Vol. 9, No. 4, Pg. 20. Trade Secrets in South Carolina: New Act Changes Outlook for Employers.

• Author: By Phillip A. Kilgore and Charles N. Griffin III

South Carolina Lawyer

1998.

Vol. 9, No. 4, Pg. 20.

Trade Secrets in South Carolina: New Act Changes Outlook for Employers

20TRADE SECRETS IN SOUTH CAROLINA: NEW ACT CHANGES OUTLOOK FOR EMPLOYERSBy Phillip A. Kilgore and Charles N. Griffin IIIIn the information age, our economy is now global, heavily dependent on technological advantage and ultimately, more competitive. Businesses compete for market share, as well as the tools of productivity-namely capital and labor. Because of rivalry for the most skilled employees, or perhaps because of the inherent mobility of modern society, employers often find it difficult to achieve workforce stability.

Although the departure of knowledgeable and skilled employees reduces productivity, the biggest risk is the potential loss of the business information they may take with them. When a competitor hires away a valuable employee, a frequent motivation is to acquire what that person knows about the former employer's business-not necessarily what the employee can do. Whether by design or inadvertence, former employees often pass along confidential information-such as production methods, product formulas and customer lists-to their new employers.

The manifest value of confidential business information led courts to recognize a common law right to protect trade secrets. Employers also began to use secrecy agreements, known as nondisclosure covenants. Often associated with its disfavored cousin, the covenant not to compete, a nondisclosure covenant does not prohibit an employee from working in the same field, but attempts to prevent the former employee from divulging the former employer's confidential information.

In 1992, the General Assembly codified laws protecting trade secrets by passing the Uniform Trade Secrets Act (UTSA), S.C. Code Ann. §§ 39-8-1 et seq. (Law. Co-op. Supp. 1992). This statute recognized a uniform private right of action for misappropriation of trade secrets, but left intact an employer's right to contract for stricter secrecy standards through nondisclosure covenants.

Any employer who uses a nondisclosure covenant as an added layer of protection received a rude shock in 1996 from the South Carolina Court of Appeals' holding in Carolina Chemical Equipment Co. v. Muckenfuss, 322 S.C. 289, 471 S.E.2d 721 (Ct. App. 1996). The Muckenfuss court struck down, for the first time, a nondisclosure covenant for being unlimited in time and territory.

The General Assembly wasted no time in overturning this decision. The South Carolina Trade Secrets Act, (SCTSA)-S.C. Code Ann. §§ 39-8-10 et seq. (Law. Co-op. 1976) (effective May 21, 1997) [http://www.lpitr. state.sc. us/ bills/285.htm]-made clear that nondisclosure agreements were not void for lack of durational or geographic limitations.

In addition to addressing the Muckenfuss anomaly, the SCTSA built on the evolution of trade secret law-starting with South Carolina common law through the passage of the UTSA-to create a useful and powerful ally for South Carolina employers.

COMMON LAW TRADE SECRET PROTECTIONS

The Supreme Court of South Carolina recognized the modern view of trade secret protection in Lowndes Prod., Inc. v. Brower, 259 S.C. 322, 191 S.E.2d 761 (1972). According to the Lowndes court, the initial issue to be determined in a trade secret misappropriation case is not whether information has been misappropriated, but, rather, whether the information is a trade secret. Id. at 324-25, 191 S.E.2d at 764. The Lowndes court adopted the prevailing definition of "trade secret" found in the original Restatement of Torts:

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A trade secret may consist of any formula, pattern, devise, 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 machine or other devise, or a list of customers.Id. (citing Restatement of Torts § 757 cmt. b (1939)). The opinion of the Lowndes court shed little light on why the information at issue in that case constituted trade secrets.

Once a party establishes that its business information constitutes a trade secret, the inquiry turns to whether the party took reasonable steps to protect its trade secret. Id. at 327, 191 S.E.2d at 765. Stated otherwise, an "[i]ntent to keep an idea or particular fact a secret is [an essential element for protecting a trade secret]." Id. (citation omitted). The Lowndes court considered the following factors:

* Were employees required to sign employment contracts, secrecy agreements or non-competition clauses?

* Were employees admonished concerning the secrecy of the information?

* Were terminated employees reminded to maintain secrecy?

* Did the...