Identifying and protecting employers' interests in trade secrets and proprietary information: every company has something that it hopes will give it an edge over the competition, and it's wise to protect this as a trade secret.

Author:Porter, William G., II
 
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TO BE successful, companies must distinguish themselves in a marketplace saturated with consumer products and services. To do so, they must cultivate and maintain a client base and recruit, train and retain a skilled work force. They must do all this while keeping their trade secrets and proprietary information from their competitors--which isn't easy. Trade secret misappropriation is estimated to cost American companies more than $100 billion annually. (1)

Today's work force is increasingly transient. When coupled with the ease of electronically storing, copying and transmitting information, the fact that a company's most valuable and skilled employees are also the most mobile presents companies with a Catch-22. How does it provide employees with trade secrets and proprietary information to facilitate their work and the company's success, while at the same time protecting itself against the possibility that employees eventually may work for a competitor or start their own competing business?

IDENTIFYING TRADE SECRETS

In all American jurisdictions trade secrets are protectable through either statutory or common law. Forty states and the District of Columbia have adopted the Uniform Trade Secrets Act (UTSA). Two states (Massachusetts and Alabama) have separate statutes affording protection, and eight states protect trade secrets under common law (Michigan, Missouri, New Jersey, New York, Pennsylvania, Tennessee, Texas and Wyoming). Many states that have not adopted the UTSA rely on the definition of "trade secret" in the Restatement (Second) of the Law of Torts.

  1. Defining "Trade Secrets"

    Courts and writers have commented on the difficulty of defining "trade secrets." As the Fifth Circuit remarked, what precisely constitutes a "trade secret" is "one of the most elusive and difficult concepts in law to define." (2) A commentator states, "Almost any subject matter may be claimed to be a trade secret. But what will be protected as such, and when and against whom such protection will be granted, are questions that cannot be answered with such certainty." (3) Even the venerable Restatement itself agrees with this assessment in Section 757, comment b: "An exact definition of a trade secret is not possible."

    1. Common Law

    Jurisdictions that have not enacted some form of the UTSA generally look to the Restatement's definition in Section 757:

    Any formula, pattern device, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers.... A trade secret is a process or device for continuous use in the operation of the business. 2. Uniform Trade Secrets Act

    Before adopting the UTSA, a state's courts may have used the Restatement definition, and even after adoption courts also may look to the cases decided under the common law in determining whether trade secret protection exists. Under the UTSA, "trade secret" means:

    information, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers, that satisfies both the following: (1) It 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. (2) It is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The UTSA definition considerably expands the Restatement definition in several respects. First, the UTSA focuses on the word "information," rather than the ways in which the information may be utilized. Second, by using the word "including," the UTSA definition indicates that the examples are not exclusive. Third, while the Restatement requires "continuous use in business," the UTSA does not specifically require that the secret be business related or that it be continuously used. Given this, the UTSA would potentially include trade secrets that a company obtained but had not yet used or were not used because they provided negative information. This latter expansion is important because a competitor can learn as much about a company's processes by studying its failures as well as its successes.

  2. Identifying Trade Secrets

    Even where UTSA has been adopted, courts look to the Restatement to assist them in deciding whether particular information is a trade secret. As one court stated, "[a]lthough all of the Restatement's factors no longer are required to find a trade secret, those factors still provide helpful guidance to determine whether the information in a given case constitutes `trade secrets' within the definition of the statute." (4) To interpret both the common law and UTSA definitions, it is helpful to consider the following factors.

    1. Secrecy

      The most important factor courts consider is whether the information in fact was secret. (5)

    2. Public Access

      The more extensively the information is known to the public or to competitors, the less likely it is a protected trade secret. One court stated, "The first and foremost consideration is whether the ... information is readily accessible to a reasonably diligent competitor." (6) Another court explained, "Manifestly, an employer can have no legitimate interest in restricting the use of easily accessible information." (7) Under the UTSA, a trade secret is "not being readily ascertainable" so as to qualify for protection if the duplication or acquisition of alleged trade secret information requires a substantial investment of time, expense, or effort. (8)

    3. Intra-company Awareness

      The greater the number of employees who know the information, the less likely that it is a protected trade secret.

    4. Security Measures

      The greater the security measures taken by the company to preserve the secrecy of the information, the more likely that it is a protected trade secret. As one court stated, "[Security] measures constitute evidence probative of the existence of secrets. One's subjective belief of a secret's existence suggests that the secret exists. Security measures, after all, cost money; a manufacturer therefore presumably would not incur these costs if it believed its competitors already knew about the information involved." (9)

      But trade secrets law does not require an employer to take every possible precaution to ensure the security of trade secrets, nor does it require that the steps a company takes are foolproof. "The owner of the secret must take reasonable, though not extravagant, measures to protect secrecy," a court explained. (10)

    5. Information's Value

      The greater the value of the information to the company and its competitors, the more likely that it is a protected trade secret. (11)

    6. Effort to Create the Information

      The more time, effort and money expended in developing the information, the more likely it is a protected trade secret. (12)

    7. Ease of Duplication

      The easier it is to replicate or properly obtain the information claimed to be a trade secret, the less likely that it is a protected trade secret. "If the information can be readily duplicated without involving considerable time, effort or expense, then it is not secret," an Illinois court declared. "Conversely, information which can be duplicated only by an expensive and time-consuming method of reverse engineering, for instance, could be secret, and the ability to duplicate it would not constitute a defense." (13)

  3. Examples of Trade Secrets

    1. Customer Lists and Client Information

      A list of customers, frequently one of a company's most valuable assets, is specifically included and protected under the UTSA definition of trade secret as long as the company has made reasonable efforts to protect the confidentiality of the information. (14)

      Customer lists compiled by former employees completely from memory, however, are not trade secrets, for, as a New York court stated, "Remembered information as to specific needs and business habits of particular customers is not confidential." (15) This is especially so where the information can be readily obtained from the customers. (16) Note that this information may nevertheless constitute a legitimate business interest warranting enforcement of a non-compete agreement, albeit not as a trade secret.

    2. Marketing, Development and Research Plans

      This information may be either positive--that is, referring to the company's best-selling products--or negative--that is, referring to its worst-selling products. (17)

    3. Novel Techniques, Ideas, Concepts, Discoveries or Inventions

      A trade secret...

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