An Overview of the US Law of Trade Secrets and Confidential Information

By Steven M. Weinberg

Posted: 24th November 2011 10:36

Introduction

Among the most important assets of a company is its non-public competitively significant information and know-how.  In today’s fast-paced highly competitive marketplace, where opportunities are won and lost in blinks of an eye, having a protected competitive edge more often than not makes the difference between success and failure.  Trade secrets and confidential information frequently provide that competitive edge; however, as intangibles that can be easily transferred in electronic media, or merely remembered, they are vulnerable to being lost or misappropriated.  For that reason, lawsuits against the unauthorized use or taking of trade secrets and confidential information have increased dramatically over the last few years.

The range of information included in this category of assets is fairly broad.  It includes client lists and non-public information about clients; business plans; marketing plans and know-how; manufacturing know-how; inventions and discoveries; sales and marketing methods; and a variety of concepts and ideas.  Some of these may qualify for patent protection, and some may not.  Some confidential information may qualify as being trade secrets and some may not.  Whatever may be the category into which this information may fall, there is one constant – they must remain secret to be protected.

The need to maintain secrecy cannot be understated.  Under US law, concepts, ideas, data and information, no matter how novel or competitively significant, cannot be protected if they have been publicly disclosed.  Many companies, from start-ups to mature, make the mistake of not securing agreement from a recipient of valuable secret information before disclosure is made.  In other words, getting a non-disclosure agreement in place from a recipient of the information after disclosure has been made will not reverse any use or public disclosure of the information by the recipient in the interim.  Far too many “secrets” and thus business opportunities have been lost because of uncontrolled disclosure.

An unfortunately typical scenario is when what appears to be a legitimate business meeting takes place without the benefit of a non-disclosure agreement in place.  Predatory companies interested in finding out about another’s business plans or other secrets – and then using them -- will create scenarios where they can acquire this information under the ruse of what looks like a legitimate business opportunity.  Many companies hungry to do business may decide not to require a non-disclosure agreement believing that they can trust the recipient, only to find out later that this was a massive error.  Or they believe that an oral non-disclosure agreement may suffice, only to encounter the recipient’s denial that such agreement existed. 

Another scenario relates to the misappropriation and use of secret information by former employees.  The laws relating to post-termination covenants not to compete by former employees vary from state to state without the benefit of a uniform federal law.  In California, for example, non-competes for former employees are completely unenforceable.  In many other states, non-competes will be narrowly construed by the courts, which require them to meet a number of exacting standards and limitations to withstand attack.  All of the states, however, will enforce covenants by former employees not to use trade secrets of their former employers if that agreement is in writing.  In states like California where non-competes of this kind are not valid, the only real leverage employers have to prevent competition by former employees is a prohibition on the post-termination use of trade secrets by them.  Employee non-disclosure agreements therefore are critical in businesses whose competitive edge is tied to their secret information.

Not only is it important for employers to prevent secret information from leaving with former employees, it also is critical for them to know whether any new employees are subject to non-disclosure agreements or covenants not to compete with their former employers.  There is rapid employment turn-over in many industries, especially for higher ranking employees, including those at the C-level.  In addition, the use of independent consultants for business and marketing strategy and R&D has become the norm.  All of these prospective new employees and contractors over the course of their careers have been exposed to third party trade secrets and confidential information; secrets and information that may be subject to enforceable non-disclosure agreements.  A best practice for every employer is to determine whether or not new employees or consultants are subject to such agreements and whether those agreements had termination dates.  Trade secrets and confidential information are valid as long as they remain secret and have commercial vitality, which means that some may last for generations, if not forever (the recipe for Coca-Cola as an example).  Far too many businesses have discovered by way of court action and a preliminary injunction that one or more of the people integral to the development of newly launched initiatives or their business used secrets or confidential information in violation of an enforceable third party non-disclosure agreement.

Trade Secrets

Many business people assume that all information they identify as being “proprietary and confidential” is protected under the law of trade secrets.  The term “trade secret,” however, has a specific meaning in the US, which derives from three primary sources – (1) the Supreme Court’s decision in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974)(adopting the definition in the Restatement of Torts § 757, comment b (1939), and holding that the patent law does not pre-empt the states from having trade secret laws); (2) the Uniform Trade Secrets Act (the “UTSA”), which has been adopted by 45 states, including California, and (3) the federal Economic Espionage Act of 1996.  The definition of a “trade secret” both under the UTSA and the Economic Espionage Act is:

“. . . . 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.”

Under the UTSA, “misappropriation” of a trade secret is defined as  including “(1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (2) Disclosure or use of a trade secret of another without express or implied consent by a person who: (A) Used improper means to acquire knowledge of the trade secret; or (B) At the time of disclosure or use, knew or had reason to know that his or her knowledge of the trade secret was: (i) Derived from or through a person who had utilized improper means to acquire it; (ii) Acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (iii) Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use….”  Cal. Civ. Code § 3426.1(b).  California courts have “equated acts of solicitation with ‘use’ or ‘misappropriation’ of protected information.”  Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514, 1524 (1997)

The UTSA creates a private cause of action for trade secret misappropriation.  The Economic Espionage Act makes trade secret misappropriation, or the conspiring to engage in such activity, whether for assisting foreign governments or as an act of industrial espionage, a criminal offense with fines and imprisonment as penalties that the Department of Justice can prosecute, even if such acts occur outside the USA.

A recent example of how the federal courts will treat trade secret misappropriation by former employees under the UTSA is a case handled by this firm, representing the plaintiff.  In Language Line Services, Inc. v, Language Services Associates, Inc., Case No. CV 10-02605-JW in the Northern District of California.  Two former employees electronically misappropriated a compilation consisting of the non-public list of plaintiff’s 1200 largest customers and financial and other competitively valuable information about each customer.  The court granted a preliminary injunction prohibiting the defendants and their new employer, a direct competitor of plaintiff’s, from communicating in any way with any of the customers listed in the compilation with a narrow exception for entities with which the defendant had a contractual relationship prior to the misappropriation.  The injunction was issued without a bond.

Confidential Information 

While the UTSA preempts all common law claims that are based on misappropriation of a trade secret, confidential information that does not qualify as a trade secret nonetheless may be protected under some state contract and tort laws.  For example, in California, if original (but not necessarily novel) concepts or ideas are disclosed under an agreement of confidentiality with the understanding that the use of that intangible property by the recipient would require compensation to its owner, the owner may obtain redress under theories of conversion or quasi-contract/unjust enrichment.  These types of claims most often are seen in the entertainment industry, where a plaintiff claims to have disclosed the idea of a new television show or film or promotional campaign in confidence, but was not compensated for its use by the recipient.  These claims are becoming more successful, not only in entertainment, but in technology and other industries.

Summary

Businesses need to ensure that their confidential information is protected against misappropriation and that they are not setting themselves up for claims by competitors or others.  Developing and enforcing policies governing these issues has never been more important.

 

Holmes Weinberg, PC, headquartered in Malibu, California, was founded by Henry Holmes and Steven Weinberg, veterans in entertainment, intellectual property and social media/technology law with more than 30 years experience each. Our clients include major corporations, entrepreneurs, athletes, celebrities and other people and companies in the entertainment, advertising, consumer products, communications and digital media industries.  We offer them the perfect blend of legal representation: expertise in entertainment, branding, trademark, copyright, advertising, digital media and business law; savvy counsel on creating new business opportunities; and aggressive protection and enforcement of brands and intellectual property rights globally. Our mission is to make it possible for our clients to reach their fullest potential.  Steven can be contacted on +1 310 457 6100 or by email at smweinberg@holmesweinberg.com

 


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