On My Mind Blog

A trade secret is confidential business information.  New York and some other states also require that the information be in use and provide a competitive advantage.  Trade secrets can be technical in nature, such as a formula, plans, or a device, or they can relate to business operations, such as lists of vendors or customers, or marketing plans.

Governing Law

Trade secrets are protected in every state either by statute or principles of unfair competition.  The most prevalent law is the Uniform Trade Secrets Act, which has been adopted in some form in all but three states. The successful plaintiff in a trade secrets lawsuit may be entitled to an award of damages as well as some form of injunctive relief.  In addition, some states have statutes making it a crime knowingly to participate in the theft of a trade secret.

The United States has also enacted the Economic Espionage Act of 1996, which creates two federal crimes involving trade secrets: (1) economic espionage, knowingly to steal a trade secret intending to benefit a foreign government or foreign agent; and (2) the general theft of a trade secret relating to a product that is produced for or enters interstate commerce. These offenses, respectively, are punishable by (1) up to $10 million in fines and up to 15 years in jail, or (2) up to $5 million in fines and up to 10 years in jail.

Essential Elements

The essential elements of any trade secret are that:

-the information is neither generally known in the trade nor publicly available;

-the information has some independent economic value giving the owner a competitive advantage;

-the owner has not publicly disclosed it; and

-the owner has made reasonable efforts to maintain its secrecy.

Unlike a patented invention, a trade secret does not require novelty because it is not protected against independent discovery.  

Value

Often the deciding factor in a trade secret case is whether the owner expended considerable time and money developing the trade secret.  Also inherent in every trade secret case is the notion of unfair competition or improper conduct.  If the accused has achieved a significant saving in time and money by obtaining the confidential information that could not be readily acquired from other sources, then a court will more likely protect the trade secret.

Secrecy

The other major issue in any trade secret situation is whether the information owner has taken reasonable steps to protect its secrecy so that, except by use of improper means, it would be difficult to obtain the information.  Absolute secrecy is not required.  A trade secret will be protected even if you have disclosed it to employees or others having a secrecy obligation.  Conversely, no trade secret protection exists for matters that are generally or publicly known, or are completely disclosed by products sold to the public either directly or through reverse-engineering without infringing any patent rights. 

The easiest way to lose a trade secret is to disclose it without an expressed or implied obligation of secrecy.  For this reason, you should take care to include confidentiality provisions in all contracts with vendors, potential business partners, or others who may gain access to the confidential information.

Employment Issues

Most trade secret disputes arise in the context of the employer-employee relationship.

Employers.  Employers often view every piece of valuable information that their employees acquire as company property. Therefore, many require employees to sign explicit confidentiality or noncompete agreements as a condition of employment.  Unless such agreements are unreasonable in scope or duration, they may prevent a worker from accepting employment in competition with a former employer.

Employees.  An employee, however, may understandably feel that his or her skills, knowledge, and experience are personal assets that can be sold to the next employer.  Employees who leave jobs where they had access to confidential technology or business information should examine any employment agreement that they are asked to sign.  

Implied obligations.  Where no written confidentiality agreement or employment policy exists, the law will still imply an obligation not to use or disclose an employer's confidential information if the employee knew or should have known that the employer wanted such information to remain secret. Moreover, under the “doctrine of inevitable disclosure,” some courts impose non-competition restrictions upon certain high-level employees even in the absence of a confidentiality agreement.  These implied obligations, however, may not apply to general information an employee learns as the result of employment.

Steps to be taken by employers.  From the employer's perspective, there should always be clearly defined and communicated policies, written confidentiality agreements regarding intellectual property ownership, and restrictive employment covenants where appropriate.  Employers should also take special care to designate sensitive materials as confidential, and to restrict access to their trade secrets on a need-to-know basis.  Even the posting of signs on company premises restricting access to areas where confidential technology is used may provide critical evidence.

Conclusion

The law of trade secrets, although simple in concept, is difficult to apply in practice.  Every situation involves balancing the interests of the trade secret owner with the public interest in making non-confidential, useful business information freely available. Cases are usually decided on the economic value of the secret, the degree of secrecy maintained by the owner, and the bad faith of the defendant.  The loss of a trade secret by an owner, or a court injunction and damages levied against a defendant, can be a disaster.

For further information about copyright matters, contact J. Christopher Jensen or your CLL attorney.

This ON MY MIND™ Blog post © 2015 by Cowan, Liebowitz & Latman, P.C., New York, NY. 

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