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DIY Audits of Coatings Companies Trade Secrets



By Steve McDaniel, JD PhD, Technology Litigators, Contributing Writer



Published June 5, 2012
The DIY approach looms large in certain sectors of our industry, with do-it-yourselfers painting everything from model cars to kitchens to yachts. As discussed in previous iPaint columns, trade secrets as a means to gain competitive edges also have a huge presence in our business.
 
I recently discussed these seemingly disparate facts with a leading coatings company serving a very large DIY market, the products for which it chiefly protects using trade secret techniques. It made me wonder if our CW readers could use a “guide book” for conducting their own trade secret audits.
 
Listen, I do recommend professional assistance, especially to get you started down the right road. But, I even more strongly recommend routine reviews of internal trade secret protection programs of any coatings company. So, here’s an abbreviated discussion of how you may wish to conduct a DIY trade secret audit.
 
There is one and only way to organize your DIY trade secret audit and, that is by preparing yourself for a trade secret lawsuit. Sorry, that’s just the way it is. Physical security is fine, gotta have it. But, unless you have built the legal barricades around your trade secrets, you’re just whistling Dixie.
 
There are really only a few possible legal theories (reasons you can use to sue someone for swiping your trade secrets) 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 (the “tort” of trade secret misappropriation).
 
This means that your audit should have two principal assessments of equal importance—a review of all contractual relationships giving rise to a duty to protect your trade secrets, and a review of all possible avenues by which someone might tortuously steal your trade secrets. Ancillary to these reviews, you must be mindful of where it is you will likely bring the lawsuit (the venue), what laws will govern the suit (the choice of laws) especially if you are a multi-state or multi-national organization (and, who isn’t these days), and when it is you must bring the lawsuit (a matter of tracking statutes of limitations).
 
You are going to have to establish your case using facts and as the trade secret owner, you have the burden to do so by presenting the court with a preponderance of the evidence in your favor. Sometimes, you have to do so very quickly if you are seeking any sort of preliminary relief to prevent use of your secrets (injunctions, seizures, freezing of assets, bankruptcy proceedings, etc.). So, prepare well in advance for this aspect of your case. You can do so by having at least compiled categorical listings of your trade secrets and by making some SWAGs as to the value of each. For example, in your formulations lab, it is likely that there are ranges of tolerances in your formulations for each of the components with which you build your coatings. These are very likely generally referred to in your published MSDS pamphlets, but are actually much more tightly defined by your chemists. Such a categorical listing might be: “The Supplier identity for Additive ABC and tolerable ranges for same in Formulation XYZ, representing 70-90% of the market advantage value of the product over the nearest competitor’s product.” That is what you would list on your pleadings, say if you were forced to sue an ex-formulation chemist who walked the ACTUAL trade secret range tolerances to your competitor.
 
The elements of a trade secret case for which you must provide proofs are that (a) the trade secret actually exists; (b) the trade secret was disclosed in confidence to the defendant or otherwise illegally gotten; and (c) the defendant’s use or disclosure of the trade secret was in violation of that confidence, causing quantifiable injury to you. There are numerous versions of these elements depending upon the jurisdiction and the facts of the case, but they kind of boil down to these three. For this reason, regardless of the theory under which you bring your suit against the thieves, your DIY audit should address the factual underpinnings of these three requisite proofs.
 
In many jurisdictions, the question of whether or not there is “use in one’s own business” comes into play.  In one of the recognized definitions of trade secrets (called the Restatement of Torts), for information to constitute a trade secret it must be “information used in one’s own business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it” and be in “continuous use.”
 
In another definition source (Uniform Trade Secrets Act), it need not be used since the owner may not have yet had an opportunity to use it.  So, your DIY trade secret audit is going to have to address which of these rules applies and set up systems accordingly, or make sure you cover both scenarios.
 
To this point in setting up your DIY audit, we have focused on things you more or less have control over in a trade secret lawsuit. Now, it gets a bit dicier—namely, predicting how the bad guy is going to act—and catching him at it. For one thing, you have to show that the thief either used or disclosed (and/or illegally acquired, under the Restatement Third of Competition) the ill-gotten trade secrets he swiped from you in order to trigger any relief from the courts. And, in many cases you have only a short period of time after you know or should have known about the heist to sue the curmudgeon.
 
See no evil, hear no evil, speak no evil may work for the three wise monkeys of the Tōshō-gūshrine, but it does not work for the trade secret owner. To the contrary, your DIY trade secret audit should have a very strong component making sure you have an effective ears-to-the-wall gathering of competitive corporate intelligence, watchful employee monitoring and reasonable security.
 
Your DIY audit needs to set in place a system that kicks in when there is sufficient reason to suspect someone else has illegally disclosed, acquired or is illegally using your trade secrets. Illegal acquisition certainly would be established by burglary, but wiretapping and fraud also qualify. Other improper means can include unauthorized interception of communications, or inducement or knowing participation in a breach of confidence by another.
 
Illegal use or disclosure can arise as a result of a breach of a confidential relationship, improper means outside a confidential relationship, obtaining the trade secrets from another that illegally acquired them, and even acquisition by accident or mistake. Similarly, “use” is not limited to traditional concepts of manufacturing and sale. Even if a competitor does not “use” its knowledge of your newest formulation improvements from a technical perspective, but accelerates its own competitive product in view of its ill-gotten knowledge of your own new product launch date, theft may be shown. Use in a foreign jurisdiction can trigger liability, and be prevented in a US-based proceeding.
 
So, cast your DIY audit net widely. And, do not be put off by claims of independent development or reverse engineering of your publicly available coatings that is miraculously accomplished after you file suit—the initial conduct was still wrongful and actionable.
 
Your DIY protection system claxons start ringing having detected a possible illegal disclosure, use or acquisition of your trade secrets, and all hands are called onto the deck. What do you deliver to your attorney to initiate the suit?
 
Generally, he will need you to gather that facts that show (1) the protected matter is not generally known or readily ascertainable; (2) it provides your company a demonstrable competitive edge; (3) you spent plenty to develop it; and (4) you intended to and did in fact take steps to keep it protected. 
 
If you’ve set up your DIY system properly, this evidence should basically spill out of your computers onto a flash drive that you can hand to the paralegal at your first litigation meeting—saving your company valuable time and lots of money—all the while impressing the heck out of your litigation attorney. Your system will regurgitate all the steps you have taken as a condition precedent to assure relative secrecy and it’s not just what you DO but what you DON’T do that will loom large. You DO have restricted access to offices, labs, computers, data, etc. You DON’T allow publication of important company information unless it has been subjected to a review process. You DO conduct exit interviews of your own employees, but you DON’T allow new employees to bring potentially confidential information of a competitor into your own facility and remind them of same at entrance interviews. You DO discuss confidential information with clients and vendors, but you DON’T do so absent a contractual duty of confidence.
 
A DIY approach to this task may seem daunting at first. And certainly the process can be eased considerably with skilled trade secret experts, but the effort will pay off in the end. Even if you decide to begin a revamp of your trade secret protection processes using a pro, you will want to routinely make DIY sweeps of your systems to make sure all parts are up-to-date and fully operational. 
 
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. And, just like any DIY project that you undertake—be it hanging wallpaper, changing spark plugs or painting your den—practice makes perfect.
 
Technology Litigators (McDaniel & Assoc. P.C.) was founded in 1999 by Steve McDaniel, Ph.D., J.D. in Austin, Texas. The firm is a full-service intellectual property law firm with a particular focus on trade secret protection. For more information visit them online at www.technologylitigators.com.
 


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