In my last article, I proposed some questions every distributor should contemplate as they move their business forward and offered up a list of 50 more that they could have just by asking for it. The response was fantastic. Most likely, because we were in the question mode, at least a half dozen distributors hit me with their questions. It was thought-provoking.
For the next few minutes, let’s explore one of the topics that are top of mind from the distributors, just like you.
Ex-employee takes our information
Here’s the first question: we just had a salesperson leave to join a competitor. While he wasn’t a stellar employee, we are concerned that he may have taken some of our pricing and marketing information with him. What can we do to protect ourselves in the future?
Every company owns trade secrets of some kind. Most people automatically think of patents and Col. Sander’s secret recipe mix of 11 herbs and spices, but trade secrets extend into many other areas of business.
For distributors, trade secrets are mostly comprised of customer lists, special agreements with suppliers, pricing schedules, policies tied to handling customer pricing requests, business plans (like target customers) and even marketing plans. According to Craig McCrohon and Fred Mendelsohn of the legal firm Burke, Warren, Mackay & Serritella, company rights surrounding this class of trade secret continue to be strengthened. Citing the Defend Trade Secrets Act (DTSA), Mendelsohn states, “[The DTSA] adds a significant arrow in the quiver of companies injured by trade-secret misappropriation.”
Simply stated, it is not only unethical to take company information to the new employer, it is also illegal. For most distributors, the cost of legal action is too high to use without some serious consideration. Experience shows that pursuing a legal initiative with a previous employee can cost upwards of $25,000 without a solid guarantee of success. With this in mind, preventive action is worth the effort.
First, employees must understand what information is considered to be a trade secret. This is achievable via three very important means: The first is a conficentiality agreement spelling out what is considered to be a trade secret. The second, an employee handbook that lists the items important to the company. Finally, an annual agreement restating the importance of preserving distributor secrets.
Careful attention must be paid when properly filing these agreements for later reference. Once more, experience indicates that many distributors lack full-time human resource professionals, and these documents have a way of being misplaced or lost when needed. If you maintain them poorly or they remain unsigned by the employee, your company may be at risk.
Mendelsohn recommends protecting documents that are highly sensitive with a password. This assists with computer forensics should an employee leave your company. And, in several cases, we are aware of computer forensics, being needed to prove that someone downloaded entire customer lists and discount levels. An unscrupulous employee was stopped dead in his tracks.
When employees leave, it is critical to remind them of the consequences of using secret information in their new role. The best approach is a registered letter reminding them of the agreement and the ramifications of using the information improperly. It’s strange how people tend to forget what a confidential agreement covers.
A terminated salesperson’s question
In the same batch of questions, we received one looking at the situation from the opposite point of view. A salesperson who had left a wholesaler asked this: “After nearly a decade of dedicated service, I have decided to join a new organization. I understand I can’t take data sheets and printed customer lists, but what about the stuff I carry in my head?”
Here is a common thought: as long as you don’t take files or printed pages, everything is hunky-dory. But, this is not the case. It’s not uncommon for sellers (and others in the organization) to have more than just a casual knowledge of sensitive, secret data. They can easily recreate discount schedules and sometimes information on nearly every significant customer. But the information still belongs to the company.
One seller related that his customers were not “just” customers; they were friends. Further, he cultivated most of the contacts through his efforts during the years and, in his words, “most would follow me to a new company if I ever leave.” In my mind, this line of reasoning puts the sales guy on very thin ice.
First, the customer contacts developed by salespeople belong to the company, not to the seller. Even though this sounds mean, cruel and contrary to the nature of the human condition, your customers belong to your employer. If the sales guy shoots out a targeted email blast saying, “I am now at Acme Distribution and look forward to serving you,” he could be in violation of trade secret laws. The same applies for communication via things such as LinkedIn and other business social media sites.
What’s worse, one salesperson made the mistake of sending out an email with a message similar to this one: “I am now at Acme Distribution and would like to offer you my same level of professional service and prices far superior to what I was allowed to provide by my previous management.” Incidentally, this short email cost him his job with the new employer. This message was both indefensible in the legal system and contrary to the new company’s stated policy during his hiring.
Worsening matters, computer forensics indicated the seller had downloaded his entire Outlook file and several other important documents. Later, he uploaded the files to the computer of his new company. This put the new organization in harm’s way legally — thus, the immediate termination.
Avoiding issues as a new employee
First, insist new employees understand you do not want them to “help you out” with information from their previous employer. No customer data, no pricing plans and no manufacturer incentive information should be part of their package of value. Ask for a signed statement saying it is against your company’s policy (along with a signed confidentiality agreement protecting your data). Make it clear no computer files originating with the old company can be stored on your computer systems.
If employees own their cellphone, ask that they discontinue using it for business while working for your company. This provides a level of separation between you and their old customers. With today’s smartphones, employees can easily hide trade secrets on their mobile devices. While perhaps a gray area, you don’t want to drag your company into a quagmire.
Sometimes, employees change to nonwholesaler positions
Employees sometimes switch to a different position within the channel — i.e. manufacturer’s representative or sales agency positions. The same rules of engagement apply. Using strategic information to garner favor with a competitive distributor is both unethical and illegal. Working to switch contractors based on previous knowledge of trade secrets is illegal, as well. Thankfully, most manufacturers are keenly aware of the legal ramifications, even if their employees are not. The recommendations here call for a letter to be sent not only to the employee but to his new employer as well.
A few parting thoughts
Demographic shifts point to more millennials in our workforce, and, like it or not, they don’t stay in the same position with the consistency of their baby-boomer counterparts. It makes good sense to up the ante on your plans for departing employees, but with that, a few extra precautions are in order.
First, product training is not considered to be a trade secret. At the same time, attending factory training classes is costly, both from a monetary as well as lost-productivity standpoint. If you do not have a policy in place covering training costs, you should create one. To allow the company to recoup their costs, many distributors require employees to repay a portion of the costs if they leave the company within three years of completion of the course. I think this is a good plan.
Secondly, now is a great time to consider ongoing employment agreements, that define the importance of trade secrets. If you lack such a plan or find it in disrepair, get it fixed.
Finally, shift your thinking. Look for ways to improve employee engagement. If you don’t conduct formalized employee reviews, you may want to consider this. Employees often leave because they don’t understand their path for career growth. It also happens when they don’t feel appreciated by their first-line manager. Management skills for first-line managers and supervisors are no longer an option.