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Protecting Your Trade Secrets

Nov. 7, 2016
Think of trade secrets as the secret ingredients that make an enterprise competitive in the market place that the competition does not know, but would like to.

Trade secrets have been part of commerce since the dawn of civilization; the secrets of the alchemist, the special know-how of the artisan. Any sizable business enterprise will own thousands of them. They can range from a company’s mailing list, personal employee information, pricing margins, financial data, trading algorithms, to future product designs.

Think of trade secrets as the secret ingredients that make an enterprise competitive in the market place that the competition does not know, but would like to; either because they lack the know-how to create them, or having them would allow them to engage in unfair competition by saving them the time and expense of self-generating the material.

Only when we can identify what constitutes trade secrets, can we take steps to protect them. In a definition consistent with most state law, the recently enacted federal Defend Trade Secrets Act (DTSA) describes a trade secret as:

[I]nformation, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives 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, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.1

Trade secrets cannot be otherwise available to the public or revealed by reverse engineering.  An owner of a trade secret must also take “reasonable steps” to keep the information secret. What is “reasonable,” may depend on the nature of the secret and the workplace.  Evidence of  “secrecy,” can include a confidentiality policy in an employee handbook or a requirement that people with access to the trade secrets sign a specific confidentiality agreement.  Requiring passcodes to access company data and computer systems, keeping hard-copy confidential information under lock and key, limiting access to R&D labs, manufacturing facilities, etc., all amount to evidence of an intent to protect confidential information from unauthorized dissemination.

Peabody vs. Norfolk remains the foundation of American trade secret law.

“Economic value” means more than the fact that the information or material can be sold.  Value can be discerned from the fact that it cost money to generate the trade secret and that the acquirer will save time and money by simply acquiring the material illegally as opposed to spending the time and resources to generate it in-house, even if it has the capacity to do so in terms of talent and funds.

In 1868, three years after the end of the Civil War, the Massachusetts Supreme Court established “modern” trade secret law in Peabody v. Norfolk when it ruled that “information” and “invention” could be property, subject to the protection of the law.  After inventing a new process and machine for making “gunny cloth from jute butts,” Francis Peabody built a factory and hired Norfolk as a machinist under a written contract that obligated him to keep Peabody’s new process secret.2 But, Norfolk soon left Peabody’s employ and used Peabody’s invention to build a competing factory.   Peabody sought an injunction and prevailed.  In its seminal decision, the Court found that “it is the policy of the law . . . to encourage and protect invention and commercial enterprise . . . If a man establishes a business and makes it valuable by his skill and attention; the good will of that business is recognized by the law as property.”3

Peabody vs. Norfolk remains the foundation of American trade secret law.  Today, the owners of trade secrets have several avenues to protect themselves against the misuse of their confidential information. Filing a legal action to obtain injunctive relief to preclude the use and dissemination of misappropriated confidential information, court ordered seizure of stolen secrets and materials, money damages, and in some cases, recoupment of their attorney fees are all viable remedies.

An essential tool for protecting trade secrets is identifying, by broad category, what constitutes a trade secret.

An essential tool for protecting trade secrets is identifying, by broad category, what constitutes a trade secret. This can be communicated via employee confidentiality agreements and employee handbooks, as can be the obligation of employees or others not to disclose such information and the consequences in case of breach.4

Should there be an actual or threatened misappropriation of a trade secret, the normal course is to seek emergency injunctive relief,  bringing suit for breach of contract (the confidentiality agreement) and or in tort for misappropriation, conversion (civil equivalent of theft), and unfair competition.  These sorts of actions are not uncommon. 

The DTSA, signed into law in May 2016, federalizes what were primarily state law causes of action.  It allows employers to file a civil suit in federal court for theft of trade secrets and obtain injunctive relief against the misuse of those secrets, as well as damages and attorneys’ fees.  In extraordinary circumstances, there is provision for a court to order the ex-parte seizure of misappropriated trade secrets by U.S. Marshals to prevent their propagation or dissemination. In the first DTSA case filed in the US that resulted in the seizure of stolen trade secrets, this author and his firm obtained a court order directing the Marshals Service to seize from the apartment of the defendant/employee computer files containing thousands of customer contacts and deal-related documents misappropriated from a New York based real estate finance firm.

On the state level, breaches of contract and business tort law suits are regularly filed as a result of misappropriation.  Creating consistency among the various states, the Uniform Trade Secrets Act, passed by every state except New York and Massachusetts, provides for injunctive relief to prevent an “actual or threatened misappropriation” and up to double damages for the “willful and misappropriation of trade secrets”  and  the recoupment of attorney fees for the prevailing party.   While much restrictive covenant litigation for breach of non-competition and non-solicitation of customer contract cases will continue to be litigated primarily in the state courts, trade secret litigation will likely see a significant shift to the federal courts in the future. 

Owners of trade secrets should put in place policies and agreements to protect those secrets and to have a plan of action in place to be able to rapidly respond in cases of misappropriation. Luckily, modern trade secret law has grown quite sophisticated and gives trade secret owners appropriate legal redress.

Richard Reice is the head of the labor and employment group at Hoguet Newman Regal & Kenney.  He is an experienced  litigator, counselor and labor negotiator.  He has also served as the EVP of HR for a Fortune 500 company.1Uniform Trade Secrets Act, 18 U.S.C. 1839 (4)
2In other words, weaving burlap from the fibers of the jute plant.
3Robert G. Bone A New Look at Trade Secret Law: Doctrine in Search of Justification, 86 Cal/L Rev 241, (1998), citing Peabody v. Norfolk,98 Mass. 452 (1868)
4A typical agreement may define confidential information as: inventions, ideas, improvements, discoveries, processes, data, programs, know-how technical and business information relating to proprietary ideas and inventions, research and development plans and , new products and services, test data, computer code and algorithms, Company and customer supplied passwords, patentable ideas, drawings and/or illustrations, existing and/or contemplated products and services, research and development, production, finances and financial projections, algorithms other software, customers, clients, marketing strategies, and current or future business plans and models, information about employees, customers, consultants, contractors, and others with business relationships, regardless of whether such information is designated as “Confidential Information” at the time of its disclosure.

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