Eric Falkenstein isn't your typical 42-year-old hedge fund manager. Instead of trading stocks all day or courting new investors, he spends his time updating his blog, researching equity strategies, and talking to his lawyer. He's a hedge fund portfolio manager who is legally restrained from managing hedge fund portfolios.

But Falkenstein didn't embezzle funds, swindle unsuspecting investors, or violate insider-trading laws. Rather, he quit his job one September day in 2006 and he hasn't been able to work since.

Several months after he resigned, Falkenstein's former employer, Telluride Asset Management in Minneapolis, sued him for stealing the firm's trade secrets and violating its confidentiality agreement. Falkenstein had created trading algorithms for Telluride during his two and a half years on the job there, and the firm believed he was planning to use the same techniques to trade stocks for a fund he wanted to establish. The latest hearing in the ongoing legal battle will take place in Minnesota today.

Welcome to the murky world of hedge fund trade secrets, where your likelihood of getting a new job may be directly related to your employer's inclination toward litigation. These types of trade-secret suits are generating a controversy in the hedge fund industry. Is the litigation little more than a bullying tactic to keep valuable employees from heading to a competitor, as the blogger Equity Private suggests? Is the specific knowledge of trading strategies one gains at a hedge fund legitimately unusable in any future endeavor? Or are traders stealing secrets with the hopes of making more money from them someplace else?

These suits may not be as bizarre as the case that was dropped yesterday by the Equal Employment Opportunity Commission of the SAC Capital trader who claimed he was forced to take female hormones to improve his trading. But they're considerably more common in the industry, and they wield much greater impact.

"Large law firms have started advising their investment bank and hedge fund clients that they may have trade-secret claims against their own employees, even when there is no evidence of actual theft," says attorney Jonathan Willens, who represents two defendants in a similar case. "They want the benefit of a non-competition agreement without paying for it." He says he increasingly hears from hedge fund employees who want to switch funds but are nervous about being sued.

They certainly have good reason to be careful. In 2004, Renaissance Technologies, the hedge fund run by the billionaire trader Jim Simons, sued two former employees and Millennium Partners, the fund they subsequently joined. Millennium settled the suit last year for a reported $20 million. The two employees, who were terminated from Millennium, continue to fight Renaissance's allegations.