Engaging in unprotected business

By Beth McDaniel, Technology Litigators | December 4, 2012

In this article, we will explore 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. No Non-Disclosure Agreement (NDA) exists to set out the limitations on disclosure of your trade secrets and remedies for misappropriation.

Unfortunately, it happens all the time.  So let’s discuss completely careless and unprotected business relations, as uncomfortable as that may be . . .

John P. Eggseck finally meets that special employee he’s been looking for, Miss Ima Crook…she’s intelligent, charming, sophisticated, well-endowed with experience and with a lust for knowledge.  She’s perfect!  Perfect for the position of mid-level managerial position in his coatings company, that is.  In the throes of this exciting encounter, the parties enter into a relationship.  They pledge their trust in each other and mutual respect.  No pre-employment agreements are signed, (they don’t want to get bogged down in all that negativity).  John proceeds to disclose to Ima his innermost (trade) secrets, he exposes himself (technically), he teaches her (manufacturing) techniques she never knew, and he spends  late nights sharing with her his hopes and dreams (proformas and projections) for the future. 

All is going along well, until- BAM!!   John discovers Ima’s run off with another paint manufacturer.   But before she leaves, she cleans out John’s trade secret files and makes off with his latest formulation…all that he has left… on a thumbdrive in her front pocket.  Now, living off of John’s blood, sweat and tears, the two cheaters are carrying on together in bliss, while John beats his head against his office wall for not having obtained a formal employment agreement, a Non-Disclosure or Non-Compete Agreements.  All the while, Miss Ima Crook is sharing John’s most valuable trade secrets with his biggest competitor, and capitalizing on his innovation to his competitor’s advantage.  This leads us to the question… 
What happens when you engage in unprotected business? 
Last month, we discussed the situation where a high-level employee with no non-compete agreement walks off with trade secrets.  In this article, we will explore 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.  No Non-Disclosure Agreement (NDA) exists to set out the limitations on disclosure of your trade secrets and remedies for misappropriation.  You have no Non-Compete Agreement to prevent her from taking a comparable position with your direct competition.     Should this misfortune befall you, are there legal remedies on which you can rely to help protect that which is yours?

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.  The term “by operation of law” refers to the application of legal principles to a relationship to which the parties have not previously contracted.  Trade secret by operation of law would also be applied in a situation in which an existing contract does not adequately cover the issues between the parties or fails for some contractual reason.

In the event there is not a contract setting out the terms related to the protection of trade secrets, there may be independent civil liability under the Uniform Trade Secrets Act (UTSA).  All but four states (Massachusetts, Texas, North Carolina and New York) have adopted the UTSA or some version of it, and in 2012 the UTSA was introduced in the Massachusetts state legislature, but as of this time has not been enacted.  For ease of this discussion, we will focus on the UTSA and not the common laws of the states who have not adopted it.

The UTSA’s definition of “trade secret” is information, including a formula, pattern, compilation, program, device, method, technique or process, that has actual or potential economic value from not being generally known to the public or to 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. 

So, in order to prove damages for misappropriation of a trade secret, one must first prove there was a trade secret in the first place.  But according to the definition, one element of a trade secret is that its owner has taken reasonable  efforts under the circumstances to maintain its secrecy.  An NDA and Non-Compete are evidence of such protective measures. 

But in the absence of such agreements, the UTSA maintains that there are other reasonable efforts to maintain secrecy, such as advising employees of the existence of a trade secret, limiting access to a trade secret on a “need to know basis,” and controlling plant access. 

What business practices might constitute “reasonable efforts to maintain secrecy?”  Trade secrets physically labeled “Confidential” and physical barriers to secret information, such as restricted access and locks on doors and desks are good signs.  Password restrictions on company computers and restricting the ability of employees to print, copy, download or send files are not only good business practices, they provide further evidence of trade secret protection.  We have recommended before that employees’ should be notified that they are subject to monitoring of their work emails, computer usage and phone calls in order to lower their expectation of privacy in the workplace.   Hopefully, for our friend John, under the UTSA in his state, a court would view some combination of these practices sufficient to be considered reasonable efforts under the circumstances.

In several previous articles, we have referred to intellectual property audits (IP Audits).  A professional IP Audit can give you the assurance your company is doing what it can to protect your valuable trade secrets, and also  be an indication you are protecting your trade secrets.  
You might be asking yourself why a Non-Disclosure Agreement, or NDA, is even necessary if you have taken other steps towards confidentiality.  Remember, a properly drafted NDA is in and of itself an indication that you took certain steps reasonable under the circumstances to protect your trade secrets.  Moreover, if you do end up in a lawsuit, you have no action in contract, but only in tort if you have no agreement.  This may limit your damages.  Furthermore, it’s easier for an employee to make a defense that he did not know it was a trade secret or wasn’t sure how to treat trade secrets in the absence of an agreement setting out these terms.

What if there’s a proper NDA but no Non-Competition Agreement?  John P. knows that the intelligence he gave Ima Crook is so intertwined in her understanding and knowledge of her business that she can’t even avoid disclosing that confidential information in the performance of the same job duties at the new paint manufacturer competitor.  That’s where the Doctrine of Inevitable Disclosure may kick in.  You may recall we discussed this doctrine in the October 2012 IPaint article titled, “When there’s No Way to Stop Your Trade Secrets From…Literally…Walking Out the Door.”
Under this Doctrine, which is recognized in some, but not all jurisdictions, a court may prevent a former employee of one company from working for a competitor in a similar position, if the nature of the new position is such that it would inevitable require the use or disclosure of trade secrets of the former employee. 

The seminal case on the Doctrine, a  7th circuit case, PepsiCo. v. Redmond, is illustrative of the application of this doctrine.  In that case, a former PepsiCo employee, (Redmond) went to work for Quaker Oats Company, manufacturer of Gatorade, a product in direct competition with Pepsi’s  All Sports drink.  Redmond made no actual threat of use or disclosure, but the appellate court stated:
Again, the danger of misappropriation in the present case is not that Quaker threatens to use PCNA’s secrets to create distribution systems or co-opt PCNA’s advertising and marketing ideas. Rather, PepsiCo believes that Quaker, unfairly armed with knowledge of PCNA’s plans, will be able to anticipate its distribution, packaging, pricing and marketing moves. Redmond and Quaker even concede that Redmond might be faced with a decision that could be influenced by certain confidential information that he obtained while at PepsiCo. In other words, PepsiCo finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.

As always, seek legal counsel to determine if this remedy is available in your state.
n addition to civil remedies for trade secret misappropriation, many states provide criminal penalties, and stiff ones at that, for misappropriation.  Further, there can also be criminal penalties for receiving stolen information.  So, in some states, the threat of jail time might make Ima less attractive to  Casanova Competitor, and serve to suppress its urge to capitalize on your trade secrets to its advantage.  

The underlying lesson here is don’t get caught with your pants down.  Practice protected business by routinely using NDA’s and non-competes with your employees.  But, 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 to