This article is the first installment in our four-part Trade Secrets at Risk: A Business Owner’s Guide series. The series continues every Friday in September.
Remote work, personal devices, and digital file transfers have made it easier than ever for employees to walk out the door with your most valuable business information without anyone noticing until it is too late.
Why North Carolina Businesses Need to Pay Attention Now
Long gone are the days when protecting confidential business information meant locking file cabinets in an on-site location that served as a mini-Fort Knox for your business. A disgruntled employee who wanted to steal your customer list had to stand at the photocopier while the whole office watched, and that’s assuming they had a physical key to access the documents in the first place. While advances in technologies bring increased convenience and efficiency in the modern workplace, the same safeguards that once were the best of the day are now obsolete. Today, that same employee can simply drag and drop an entire database onto a thumb drive in seconds, forward it to a personal email account, or transfer it over Bluetooth before anyone knows it is gone—no lock, no key, nor file code needed
Because of the rapid transition to a digital workplace, exacerbated by a global pandemic that shifted the office into our homes, companies of all sizes should take the time to review their procedures to ensure their modern business are protected by modern-day security measures. Specifically, three developments have made trade secret protection more urgent for every North Carolina business, regardless of size or industry.
First, remote work has made a profound impact on workforce security. When employees are at kitchen tables and home offices, your sensitive information sits on personal Wi-Fi networks and personal devices that you cannot see or control. Second, digital storage allows files to easily be transferred from one device to another. Files that once required physical access to steal now move instantly and invisibly. Third, the decline of non-compete agreements has left a gap in the traditional safeguards used to protect proprietary information. Courts and regulators have grown increasingly hostile to non-competes, and a federal effort to ban most of them outright, while ultimately reversed by the courts, signals where the legal winds are blowing. If you cannot rely on a non-compete to stop a departing employee, protecting your information itself becomes the strategy.
Adding even more gravitas to the issue, the financial stakes make this more than a legal housekeeping concern, and a genuine issue that may affect your business’s bottom line. Jury verdicts in trade secret cases have grown dramatically in recent years. A case against Motorola produced a $407 million award. Computer Sciences Corp. faced a $210 million verdict. An insulin-related trade secret case resulted in a $452 million award. A Virginia jury returned a $2 billion verdict against Pegasus Systems in a case brought by Appian Corporation, though an appellate court overturned it on jury instruction grounds and ordered a new trial. The damages are real, and they come from multiple directions: what the plaintiff lost competitively, what the defendant gained, and the long-term erosion of competitive advantage that courts are increasingly willing to quantify.
What Counts as a Trade Secret Under North Carolina and Federal Law
North Carolina businesses have two layers of protection available. The federal Defend Trade Secrets Act, enacted in 2016, provides access to federal courts and nationwide remedies. North Carolina’s Trade Secrets Protection Act provides a parallel state-law cause of action. Both laws share the same core requirements, and both may apply to a single incident of misappropriation.
Under either law, three things must be true. First, the information must be actual information. Second, it must be secret, meaning it is not generally known in your industry and you have taken reasonable steps to keep it that way, and third, the secrecy itself must be what gives it commercial value. If your competitor knowing this information would cost you business, you likely have a trade secret.
The categories are broader than most people expect. Formulas, customer lists with purchasing history and pricing tiers, software code, manufacturing processes, and pricing strategies all qualify. Even compilations of publicly available data can be protectable if the compilation reflects years of proprietary work and provides a competitive edge. Courts have recognized that a database built from public sources can be a trade secret when the effort of assembling and organizing it is what creates the value.
One distinction that surprises many business owners: unlike patents, trademarks, and copyrights, trade secrets require no government registration. You develop the information, you protect it, and the protection exists automatically. It also does not expire. As long as the information remains secret and commercially valuable, protection continues indefinitely, unlike a patent, which expires after twenty years. A trade secret, properly maintained, lasts as long as you keep it secret.
What Does Not Qualify as a Trade Secret
Two categories frequently cause confusion for North Carolina business owners. A basic list of names and phone numbers available through public sources is probably not a trade secret, but a customer database that includes years of buying history, contact preferences, pricing arrangements, and buying cycles is a different matter entirely, because the secrecy of that compilation is what gives it commercial value.
Employee skills and general knowledge are another common source of confusion. You cannot prevent a former employee from using skills and experience they developed during employment. For example, a chef who learns a knife technique at your restaurant can use that technique at the next one, but that same chef cannot leave with your specific secret recipes. The line is between general professional skill, which travels with the employee, and specific proprietary information, which belongs to you.
Information that is readily ascertainable through proper means also falls outside protection. If a competitor could figure out your formula by legally reverse-engineering your product, a court is unlikely to treat that formula as a protected trade secret. The law protects against theft, not against independent discovery or legitimate competition.
What Trade Secret Misappropriation Means in Practice
Trade secret misappropriation under the DTSA covers three situations: acquiring a trade secret by improper means, disclosing or using a trade secret without consent, and receiving a trade secret while knowing it was obtained improperly.
That third category trips up North Carolina employers who are hiring. If a candidate signals during the interview process that they are bringing confidential information from their current employer, accepting that person and that information creates liability. Gavin Parsons, a Raleigh trade secret attorney with Ward and Smith, handled a case in federal court where this happened. A competitor hired an employee who, unbeknownst to the new employer, had forwarded company files to a personal account and transferred data to a thumb drive before leaving. When the original employer filed suit, the new employer was pulled into serious federal litigation for something it had not known about and had not directed. The lesson: when you are hiring, ask candidates specifically whether they have signed employment or confidentiality agreements, make clear that you do not want them to bring any confidential information from their prior employer, and document that you said it.
Two companies can independently arrive at the same trade secret, and both hold valid protections simultaneously. Unlike a patent, a trade secret does not exclude others from the market. It protects against theft, not against a competitor who develops the same idea through their own legitimate work.
How AI Tools Have Created a New Exposure
Employees use AI tools at work whether companies formally permit it or not. When an employee enters confidential business information into a public AI platform like ChatGPT, that information may be incorporated into the platform’s training data and is no longer secret in any meaningful sense. Courts have found that inputs to public AI tools are not protected by attorney-client privilege and are fully discoverable in litigation. The same reasoning applies to trade secret protection: putting confidential company information into a public AI platform can constitute a waiver.
This is not a hypothetical risk. It is happening now in North Carolina companies across every industry. Your employees need to hear clearly and in writing that they may not enter confidential company information into any public AI tool. This belongs in your written confidentiality policy, in onboarding materials, and in periodic reminders. Article 3 in this series addresses AI policy as part of a broader trade secret protection program.
