Spross & Associates, PLLC

Data Security – Employees versus Contractors

These days with companies using more and more outsourced resources, there is always a concern with data security.  There is always the risk of individuals being bad actors, whether they are employees or contractors working for a third party.  These days most companies will not use stolen competitor data (and most of the time people can tell it was stolen).

If an employee of a company steals data and sells it/provides it to competitors, there are 2 types of remedies.  First under the Federal Economic Espionage Act of 1995, it is a potential criminal violation and can be punishable by jail time.  From a civil perspective, the company could sue the individual for the damages caused by the release of the data, which would include intellectual property infringement and breach of contract (assuming there is an executed confidentiality agreement or proprietary information agreement with the employee).  [side note – it is critical to have a confidentiality agreement/assignment agreement/proprietary information agreement with each employee] 

Unfortunately, for the company almost every individual is judgment proof.  For instance, let’s say the damage caused was $10mm.  There are very very few folks that could pay a $10mm judgment.

Contractor:  a contractor/contractor employee has the same confidentiality and IP obligation as an employee (as long as the appropriate documents are in place).  An individual that works for the company cannot take trade secrets and sell them/disclose them or they face criminal penalties.  In addition, the company is on the hook for their employees and subcontractors conduct.  Let’s say that there is a bad guy that takes the confidential information.  The company would be on the hook for the $10mm in damages indicated above.  Unlike individuals, companies many times can pay the judgments or they have insurance that may cover the damage.  The company whose information was disclosed has a shot at real recovery.

 

All this being said, the concern many companies have is someone “disappearing” with the confidential information or data in a foreign country and then selling or posting the information anonymously on the web.  They then argue it is much more difficult to track someone down in these countries (which it can be).

I personally do not see the risk as any greater or less with an outsourced resource rather than an employee (you are basically at risk of the bad actor in both cases) and I see the recourse/recovery as more favorable against a company, even if they have employees/subcontractors in foreign locations (as long as that company is in the United States and has assets).

Major Difference between ISOs and NSOs

So you are at the point in your company where you want to issue stock options and you have heard that there are Incentive Stock Options (ISOs) and Nonstatutory Stock Options (NSOs) and you wonder what the difference might be.  There is one very big difference between the two. ISOs are taxed when the underlying stock is sold and NSOs are taxed when the option is exercised.  This can delay your tax burden by a long period of time.  There are all kinds of issues about capital gains versus ordinary income and other tax consequences to exercising options, but that is for another discussion.

Keep in mind that there are multiple criteria that must be followed for ISOs.  For instance, an ISO can only be issued to an employee.  Make sure you follow all of the requirements for ISOs versus NSOs and get professional help with the appropriate agreements.

Fax/Scan the Whole Document

There are a lot of folks that like to only fax or scan a signature page or the first page and a signature page when returning an agreement.  I know, it saves paper and fax time and disk space.  That is not a good enough reason not to send the whole document.  Think about how easy it is to slip in another page 2 that contains provisions that you did not agree to.  Even easier and almost undetectable is adding or removing a “not”.  That can be a disaster down the road.

Do not take the easy path on this one.  Scan or fax the entire document.