidentiality or nondisclosure agreement or a nonsolicitation agreement, not from a noncompete. Minn. Stat. § 181.988, subd. 1(a). Second, a contractual agreement allows you to specifically outline what is confidential and what an employee may not do, which minimizes the arguments a former employee can make in court about his or her conduct. Third, where such an enforceable contract exists, a breach-of-contract claim can be more straightforward to prove than a Uniform Trade Secrets Act claim, which additionally requires establishing that the information qualifies as a trade secret and that misappropriation occurred by improper means. Minn. Stat. § 325C.01, subds. 3, 5.

How Can a Strong Employee Handbook Help an Employer Prevent Theft of Company Clients and Information?

A strong employee handbook serves a purpose similar to specific confidentiality and non-solicitation agreements in an employment contract. A strong handbook allows the employer to state with particularity what is considered confidential or a trade secret. Further, it may give guidance as to what may not be released. It limits the arguments a former employee may make regarding a violation of Minnesota’s Uniform Trade Secrets Act. It will be hard for an employee to contradict a handbook that specifically states a customer list is confidential and not to be released and to then claim that taking it was lawful.

Written by Jason Priebe