Fall 2008 - #10. Disloyal Employees and Trade Secrets: What We Can Learn from Barbies and Bratz.

Author:by Jane Osborne McKnight, Esq.

Vermont Bar Journal


Fall 2008 - #10.

Disloyal Employees and Trade Secrets: What We Can Learn from Barbies and Bratz

The Vermont Bar Journal #175, Volume 34, No. 3 FALL 2008

Disloyal Employees and Trade Secrets: What We Can Learn from Barbies and Bratzby Jane Osborne McKnight, Esq.An employer's trade secrets, like information protected by trademark and patent laws, represent the investment of time, "sweat equity," and monetary resources by an individual or business entity. Even in Vermont, however, they are misappropriated on a regular basis by disloyal employees who plan to compete with their employers or seek employment with a direct competitor. What is an employer to do? In contrast to patented inventions or registered copyrights and trademarks, trade secrets are deemed protected without disclosure to the world and their protection is not limited to a finite term. Thus, CocaCola's unpatented proprietary soft-drink formula, arguably its most valued asset, is guarded exclusively by trade secret law. Trade secret protections vary somewhat from jurisdiction to jurisdiction, despite adoption of a uniform act by the vast majority of American states. A review of trade secret law in Vermont demonstrates that ample protection is available to employers vis-à-vis employees trusted with proprietary materials, if the employer will avail of those protections.

A Primer on Vermont Trade Secret Law for Employers

Along with approximately forty-five other states,(fn1) Vermont has adopted the Uniform Trade Secrets Act, effective July 1, 1996 (UTSA).(fn2) The law has no retroactive effect.(fn3) The UTSA evinces the express intent to displace conflicting tort, restitutionary, and other law of Vermont that provided civil remedies for misappropriation of a trade secret.(fn4) Notably, the UTSA does not affect contractual or criminal remedies, even if based upon misappropriation of a trade secret.(fn5)

The terms of the UTSA define "trade secret" as information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(A) 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 (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.(fn6)

Actual or threatened "misappropriation" may be enjoined.(fn7) The injunction will terminate if the trade secret ceases to exist per se, but may continue for a period of time if necessary to eliminate the commercial advantage that flows from its misappropriation.(fn8) The UTSA also authorizes-but does not require-a superior court to order royalties for future use of the trade secrets, if use could have been prohibited by law. Statutory royalties are to be awarded only in exceptional circumstances.(fn9) In some circumstances, affirmative acts to protect a secret may be compelled by court order-that is, a mandatory injunction may issue.(fn10)

A complainant is entitled to recover damages for misappropriation of a trade secret.(fn11) Damages may be awarded on account of the actual loss caused by the misappropriation and the unjust enrichment caused by misappropriation.(fn12) If damages are difficult to compute, a reasonable royalty may be ordered.(fn13) Moreover, if the misappropriation is "malicious," the court may award punitive damages.(fn14)

"Misappropriation" of trade secrets is defined as the "acquisition of a trade secret of another without express or implied consent by a person who:

(i) used improper means to acquire knowledge of the trade secret; or (ii) at the time of the disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was: (I) derived from or through a person who had utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (iii) before a material change of his or her position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.(fn15)

The conduct that constitutes acquisition of trade secrets by "improper means" includes: theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage though electronic or other means.(fn16) In the employment context, employees are routinely given access to trade secrets during the course and scope of their employment. A trade secret is, in the terms of the UTSA, acquired "under circumstances giving rise to a duty to maintain its secrecy or limit its use." The employee's duty of loyalty and fidelity to his employer continues throughout the term of his employment. If the employee uses the trade secrets for himself or another, then the trade secrets have been obtained, "from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use"-that is, the plaintiff in the resulting trade secret dispute. If the employee takes trade secret materials with him at the time of his departure from employment, he has acquired the trade secrets, "by improper means."(fn17)

It should be noted that Vermont has adopted a "cybercrime" statute, 13 V.S.A. 4101-4107, which may also be implicated in situations involving employees and misappropriation of trade secrets located on a computer or network. Knowing and intentional access of a protected computer, "without lawful authority," is punishable by six months in prison and a fine of $500.00. The statute also provides a private right of action for damages. No cases have arisen under the statute as of the date of this article.

Applicable Federal Law

Vermont employers should be advised that federal law also makes theft or misappropriation of a trade secret a federal crime. The U.S. Economic Espionage Act of 1996 (USEEA) criminalizes the theft of a trade secret to benefit a foreign power and also that perpetrated for commercial or economic purposes.(fn18) Economic theft of trade secrets may result in a prison term of up to ten years and a fine of up to $5 million. The district courts have exclusive jurisdiction over actions under the USEEA, including civil actions for injunctive relief. Unfortunately for private parties, only the Attorney General may pursue such actions. There is no "private right of action," embodied in the statute.

In contrast, the U.S. Computer Fraud and Abuse Act (CFAA) does provide employers with a private right of action where the misappropriation of trade secrets by an employee involves a "transmission" that causes "damage" to a computer. In the matter of International Airport Centers v. Citrin,(fn19) the U.S. Court of Appeals, by Judge Posner, held that the installation of an "overwriting program" intended to wipe a hard drive and make data unrecoverable is a "transmission" within the meaning of the CFAA. In Citrin, defendant quit IAC and went into business for himself, in breach of his employment contract. Before returning his company laptop, he deleted all data on it, presumably taking the date with him, and loaded a secure erasure program. The district court dismissed the suit for failure to state a claim on which relief could be granted. The seventh circuit reversed and remanded, holding that the installation of the secure erasure program was a "transmission" that caused "damage" to a "protected computer." Citrin also "intentionally accesse[d]" a "protected computer without authorization" and caused damage. Judge Posner observed that from the moment Citrin breached his contract and his duty of loyalty to his employer, he was not authorized to access the IAC laptop. This, of course, happened even before he left his employment, a point of note. Using the Posner analysis, an aggrieved employer might contend that from the moment the duty of loyalty is breached, an employee has no lawful authority to access trade secrets on his employer's computer and is liable under the Vermont computer crimes statute.

No federal trade secret statutes have been adopted by Congress. There is currently, however, a move underway to "federalize" trade secret law.(fn20) Proponents criticize the...

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