Misappropriation of Trade Secrets and Employee Loyalty
By Randall P. Sutton
SAALFELD GRIGGS PC
How the law Protects your Confidential Business Information
WHAT IS A TRADE SECRET?
Oregon law protects businesses from the disclosure of their trade secret information. However, it is often difficult to determine whether information is, or is not, a “trade secret.” Although the law can be very protective, the law does not protect businesses who fail to treat confidential information with appropriate care. In addition, although a business may consider certain information to be “confidential,” not all confidential information is entitled to protection as a “trade secret.”
A trade secret can include any document, drawing or data that contains confidential business information. A trade secret can include:
- Business methods;
- Computer programs or data;
- Cost data;
- Customer lists or other information about a customer;
- Drawings or blueprints;
- Formulas or specifications;
- Marketing plans;
- Production methods or techniques;
- Records of sales, purchases, or transactions etc.
However, these documents cannot qualify for trade secret protection unless both of the following apply:
Information is Valuable Because it is Not Known by Others: First, the information must be valuable because it is not generally known to the public or to your competitors. Therefore, information readily available to the public, or easily obtained by competitors, cannot be a trade secret.
Information Protected from Disclosure: Secondly, if a business wants certain information to qualify as a trade secret, it must make efforts that are reasonable under the circumstances to maintain the secrecy of the information. If the business gives free access to the information, it will not qualify for trade secret protection.
WHEN IS INFORMATION VALUABLE BECAUSE IT IS NOT KNOWN BY OTHERS?
There are two issues in determining whether information is valuable because it is not known by others. First, there is the question of whether the information would be valuable if a competitor gained access to the information. Second, there is the more difficult question of whether the information is readily available to the public or your competitors.
The key in answering the first question is to determine whether your competitors could obtain a financial advantage if they were to acquire the information. Does the information give you a competitive advantage? Have your competitors been disadvantaged by not having the information? Did the information take a very long time to gather? These are the kind of questions that will help determine whether the information has value because it is secret.
Answering the second question is more difficult. Whether information is “generally known” is hotly disputed in most trade secret lawsuits. Realistically, with enough time and effort, a person can learn almost anything. The rare exception to this general rule may apply to highly secret formulas, such as the formula for Coca Cola, or to the unpublicized goals and strategies of key individuals in your business.
Fortunately, the law does not require absolute secrecy. Rather, information is entitled to protection so long as it is not “generally known.” This raises the question of how much effort may be needed to turn ordinary information into a trade secret. In general, the more effort or money expended by a business in developing the information, and the more difficult the information was to obtain, the more likely the information will be considered a trade secret. For example, a customer list that takes hundreds of hours to recreate would likely be entitled to protection. On the other hand, if the information could be gathered in only a few hours, by looking through the yellow pages or surfing the Internet, it may not be protectable.
Whether the information is published can be key to determining whether it is a trade secret. For example, although information in a phone book will typically not be a trade secret, unpublished information or back office phone numbers may be. It all depends on how difficult it is to obtain the information. If the information would be readily disclosed to anyone who cold calls the business, the information will usually not be a trade secret.
WHAT ARE REASONABLE EFFORTS TO MAINTAIN SECRECY?
As discussed above, even highly confidential information will not qualify as a trade secret if you don’t take reasonable efforts to protect the information from disclosure. Some of the reasonable efforts that a business can take to show it intended to protect information as a trade secret include:
Confidentiality Policy in Your Employee Handbook. A confidentiality policy in your employee handbook helps show that all employees were informed that certain information was to be held confidential. In a breach of duty of loyalty claim, the policy may also be helpful to show that the employee understood his or her fiduciary duties with regard to the information. It is important to note, however, that because an employee handbook should not be a contract, an employee who violates the policy is subject to discipline or termination, but cannot be held liable for breach of contract.
Confidentiality and Non-Disclosure Agreements. A confidentiality agreement with your employees also helps show that both the employer and employee consider certain information to be a trade secret. The Agreement will typically identify confidential information and require that the employee not use or disclose the information to others. The agreement can specifically expand the protections granted by the law, by more broadly defining confidential information to include information that may not qualify as a trade secret, most importantly, or the employee who discloses the information can be held liable for breach of contract.
Limited Access to Information. Any information that you seek to protect as a trade secret should be disclosed on a “need to know” basis only. For example, although your sales people may need to have access to your customer list, shop employees or clerical personnel probably do not. Having a rolodex of your customer list out on a desk or front counter for anyone to use, or allowing employees to print, keep a copy, or even take home your customer list, will help destroy trade secret status.
Passwords to Data. When the information is maintained on a computer, access to the information should be limited to those who must use the information to perform their jobs. One of the best ways to limit access is to give only a few users a password to access the data.
Locked or Enclosed Storage of Information. It is very important that confidential printed materials are stored in locked file cabinets, and accessed only by those with authorization. Better yet, you may wish to require that only those employees who have signed a Confidentiality and Non-Disclosure Agreement will be allowed access. A good piece of evidence for use at trial would be a sign in/out sheet that employees use to access the information.
WHEN IS YOUR CUSTOMER LIST OR OTHER CUSTOMER INFORMATION A “TRADE SECRET”?
Every business seeks to protect its customer base. Fortunately, customer lists are specifically defined as a trade secret under the Oregon law. However, as with other trade secrets, the law will only protect a customer list if the information is not readily available to others, and the business has taken steps to keep the information secret.
The key with customer lists, as with other trade secrets, is to determine how valuable the information is, and how difficult it would be for your competitors to obtain the same information. If the information is sufficiently valuable, it also must be vigorously protected from disclosure.
In some cases, the identity of a customer may not be secret, but inside information about the customer is. For example, everyone may know that ABC Corporation needs the widgets that you and your competitor produce. However, only you know who at ABC Corporation is responsible for ordering widgets, the names and ages of that person’s kids, how many widgets ABC needs, when they need them, what their specifications are, how much they are willing to pay, and other unpublished information. Having this sort of inside information is often key to gaining or keeping your customer’s business.
HOW DOES THE LAW PROTECT TRADE SECRETS?
Both the person or company who takes information, and the person or company who receives the information, can be liable for misappropriation. The following describe several types of misappropriation. Many of these circumstances require proof of “improper means.” The law defines “improper means” to include theft, bribery, breach of a duty to maintain secrecy, or misrepresentation:
A person acquires a trade secret information knowing, or having reason to know, that the information was acquired by improper means.
Example: You call your competitor, pretending to be a potential customer, and obtain inside information. You would be liable for misappropriation.
A person discloses or uses a trade secret, after acquiring that secret by improper means.
Example: Your new employee, who took the customer list of his former employer, provides that information to you. The employee may be liable for misappropriation.
A person discloses a trade secret, knowing that it was acquired by accident or mistake.
Example: Your competitor accidentally emails confidential information to you. You realize that the email was forwarded by mistake, and that the competitor would not have wanted this information disclosed. If you use or disclose this information, you may be liable for misappropriation.
A person discloses or uses a trade secret, knowing that it was obtained by a person who used improper means to acquire the secret.
Example: You are aware that your new employee entered into a confidentiality agreement with her former employer. In breach of her duty of confidentiality, the new employee gives you trade secret information and you use it. Both you and the former employee may be liable for misappropriation.
A person discloses or uses a trade secret, knowing that it was obtained under circumstances giving rise to a duty to maintain secrecy or limit the use of the information.
Example: Your new employee learned the information as part of his duties for the former employer. The employee’s duty of loyalty requires that the employee keep the information secret. The employee discloses the information to you anyway, and you use the information. Both you and the employee may be liable for misappropriation.
LIABILITY FOR MISAPPROPRIATION OF TRADE SECRETS.
A business that prevails on a misappropriation of trade secrets lawsuit may be entitled to an injunction, damages, and attorney fees:
Injunction: One of the strongest remedies for misappropriation of trade secrets is injunctive relief. When a business believes that its confidential information is being used or disclosed by another person or business, it has the right to seek a temporary restraining order and a preliminary injunction promptly stopping the disclosure and use of the information. These are pretrial proceedings, and can happen relatively quickly. However, an attempt to obtain an injunction usually meets with vigorous opposition. Many misappropriation of trade secret lawsuits are won or lost at this stage. If the release of the information is not prevented, it is often difficult to determine damages. If the court orders the injunction, this will many times prompt a settlement of the lawsuit.
Damages: A person or business who misappropriates trade secrets can also be liable for damages. This can include lost profits resulting from the unfair use of the information. In addition, where the misappropriation was “willful or malicious,” the jury may also award punitive damages.
Attorney Fees: In some cases, a prevailing party may also recover its reasonable attorney fees from a person or business who misappropriates its trade secrets.
DO EMPLOYEES HAVE A DUTY OF LOYALTY?
Employees have a duty not to directly compete with their employers. Therefore, so long as an employee works for a business, the employee cannot take actions to compete with the employer. Once the employment relationship terminates, however, the employee is usually free to compete. Competition may include opening up the same type of business, or even soliciting the existing customers and employees of the former employer. If an employer wishes to restrain a former employee, it must have entered into a noncompetition or nonsolicitation agreement with the employee.
Although an employee is free to compete with the employer once the employment relationship ends, this does not mean that the employee is entitled to reveal the former employer’s trade secrets. If information is a trade secret, the law’s protection of the secret continues even after the employee terminates.