Trade Secrets, Duties of Confidentiality, and Misappropriation Claims Under the Colorado Trade Secrets Act - August 2008 - Labor and Employment Law

• Publication year: 2008
• Pages: 81
• Citation: Vol. 37 No. 8 Pg. 81

37 Colo.Law. 81 Colorado Lawyer 2008.

2008, August, Pg. 81. Trade Secrets, Duties of Confidentiality, and Misappropriation Claims Under the Colorado Trade Secrets Act - August 2008 - Labor and Employment Law

The Colorado Lawyer
August 2008
Vol. 37, No. 8 [Page 81]

Articles
Labor and Employment Law
Trade Secrets, Duties of Confidentiality, and Misappropriation Claims Under the Colorado Trade Secrets Act
by Robert W. Kiesnowski, Jr.

Labor and Employment Law articles are sponsored by the CBA Labor and Employment Law Section to present current issues and topics of interest to attorneys, judges, and legal and judicial administrators on all aspects of labor and employment law in Colorado.

Article Editor

John M. Husband, Denver, of Holland & Hart LLP - (303) 295-8228, jhusband@hollandhart.com

About the Author

Robert W. Kiesnowski, Jr. is a partner in the law firm of Worstell & Kiesnowski, emphasizing district court civil litigation and appellate advocacy.

This article discusses Colorado trade secret law and the factors Colorado courts and the Restatement (Third) of Unfair Competition consider in determining whether a trade secrets exists, duties of confidentiality and the substantive elements needed to prove misappropriation claims in Colorado.

Recently, many practitioners have seen an increase in trade secret misappropriation claims under the Colorado Uniform Trade Secrets Act (Act).(fn1) Despite this increase, there still is little reported Colorado appellate authority that defines the substantive elements needed to prove trade secret misappropriation claims or that provides clear examples of what types of damages are available under the Act and under what circumstances

The Act generally describes the types of information that might be regarded a trade secret(fn2) and clearly defines the term "improper means."(fn3) However, the Act's definition of "misappropriation"(fn4) may be confusing to some practitioners. Further, the Act provides a less-than-clear articulation of what measures of damages are available;(fn5) several Colorado state and federal opinions have attempted to unravel the Act's damages provisions but only in very general terms.(fn6) Thus, there is very little Colorado case law that addresses how the above information is to be distilled or synthesized into uniform jury instructions.

This article is intended to provide an overview of trade secrets law under the Act, particularly those factors Colorado courts and the Restatement (Third) of Unfair Competition (Restatement)(fn7) consider relevant in determining whether a trade secret exists. The article also identifies some of the circumstances where a duty of confidentiality may arise, as well as the factors to consider when making that determination. Finally, the article identifies the substantive elements of trade secret misappropriation claims under the Act.

Trade Secrets and Protection

The Act defines a trade secret as:

the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.(fn8)

Similarly, Restatement§ 39 defines a trade secret as:

any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.(fn9)

Included within both definitions is the concept noted by the Tenth Circuit in Rivendell Forest Products, Ltd. v. Georgia-Pacific Corp.:(fn10)

a trade secret can consist of a number of different components, all of which are publicly known, so long as the specific combination of information could lead to a competitive advantage.(fn11)

Although the term "trade secret" defies precise definition, Colorado courts have identified a number of factors as relevant in determining whether a trade secret exists. These factors include:

the extent to which the information is known outside the business

the extent to which the information is known to those inside the business - for example, by employees

the precautions taken by the holder of the trade secret to guard the secrecy of the information

the savings effected and the value to the holder in having the information as against competitors

the amount of effort or money expended in obtaining and developing the information

the amount of time and expense it would take for others to acquire and duplicate the information.(fn12)

The Comments to Restatement§ 39 also identify several factors as relevant in determining whether a trade secret exists. There is some overlap between the Act and the Restatement, but the additional factors identified in the Restatement should be considered. They include:

any benefits the owner realizes by use of the information in its business, including whether the information teaches conduct to be avoided in processes or techniques, sometimes referred to as "negative" information

whether the information is disclosed under circumstances that give rise to a duty of confidentiality - for example, disclosure to employees or licensees

whether the information is generally known or readily ascertainable through proper means by others to whom it has potential economic value

whether the information may be found in published materials that are reasonably accessible to competitors

whether the information is readily ascertainable from an examination of the product on public sale or display

the willingness of licensees and others to pay for disclosure of the information

the unsuccessful attempts by a defendant and others to duplicate the information

the precautions taken to maintain the secrecy, including, but not limited to, physical security designed to prevent unauthorized access; procedures intended to limit disclosure based on the need to know; and measures that emphasize to recipients the confidential nature of the information, such as nondisclosure agreements, signs, and restrictive legends.(fn13)

The Act separately identifies the element of secrecy, whereas the Restatement considers secrecy as one factor relevant in determining whether a plaintiff possessed a trade secret. The distinction, however, is probably one without a difference, because secrecy is required by the Act and the Restatement. To be a trade secret, the Act further requires that "the owner thereof must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes."(fn14)

Because of the intangible nature of a trade secret, the extent of the property right therein is defined by the extent to which the owner of the secret protects his or her interest from disclosure to others.(fn15) Information that is public knowledge or that is generally known in an industry cannot be a trade secret.(fn16) If an individual discloses a trade secret to others who are under no obligation to protect the confidentiality of the information, or otherwise publicly discloses the secret, his or her property right is extinguished.(fn17)

Thus, the trade secret must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.(fn18) Extreme and unduly expensive procedures need not be taken.(fn19) Reasonable efforts have been held to include advising employees of the existence of a trade secret, limiting access to a trade secret on a need-to-know basis, and controlling plant access.(fn20)

Duties of Confidentiality

In many instances, the trade secret defendant or third party from whom the defendant acquired knowledge of the secret may have been under a duty of confidentiality. Typically, such duty arises when a person is granted access to another's trade secret(s) for the limited purposes of evaluating a potential commercial transaction(fn21) - for example, the sale of a business or a licensing agreement - or in the employer-employee context.(fn22)

Commercial Transactions and Nonemployees

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