Protecting Company Trade Secrets

 

Protecting trade secrets is not usually the first thing that comes to mind when conceptualizing business intellectual property. But, employees often leave to work for competitors or themselves and may take invaluable company confidential information with them. The law allows companies to protect trade secrets, but only if employees understand the information is confidential and your business has shown the intent to keep it confidential.

In a 2006 Illinois case, Liebert Corp. v. Mazur, four employees resigned from a company to accept positions with a competitor, but downloaded huge quantities of company data before leaving. Those employees were sued by the business, but the court ruled that the downloaded customer lists and sales quotes were not trade secrets protected by law. This was because the company did not adequately protect them by their “failure to either require employees to sign confidentiality agreements, advise employees that its records were confidential, or label the information as confidential.”

The lesson to be learned from this and similar decisions is that businesses, at least in Illinois, should always use non-disclosure or confidentiality agreements to protect your valuable trade secrets and confidential information.

Generally speaking, confidentiality restrictions are far more likely to be upheld by the courts and far less burdensome to the departing employee than either a non-solicitation or a non-compete agreement. A restrictive covenant placed on the employee after employment/contract duration will typically be enforced if its terms are reasonable. A confidentiality agreement/restriction is not generally held unenforceable for lack of duration or geographic limitations where only trade secrets and confidential information are involved. If the restriction does not try to completely restrain an employee or contractor’s future career, it will typically be upheld.

As a general rule of thumb, the party who will be disclosing more information should: (a) broaden the scope of the definition of confidential information, (b) lengthen the term during which the information must be kept confidential or make it forever or in “perpetuity”), (c) limit access to the confidential information, and (d) limit the ways in which the information may be used.

Restricting rights to use any confidential information at any time during or after employment/contract duration can sometimes be effectively used as a back door non-compete provision. Confidential Information can be defined in the agreement to include customers and/or prospective customers and key suppliers and distributors. Sometimes, this is more effective than attempting to cautiously tailor a non-compete provision since confidentiality and non-disclosure restrictions are more likely to be upheld.

 

Trade Secrets Law

Much of what you might imagine is protected in a confidentiality agreement is already protected under common law or by specific state statute. Most States have adopted, with some minor modifications, the Uniform Trade Secrets Act (UTSA). The UTSA protects “trade secrets,” which is defined as follows:

You should protect material that is not identified as a trade secret under the UTSA by using a confidentiality agreement/provision. This can basically broaden the protection inherent in state law. But, an even more important purpose of a confidentiality agreement/provision is that it can help protect your business’s “trade secrets” under the UTSA as well. Drafting and entering into such an agreement reflects that you, the employer, have taken affirmative security measures to maintain the secrecy or confidentiality of this information. The fact you have taken the time to go to such lengths to protect what you deem to be confidential, clearly establishes your intent to protect this information and will be generally looked upon favorably by the courts.

As the UTSA makes clear, a trade secret will not be protected unless efforts are made to maintain its confidentiality.  Accordingly, you should engage in the following practices to establish your business’s intent to protect its confidential information:

  • Only allow computer access to critical information only on a need-to-know basis;
  • Have employees sign confidentiality agreements;
  • Label critical documents as confidential;
  • Require a separate log-on for confidential website pages. Also include language stating that by logging on, employees agree to keep the information confidential.

 

Defend Trade Secrets Act

On May 11, 2016, the Defend Trade Secrets Act (DTSA) went into effect. This legislation creates a federal, private cause of action for trade-secret misappropriation if the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce. Defend Trade Secrets Act of 2016, S. 1890, 114th Cong. § 2 (2016). Businesses should be aware of this important new law. Before the enactment of the DTSA, in the absence of diversity jurisdiction or an independent federal cause of action, businesses had to rely on suing in state court for trade secrets misappropriation. There is now a uniform statute to be applied nationwide, at least in federal court. The DTSA will not preempt existing state laws, but it gives businesses another option to protect their invaluable confidential information.

The DTSA definition of “trade secret” is broad and defined as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”

Another important feature of the DTSA is the civil seizure mechanism. A court may “issue an order providing for the seizure of property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.” Before a formal finding of misappropriation, a business can seek to prevent further disclosure of its confidential information and stop the bleeding pending proceedings.

The bottom line is that your company should be very proactive about protecting trade secrets.