1/5/2001

By Glenn E. Coe and Austin J. McGuigan

The following was a presentation to The Network of Trial Law Firms, Inc. Conference, Kiawah Island, South Carolina, Fall 2000
Protect the Fort:
Protecting Trade Secrets and Other Confidential Information

With the technological explosion that is occurring throughout the world, renewed attention is being given to trade secret laws. Somewhat ironically, trade secret laws, the oldest recognized way to protect intellectual property, are increasingly being used to protect the newest, cutting-edge advances in our technological society. In part, this is because of the quick turnover of technological advances resulting in present state-of-the-art innovations becoming antiquated, in some instances within months, by the next generation of technological developments. With increasing frequency, more corporations find that the time required to apply and prosecute patents to protect intellectual property, which patents may be obsolete well before the patent protection period expires, may not make economic sense if the intellectual property can be protected as a trade secret. Obviously, if the intellectual property at issue can be readily reversed-engineered and must be disclosed to the public to derive economic value from its use, there may be no alternative but to obtain patent, copyright, or trademark protection.

Society has countervailing concerns with respect to trade secrets. The law seeks to balance the need for incentives, the risks of foreclosing the use of basic ideas or information already in the public domain, and the benefit of making innovative knowledge available to the public. Courts have to weigh how similar two pieces of information must be to infer impermissible acquisition, use or disclosure, as courts generally do not preclude defendants from using information that was independently discovered or developed.

Civil causes of action for theft or misappropriation of trade secrets are governed by state law, in contrast to patent, copyright, and trademarks, which are regulated and controlled by federal law. The majority of states have adopted the Uniform Trade Secrets Act ("UTSA"), which has standardized state statutes concerning trade secrets. As of 1999, 42 states had adopted the UTSA, some with modifications. Notable exceptions are New York, Texas, Pennsylvania, and New Jersey, which continue to apply their respective common law to trade secret cases.

Many states have also enacted specific statutory schemes addressing the crime of trade secret theft. In addition, the Federal government has recently enacted the Economic Espionage Act, which focuses on theft of trade secrets by national and foreign persons or entities.

What is a Trade Secret?

A trade secret is information that:

  • derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
  • is the subject of efforts that are reasonable under the circumstances to
    maintain its secrecy.

States that follow the common law usually do not consider a trade secret to be information relating to a single event such as salaries, investments, a secret bid or an IPO offering date. A trade secret, under the common law, is usually information that is continuously used in the operation of a business. The UTSA, however, does not require proof of continuous use in one's business, but protects even the company's secrets that have not yet been used.

Trade secrets, according to applicable state statutes, may

  • relate to the production of goods (such as parts, the machinery to manufacture parts, or specifications or formula for producing parts or goods);
  • relate to the sale of goods (such as a code for determining discounts, price lists, a list of specialized customers or methods of management or operation of the business);
  • include scientific and/or technical information;
  • include computer programs/software provided they have not been disclosed on the internet or, otherwise, to the public; and/or
  • include confidential business or financial information.

Trade secrets may also include:

  • Formulas
  • Designs or Patterns
  • Compilations
  • Programs
  • Devices
  • Methods (e.g., treating or preserving materials)
  • Techniques
  • Processes (e.g., of manufacturing)
  • Drawings
  • Cost Data
  • Customer Lists

Factors Establishing a Trade Secret
Courts may consider the following factors in determining whether certain information is, in fact, a trade secret to be protected by the legal process:
1. The extent to which the information is known outside the business (e.g., if customers' names can be readily ascertained through ordinary business channels or reference sources, such will probably not be regarded as a trade secret. However, a listing of "customers whose trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money" may obtain trade secret protection.)

2. The extent to which the information is known by employees or others involved in the business. In other words, is the information made known only to employees with a need to know it? Obviously, employees to whom the information is disclosed must be made aware at the commencement of their employment, or of the development of the trade secret, that the employer requires that the information be kept secret.

3. The extent of measures taken by the company to guard the secrecy of the information. "A substantial element of secrecy must exist, to the extent that there would be difficulty in acquiring the information except by the use of improper means." However, absolute secrecy is not required. Only as much secrecy is required as is practicable under the circumstances.

4. The value of the information to the company and to its competitors.

5. The amount of effort or money expended by the company in developing the information (e.g., research and development costs).

6. The ease or difficulty with which the information could properly be
acquired or duplicated by others.

7. The extent to which any confidential or fiduciary relationship has been breached in disclosing the information (e.g., the owner's accountant, who learned everything about the owner's business, leaves and sets up competing business using the owner's processes and customer lists ).

8. The method by which the trade secret was obtained by the competitor (including, but not limited to, the degree of difficulty and/or the use of improper means such as theft. If the defendant had to steal the trade secret, that is persuasive evidence that the information is a trade secret and that it could not be easily acquired or duplicated).

9. The individual's personal relationship with his/her former employer's customers.

10. The unfair advantage accruing to the competitor from the use of the stolen trade secret.

11. The extent to which the owner of the trade secret investigated and prosecuted those who stole its trade secrets (e.g., if earlier thefts of the trade secret were not investigated or prosecuted, that suggests that the owner did not consider the information to be a trade secret.)

Steps That Should Be Taken To Protect Your Company's Trade Secrets

1. Periodically prepare an inventory of trade secrets associated with your business. The inventory should be done by key engineering, production, marketing, human resources and finance personnel and involve senior officers with an overview of the company, its operation and of the industry. An attorney knowledgeable about trade secret law should work with each of these persons to focus their considerations. This may also enable the attorney-client privilege and attorney work product protection to attach to the inventory.

2. Determine how the information gives your company a competitive advantage within your industry, and the extent to which, if any, the information is available through public sources if someone searches diligently for it.

3. Develop a plan for maintaining secrecy and confidentiality of information you consider to be a trade secret, including plans to limit possession of and access to your trade secrets by employees, servants, agents and consultants.

4. Educate employees on what information is a trade secret that cannot be divulged to outsiders, and advise them of the consequences of unauthorized disclosure, including civil and criminal prosecution.

5. Have your employees sign an Intellectual Property Agreement pursuant to which they acknowledge:

  • that certain information they will acquire through their employment is regarded by their employer as being a trade secret and the employee so recognizes such in writing;
  • that the employee agrees, during the course of employment and thereafter, not to use the trade secrets for his/her own benefit and/or to disclose the same to any other persons and/or entities, except as required to perform job duties while in the employer's employment and/or with written consent of the employer;
  • that all trade secrets will be returned by the employee upon request or termination of employment, whichever occurs earlier; and

6. Have your employees sign a Restrictive Covenant pursuant to which the employee agrees not to compete with the employer for a reasonable time (a period of time greater than two years will receive close scrutiny by a court) and/or within a defined geographical area (the larger the area the less likely the court will enforce it).

7. Conduct exit interviews with employees when their employment terminates. Such interviews should include, inter alia, reiterating prohibition against use or disclosure of trade secrets and insuring the return of all trade secrets possessed by employees during their employment.

8. Clearly identify all trade secret documents with a legend on the first page, e.g., "This CONFIDENTIAL document is the property of [the owner] and may not be disclosed or used by anyone without the written permission of [the owner]."

9. Create and enforce document control procedures to ensure that confidential documents are returned to secure locations.

10. Do not allow public access to areas of your business where trade secrets may be viewed, even inadvertently.

11. If the trade secret(s) must be shared with a third party vendor, supplier, distributor, consultant or other third party, it must be pursuant to written confidentiality agreements that require your company's written approval before the trade secret is reviewed and/or disseminated further by the third party. Contractual protection extends only to parties to the contract.

12. Be consistent in the protection of your trade secrets, as any failure to do so may be perceived and/or interpreted as a relinquishment of the secret. Conduct periodic internal audits checking on the implementation of your company's plan to protect its trade secrets, including a review of Confidentiality Agreements with employees, suppliers and third parties.

13. If someone successfully steals your trade secret, immediately pursue all legal alternatives against them and zealously prosecute any misappropriation both civilly and, if possible, criminally.

14. If there is litigation, obtain a protective order to ensure that your trade secrets are treated confidentially during the course of litigation. Whether a claimed trade secret is widely known in the industry or is known only by the plaintiff, is considered by most courts as a question of fact. However, whether laxness in enforcing confidentiality procedures destroyed the secrecy requirement, is generally considered to be a question of law.

13. Strategy sessions should be held with your trial counsel present to ensure maintaining attorney/client confidentiality.

What To Do If The Fort Has Been Breached and Your Trade Secrets Have Been Stolen

Aggressive investigation and civil and criminal prosecution must be pursued without delay. Following are civil and criminal remedies that should be considered, depending on the remedies provided by the applicable federal and state statutes and/or common law:

Civil remedies.

1. Injunction (proof of misappropriation of trade secrets gives rise to a presumption of irreparable harm as once the trade secret is disclosed, the secret is lost forever).

  • Seek an order compelling the defendants to turn over and/or destroy all copies of documents and devices which embody or contain the trade secrets;
  • If there has been flagrant, wrongful use of the trade secret, and future use might prove difficult to detect, courts have ordered the destruction of machinery or products;
  • If anti-trust exposure is on the horizon, consider a licensing agreement.

2. Compensatory damages for actual loss caused by the misappropriation and for any unjust enrichment/unjust profits earned by the defendant.

3. Punitive damages and attorney fees for willful and malicious conduct. Check your local state statutes and/or common law as multiple punitive damages may be allowed.

4. Damages for breach of fiduciary duty or breach of confidential relationship. Courts have held that "knowledge acquired by an employee or agent during his hire cannot be used for his own advantage to the injury of his employer or principal during the period of hire." This duty extends after the period of hire if the civil action is based on misappropriation of a trade secret.

5. Damages for tortious interference with business expectancies if the defendant's interference causes actual loss to your company. Some states require a showing that the defendant was guilty of fraud, misrepresentation, intimidation or molestation, or acted maliciously with improper motive or improper means.

6. Damages for civil conspiracy if there is evidence that the acts were committed pursuant to a formed conspiracy between two or more people, to do a criminal or unlawful act, or by criminal or unlawful means, and one or more of the conspirators performs an act pursuant to the scheme and in furtherance of the conspiracy which caused damage to your company. If there is a conspiracy, all conspirators are civilly liable for the damage resulting from any overt act committed by any one of them pursuant to the conspiracy.

7. Damages for Unfair Trade Practices. Many states have an Unfair Trade Practices Act that prohibits persons from engaging in unfair methods of competition, and unfair or deceptive acts or practices in the conduct of trade or commerce. If the defendant's conduct violates public policy, is

immoral, unethical, oppressive or unscrupulous, or causes substantial injury to the consumer, competitors or other businesses, such could constitute unfair trade practices under your state statutes. Said statute may provide for multiple damages, punitive damages, attorney fees and/or injunctive relief.

Criminal Prosecution - State

Various state criminal statutes may be violated by a defendant misappropriating your company's trade secret(s), including the following:

1. Larceny by embezzlement and/or theft of services.

2. Commercial bribery if a benefit has been conferred upon an employee, agent or fiduciary without your company's consent to influence his or her conduct in relationship to your business.

3. Burglary/criminal trespass. If someone enters your business with the intent to commit a crime, such as to steal your trade secret.

4. Computer crimes. If someone gains unauthorized access to your computer system to steal your computer services or, without your consent, obtains computer data or alters, deletes, tampers with, damages or destroys computer data with the intent to obtain unauthorized computer services.

5. Criminal Conspiracy. If someone agrees with one or more persons to engage in or cause performance of conduct constituting a crime and one of said persons commits an overt act in furtherance of the conspiracy.

6. Criminal Attempt. If the person attempts to commit a crime and acts with the necessary mental state required to commit the crime that is a substantial step in the course of conduct planned to culminate in his commission of the crime. (An advantage to a charge of Criminal Attempt is that the court is not likely to require the prosecution to disclose the trade secret during discovery or the trial as the prosecution is only required to prove that the defendant attempted to steal the trade secret.).

Criminal Prosecution - Federal

In addition to possible state criminal statutes, the federal government has enacted the Economic Espionage Act (the "EEA"), 18 U.S.C. § 1832 et seq. "The [EEA] defines a 'trade secret' broadly, to include both tangible property and intangible information, as long as the owner 'has taken reasonable measures to keep such information secret' and the information 'derives independent economic value ... from not being generally known to ... the public.' United States v. Hsu, 155 F.3rd 189, 196 (3d Cir. 1998); 18 U.S.C. § 1839(3)."

Conspiracy to steal trade secrets may also be charged under the EEA when it can be shown that an agreement existed, that the agreement had an unlawful purpose, that the defendant was a voluntary participant with intent to agree and to commit the substantive offense, and that at least one conspirator committed an overt act toward achieving the conspiracy's purpose.

CONCLUSION

A company's trade secrets may be among its most valuable assets, enabling the company, inter alia, to compete aggressively in its industry and to recover significant investments in research and development of new products. Protection of the company's trade secrets, accordingly, should be given high priority and pursued in a comprehensive manner.

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Counsel familiar with trade secret law, criminal law and law enforcement agencies can effectively assist a company in identifying its trade secrets, in establishing and monitoring company procedures to ensure the protection of such trade secrets, and in investigating and pursuing appropriate civil relief and criminal prosecution when a theft or misappropriation of trade secrets occurs.