All Good things...Must Come to an End...Unless They're Really Good, Like You Know, Chocolate

By Steve McDaniel, Beth McDaniel and Jn Hurt, Technology Litigators | December 11, 2013

The year in review.

As we approach the New Year, we here at the law firm are wondering what you our readers would want us to write about next year.  We’d love to hear your ideas as to what that might be, and you can let Coatings World know by contacting our Editor and letting her know (Kerry Pianoforte, kpianoforte@rodmanmedia.com). Be nice, because she is a very nice lady, and she works very hard while she somehow puts up with us AND manages being a brand new mom! We will collect these ideas and return to iPaint-ing for you sometime mid-year.  Until then, we’re going on break. But, before we do, we would like to remind you about the topics and ideas we have already discussed with you.

A “protective wall of paper”—a series of documents including agreements and restrictive covenants to protect your trade secrets—is your first line of defense against the techno-thief. The Wall will help you to avoid theft by relatively honest people and if litigation is inevitable it will serve as concrete evidence in court showing you took reasonable and proper steps to protect your trade secrets. A trade secret audit will have you locked and loaded and the thief will be staring down both barrels of a sawed-off 12-gauge shotgun poking out from behind a wall of paper.
The paint and coatings industry is one whose recipes tell only a part of the story. We produce many high-solids suspensions, with many ingredients, using many process steps all of which are embodied in the product on the shelf. Even with the product in hand, and even with the publicly available Materials Data Safety Sheet, a competitor is sorely pressed to duplicate the coating in many cases. So, we are often the target of high-stakes trade secret theft. Many times, it’s an inside job.

What is and isn’t a trade secret – not always a cut-and-dried proposition. We look to several sources for those definitions. We look at trade secret cases that have been or are currently being litigated for suggestions of how to determine what is or isn’t a trade secret, and these collectively form the common law. Lawyers occasionally look at the common law cases and summarize or “restate” the case law – generating what is called the Restatement of Torts, or Restatement of Unfair Competition. Sometimes, they will suggest statutes to govern what is and isn’t a protectable trade secret—for instance in what’s called the Uniform Trade Secrets Act. Sometimes states adopt these suggestions from one or the other of these bodies of law into their own state laws—that’s called statutory state law. The Feds do the same thing, ergo, federal statutory trade secret laws like the Economic Espionage Act. It gets really mind-numbing when you cross back and forth over national borders to protect your company’s crown jewels. If in doubt, ask a litigator.

Remember, it is not uncommon that a trade secret heist is an inside job.  Secret formulas, manufacturing processes, financial information, future product plans, customer lists…what are your trade secrets and what are you doing to protect them from inadvertent or intentional misuse or misappropriation by your own employees? Trade secret protection is afforded to you as employer, but only if you the employer take reasonable steps to treat this information as confidential and you provide notice to employees of the status of the secrets. Protect, inform, get consent, maintain and remind employees of your trade secret policies. Employees need to know the boundaries of their access to trade secrets, how to treat trade secrets and the consequences if breached. It is important that these policies are set forth in clear and unambiguous language.

Patent versus trade secret protection? In many cases, a patent is not the best way to approach this. A patent is in essence Plaintiff’s Exhibit No. One, i.e., you’re going to have to sue someone. You may have to repeat the process and spend gobs more money in Japan, Europe, etc. to cover those markets. Getting a patent in the U.S. these days is an expensive crap-shoot with the dice moving in super-slow motion. Your company’s internal “know-how” can be protected immediately by binding contracts and concrete actions. Patent protection has its own intrinsic value, but trade secrecy is like love—it’s yours to cherish forever and it shouldn’t cost you as dearly.
If you have to resort to the courts to protect your trade secrets, all of the work you have done to batten-down your trade secret assets will be scrutinized and examined under the microscope and harsh light of 20/20 hindsight. Therefore, the creation of a program and its routine and rigorous enforcement is essential because every element of your program will be attacked as a defense to enforcement.  If you fail to show that you have trade secrets or that you have not adequately protected them, even if the defendant wrongly accessed them, you will likely lose your case. Not only will you be unable to enforce it against the present defendant, it is likely that you will be unable to enforce them against any subsequent violator. So, in setting up your trade secret protection program, think “lawsuit.” 

Doing It Yourself – even if you are setting up your trade secret protection protocols yourself, there is one and only way to organize your DIY trade secret audit and, that is by preparing yourself for a trade secret lawsuit. There are really only a few possible legal theories and chiefly there are two upon which you should focus your audit. Namely, either the bums broke a contract with you under which they promised NOT to steal them, or they committed the civil equivalent of criminal theft. In many cases, a well-designed process can prevent trade secret theft in the first place. In the instance that misappropriation takes place, this same well-honed system can quickly and summarily prevent actual damaging use or more widely disclosed knowledge of your competitive information. And, in the fairly rare event that the suit goes the distance, your system will place your case in the best possible position to prevail.

But, and not just because we are lawyers, do consider using a pro to set up your protective processes. There are two main goals of a professional audit. The first is to insure your procedures are strong enough to discourage and/or prevent a trade secret theft under “real world” attacks; and the second is to use the documentation of these procedures to provide ammunition in court to quickly and decisively stop any breach.
We have also discussed what to do in the event that you have not been as diligent as perhaps you should have been in setting up your bastions of trade secret protection. There are instances in which a high-level departing employee can still be bound to protect your crown jewels even if he/she is not contractually bound to do so – the Inevitable Disclosure Doctrine – best explained by the Rolling Stones song, “You Can’t Always Get What You Want (but sometimes just sometimes you get what you need)” You might be able to temporarily prevent someone from using your trade secrets long enough to establish your market lead, though you would prefer that prohibition to last forever.

But what about completely careless and unprotected business relations, and employees to which the law does not extract a heightened fiduciary duty? We explored the situation where your trade secrets have been absconded in the hands of a mid-level employee, only to discover that you have failed to contractually protect yourself. Where there is a contract between the parties, to the extent it is consistent with public policy, a court will look to the contract to govern the parties’ intentions.   But where there is no contract, trade secret law can offer protection by operation of law.  There may be independent civil liability under the Uniform Trade Secrets Act (UTSA). If you do discover a hole in your prophylactic Wall of Paper, good business practices under the UTSA may provide you the protection you need.

And let us not forget that we are chemists, engineers, scientists, and technical-industry gurus!  WE KNOW lots of tricks of the trade and in-depth secrets that are important to protecting our technology. For instance, the common wisdom is that a mixture of commonly-known chemicals will not qualify as a trade secret.  But, specific proportions, acceptable ranges of concentrations, orders of addition, pot times, etc. might very well be protectable. So, dig deep and deeper again to identify even more of your corporate assets heretofore un- or under-appreciated.  Search for them where they lie cloaked and unseen, in the intimacy of the chemistry itself.  Look for something that in many cases is unrecognizable but to a few chemistry nerds like us, and certainly not necessarily in the common knowledge surrounding our formulations.
It is also important that we know what our assets are worth. The law imposes a “value” standard on trade secrets.  A trade secret is valuable if it gives its owner “an opportunity to obtain an advantage over competitors who do not know or use it.” Courts appear may deny protection to any alleged trade secret that is deemed to be “valueless.”  “How much are our corporate trade secrets worth?” thus becomes a very important question under a variety of business and legal scenarios – restraining orders, injunctions, licenses, mergers, and overall company worth. If you’re ahead of the game (you are the trade secret owner), stay ahead of the game (by knowing exactly what your trade secrets are and what they’re worth).

And, this becomes critical when it is time to license your trade secret – with the caveat that you must take care that your licensee does not intentionally or unintentionally divulge your property.  A prospective licensee will likely want to look under the hood at your trade secrets prior to opening up their billfold.  All the procedures for maintaining secrecy should be incorporated into the pre-negotiation confidentiality/nondisclosure and subsequent licensing agreements, as well as which of your trade secrets will be part of the agreement(s).  The agreement should clarify the licensee should use reasonable safeguards to maintain the trade secret’s security in order to maintain its secrecy, and may include details regarding the security to be implemented, and rights for the licensor to inspect the security measures. The real meat and potatoes value of your intellectual property often is in your trade secret rather than a patent portfolio, and you should not forget that in determining the licensing royalties.  Though your patents may cover related materials, and must include the “best mode” of practicing an invention as of the date of filing the patent application (i.e., a previously held trade secret = the best mode), often after the patent application’s filing date new trade secrets such as substantive refinements and improvements or spin off technologies are developed.  These additional, non-patented trade secrets often have the most real world licensing value as part of your trade secret portfolio.   Further, patents must disclose the best mode, but not the worst mode (please do not give the patent office any ideas, OK?).  Working know how of what not to do – the technological dead ends – can be of tremendous competitive edge value in accelerating development of a technology by showing a licensee where not to waste resources in bringing a product to market.

And then we handled the hot potato of non-competition - the very term seemingly un-American.  And, we admitted that that pretty much sums up the same attitude that the American courts have towards non-competition agreements. So, how you walk the fine line between protecting your trade secrets and other confidential information using a non-competition agreement and running afoul of the natural disdain with which courts hold such agreements, is a dicey process. The drafting and enforcement of non-competition agreements is a nuanced exercise.  One size does not fit all - but if you do choose to use one,  then a non-competition agreement should be just one piece of the innovation protection pie, used in connection with confidentiality, non-solicitation, anti-raiding  and assignment of invention agreements to comprise a well-balanced intellectual property program.
And the thieves are getting very, very good at stealing your trade secrets – hacking is a worldwide industry in itself. So besides draining your bank account, what are hackers after? They want your money, your trade secrets, you customer files. Trade secrets, like formulations, know-how, branding, internal codes, employee and customer information, business strategies and other sensitive information can all be compromised by electronic theft. Cyber hackers are just thieves, looking for an easy entry point.  You lock your doors at night; lock your cyber valuables as well. With proper security, that hacker will likely move on to some unsuspecting victim. And then maybe you won’t find out the hard way about that condo in Singapore you bought that you will never see.