TRADE SECRETS

IVAN HOFFMAN, B.A., J.D.



        Trade Secrets.  A hot button issue for many companies, especially Internet ones.  One of the key issues facing individuals and companies alike both in making deals, whether called “strategic alliances” (read “Strategic Alliances.”) or otherwise as well as in employment situations and in consulting and other agreements is the protection the company seeks for its trade secrets.  While primarily the subject of contract (see “Private Laws”), trade secret rights and obligations are also governed by the Uniform Trade Secret Act (“The Act”) that may be applicable in your state and cases decided under that statute.  Let me deal with the California version of The Act, which is found in Civil Code section 3426 and following sections.  Although the general principles are probably quite similar, the actual statute and judicial decisions in your state may be different so you should consult with an attorney in your state.

        I have previously written about some of these issues in non-disclosure agreements (“The Non-Disclosure Agreement”) as well as within the scope of an employment agreement (“The Employment Agreement”).  This article, however, deals with the specifics of trade secrets.  However, it should be noted that trade secrets issues do not exist standing alone.  It is often intertwined with issues related to contract rights, copyrights, trademarks and the line between acceptable and unacceptable restrictions on the right to work.  There may be situations in which although a non-disclosure agreement or a covenant not to compete may be unenforceable and yet, if the subject matter of the claim deals with bona fide and protectable trade secrets, a claimant may be able to prevail on that legal theory.   In any event, trade secret protection is a matter of both statutory, judicial and contract law and all 3 areas are generally involved in any such controversy.

        Indeed, the theft of trade secrets is also a federal crime punishable by stiff fines and imprisonment.  And while I will focus in this article primarily on the issues relating to the protection of trade secrets in a business context since that is probably the part most important to you as a reader and because the federal law does not create any private right of action against the taker, where appropriate I will speak to the federal law as well.

What is a “Trade Secret?”

        The Act defines a trade secret as follows:

(d) “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and

(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

        There are, accordingly, at least 2 prongs to this definition.  The first is that the information must have economic value, whether actual or potential, that is derived from its very secrecy.  This means that it is not merely ordinary information that is protected but information that offers the claimant a competitive advantage over others who do not have that information.  See the discussion below about customer lists.

        The second test is that it must be shown that the claimant has taken “reasonable” steps to insure the secrecy of that information.  This means that it is up to the claimant of the trade secrets to show that it has a policy, within its normal business procedures, that is designed to protect the secrecy of the information.  This may be some form of marking of the information as “Confidential,” some restricted access to that information, perhaps provisions in its employment and other agreements dealing with this information and so on, as but a few examples. The Internet and the potential for exposure of trade secrets via this medium has opened up a wide ranging area for companies to deal with in terms of protection. If the company fails to protect its claimed secrets via employee or other parties’ access to files stored on the company’s servers and those secrets are disseminated via the Internet, there may be a loss of the claim if the company failed to exercise reasonable control.  As I discussed in “The Non-Disclosure Agreement,” a company should examine its policies in this regard and take pains to document its procedures in writing and have a written policy in effect regarding disclosure to employees and others.  This is an essential component of protection since it is up to the claimant of the confidential information to show that it considered it to be confidential and a written paper trail in this regard is the key element in such burden of proof.

        The secrets must be taken by some form of “misappropriation” and “improper means” including theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means.  However, the California statute specifically states that “Reverse engineering or independent derivation alone shall not be considered improper means.” [emphasis added].

        Under the federal law, the taking of trade secrets can be by stealing, appropriating, taking, carrying away, concealing, copying, duplicating, sketching, drawing, photographing, downloading, uploading, altering, destroying, photocopying and other forms of activity and includes the buying or possessing of trade secrets.

Customer Lists

        Let me discuss customer lists as but one example of claims that may arise in this area of the law.  These lists are among the most hotly contested matters dealing with trade secret claims.  The cases have dealt with “real world” customer lists but *may* be extrapolated to apply to online, email lists.  It would again depend upon how the information was compiled and reformatted by the claimant.

        Often these lists are part of a business’ most important assets but that, standing alone, does not make the lists a trade secret worthy of being protected.  There is no uniformity in judicial decisions concerning these lists and the situation usually arises when a former employee is sued for using these lists to solicit the customers.  The cases turn on the applicability of the factors set forth above.  The courts examine whether the lists are merely lists of customers otherwise available or whether the claimant compiling the lists has added a measure of what might be considered “sweat of the brow” information to the mere existence of the data, such as through research, ingenuity, marketing and other efforts.  This is what I was referring to above when I said that public information can be repurposed to create a trade secret.  Clearly, a listing of names and addresses alone is not protectable.  But the more the claimant has added to that public information, such as including contacts, specific customer information and so on, the more strength is added to the claim that such public information has now become “privatized.”

        The courts also examine whether or not the owner of the information has taken necessary and reasonable precautions to safeguard the information.  Merely disclosing it to the employee is not, in and of itself, sufficient to remove the cloak of protection the list might otherwise have since the value of the information comes from its use.  However the disclosure must be in the form of a confidential communication with express instructions, hopefully in writing, limiting the use of that information.   There must be a policy, in writing is best, that defines what the information is and how and under what circumstances it can be used and by whom.

        Clearly there are other forms of trade secrets claims including those that rise to the level of real intellectual property as well as business plans and other forms of “knowledge” a company may possess.  The way these are defined in any employment or independent contractor agreement often is a key element in terms of protectability.

Remedies

        If a court finds a violation of a trade secret, it can issue an injunction against the use of the information but it may also “condition future use [of the information] upon payment of a reasonable royalty for no longer than the period of time the use could have been prohibited.”  This means that if the information is already “out there,” since an injunction might not be effective, the court can order the violator to pay a licensing fee to the owner of the information.

        And in the most offensive situations, a court can order the violator to pay exemplary damages.

The Day of the Deal

        In “Private Laws,” I wrote about the need for each party to protect him, her or itself in a transaction in the form of a thorough, written agreement since there are always gaps in the law that may fail to cover the specifics of a situation.  This area of the law is no exception. Thus, the statute states:

            “(b) This title does not affect (1) contractual remedies, whether or not based upon misappropriation of a trade secret….”

        The law thus recognizes that the parties may negotiate to protect themselves within the four corners of the written agreement in ways that the statute itself does not touch.  And it is the business with vision that sets out to protect its secrets in the form of a written agreement and policy so as not to have to rely on the vagaries of judicial and statutory interpretation.  By creating it’s own “private laws,” the business may be in a better position to control its own destiny in this area.

Conclusion

        If you are a claimant of protectable trade secrets, it is up to you to know your legal rights and in a certain sense more importantly, your legal obligations to protect those secrets.  If you are an employee or a third party to whom such secrets are being disclosed, you too must know where you stand legally.  As with many areas of the law, not everything is what is initially appears to be.

        Write it down.  Clearly. Thoroughly.  It’s your business.

© 2000 Ivan Hoffman

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This article is not intended as a substitute for legal advice.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  You should consult with an attorney familiar with the issues and the laws.
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No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used without the express written approval of the author.


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