Steve McDaniel and Jon Hurt, Technology Litigators04.17.15
You want the best most innovative people to work for you. Sure you do. You hire them for their specialized expertise in your field of technology. They are the ones that develop your proprietary technology – your trade secrets. But simultaneously, they are also refining their general expertise in the field.
All good things come to an end, and so does their employment. These valued employees move on to greener pastures, working for, or directly as, a competitor. But is the work product they now create for a new employer that mirrors, mimics or reflects your products, a misappropriation of your trade secrets or is it merely an application of their expertise in the that field to do their job and make a living?
A guiding benchmark is the “employed to invent” doctrine established by the U.S. Supreme Court in the 19th century “That which [an employee] has been employed and paid to accomplish becomes, when accomplished, the property of his employer.” In the absence of written agreement(s) with the employee, often state and federal laws based on this principal will support your claim of ownership of the trade secret created by an employee while employed.
However, trade secret misappropriation cases invariably have the local flavor of jurisprudence in the state that they are prosecuted, and different answers to the “who owns it?” question have been generated depending upon the how much light the facts of the case provides.
In Wexler v. Greenberg, Buckingham Wax Company’s chemical formulas were often created by the head chemist, Mr. Greenberg, typically through reverse engineering competitors’ formulas and then making improvements. Mr. Greenberg also had access to all of Buckingham’s formulas made under his supervision, production methods and raw material suppliers. He later quit and went to work for a different company, Brite Products Co., Inc., that soon began producing Buckingham’s products (i.e., formulas that Mr. Greenberg developed at Buckingham). Sounds like a clear case of trade secret misappropriation, right? Not so fast. The Supreme Court of Pennsylvania found that though the formulas being used by Mr. Greenberg were trade secrets, they were all developed by Mr. Greenberg. The circumstances were unlike cases where a company provided a trade secret to an employee which would invoke an implied pledge of secrecy given the absence of a written work agreement (hint hint) between Mr. Greenberg with Buckingham that would limit his disclosures. Thus, the trade secrets created by Mr. Greenberg at Buckingham “forms part of the technical knowledge and skill he has acquired by virtual of his employment with Buckingham and which he has an unqualified privilege to use.”
In contrast, though the circumstances were similar, the Supreme Court in Iowa came to a differing conclusion in Basic Chemicals v. Benson by a slight change in the facts. Mr. Benson was an employee tasked to “establish formulae, lowest costs, highest profits in keeping with competitive markets, sell and create necessary selling force, and otherwise be responsible for all details of” Basic Chemicals, Inc. After quitting, Mr. Benson became employed by Berman Chemical Company, which began selling products that Mr. Benson asserted to customers would have “physical and performance constants … identical to those purchased from me in the past.” However, in light of “letters written by Benson to salesmen and customers during his employment by Basic in which he recognized that the various formulas involved were secret and confidential. …Benson praised the ‘know-how’ of Basic.” the court found that the trades secret formula, though developed by Benson were not available for his use in latter employment. This aspect of the case seems to have hinged on how Benson had characterized the trade secrets, and not by the proactive actions (i.e., employment agreements) of Basic. But this line of reasoning begs the question, what if Benson had not characterized the formula in a way that could be held as an admission that he knew they were confidential?
Though both of these cases occurred prior to the adoption of their version of the Uniform Trade Secrets Act by Pennsylvania and Iowa, but they highlight the differing outcomes that can occur based on slight tweaks to the facts of the case in the absence of written contractual agreements. Trade secret law, a creature born of cases argued before the various state courts, are always fact-intensive. Basically, they revolve around the old who-done who wrong made-for-TV melodrama format.
In certain circumstances, a court may wind up splitting the baby in two regarding ownership of a trade secret created by an employee under the shop rights doctrine. The shop rights principal finds its home in various state court patent case law where an employee conceives an invention while using an employer’s resources, such as using equipment or materials. An important difference here though is the factor that the employee was not hired to develop the invention that was conceived. Under this doctrine, the employee owns the invention (or trade secret), but the employer has the right to use it without paying a royalty. But, to clearly establish a shop right exists requires a judge deciding so after the hassle of a court case. And the employee is free to use the trade secret as a competitor.
However, if you are in California, an employee may have a harder time using this or other types of arguments to gain ownership of work related trade secrets. The Golden State’s Labor Code Section 2860 explicitly states – “Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.” Well, that seems helpful. On the flip side, California statues generally ban non-competition agreements that we have previously discussed as a way to limit potential misuse of trade secret information by former employees. And California statutes, as well as those of some other states, explicitly prohibit an employment agreement from becoming overly ambitious by requiring assignment of an invention made using the employee’s own time and resources, which arguably carries over to trade secrets.
To make things even murkier, what happens if in the above examples, if it was not an employee, but an independent contractor involved?
The Massachusetts Superior Court recently ruled in C.R.T.R., Inc. v. Lao, et al. that an independent contractor who had taken customer names, prices, accounting records and business relationship information about another company could not be sued for trade secret misappropriation. Some of the facts that seem to weigh most against the plaintiff was the lack of confidentiality agreement with the independent contractor, and the depositions of employees that one “know the customer lists were confidential, though no one had ever told her so” and another employee stating that “on one occasion, she was told not to bring work out of the office” as being inadequate evidence that “any measures were taken to protect its purported trade secrets.”
However, for creation of a trade secret by an independent contractor working for a client, the U.S. District Court in Colorado in Computer Assoc. Int’l, Inc. v. American Fundware, Inc., applied extension of trade secret common law employer ownership to an employee created trade secret to an independent contractor stating that “status as an employee or an independent contractor … is irrelevant to the ownership of a trade secret.” This case is often cited in other federal district court cases.
Sorry to tell you this, but this area of laws protecting your trade secrets is literally “50 shades of Grey” as that’s the number of stars in old glory. The take home message is you should check with your local counsel familiar with the state laws that may come into play in protecting your trade secrets. Though almost all states have now adopted versions of the Uniform Trade Secrets Act, there may be differences between the versions from one state you do business in with another’s. And each state may have very specific statues and past case law history that may influence the outcome of litigation. With that in mind, your legal team should without fail draft legal agreements that most advantageous for you to match the likely jurisdictions where lawsuits may be filed, and minimalize the shadows cast by state law effects’ on your claim to ownership of the trade secrets created in the conduct of your business.
All good things come to an end, and so does their employment. These valued employees move on to greener pastures, working for, or directly as, a competitor. But is the work product they now create for a new employer that mirrors, mimics or reflects your products, a misappropriation of your trade secrets or is it merely an application of their expertise in the that field to do their job and make a living?
A guiding benchmark is the “employed to invent” doctrine established by the U.S. Supreme Court in the 19th century “That which [an employee] has been employed and paid to accomplish becomes, when accomplished, the property of his employer.” In the absence of written agreement(s) with the employee, often state and federal laws based on this principal will support your claim of ownership of the trade secret created by an employee while employed.
However, trade secret misappropriation cases invariably have the local flavor of jurisprudence in the state that they are prosecuted, and different answers to the “who owns it?” question have been generated depending upon the how much light the facts of the case provides.
In Wexler v. Greenberg, Buckingham Wax Company’s chemical formulas were often created by the head chemist, Mr. Greenberg, typically through reverse engineering competitors’ formulas and then making improvements. Mr. Greenberg also had access to all of Buckingham’s formulas made under his supervision, production methods and raw material suppliers. He later quit and went to work for a different company, Brite Products Co., Inc., that soon began producing Buckingham’s products (i.e., formulas that Mr. Greenberg developed at Buckingham). Sounds like a clear case of trade secret misappropriation, right? Not so fast. The Supreme Court of Pennsylvania found that though the formulas being used by Mr. Greenberg were trade secrets, they were all developed by Mr. Greenberg. The circumstances were unlike cases where a company provided a trade secret to an employee which would invoke an implied pledge of secrecy given the absence of a written work agreement (hint hint) between Mr. Greenberg with Buckingham that would limit his disclosures. Thus, the trade secrets created by Mr. Greenberg at Buckingham “forms part of the technical knowledge and skill he has acquired by virtual of his employment with Buckingham and which he has an unqualified privilege to use.”
In contrast, though the circumstances were similar, the Supreme Court in Iowa came to a differing conclusion in Basic Chemicals v. Benson by a slight change in the facts. Mr. Benson was an employee tasked to “establish formulae, lowest costs, highest profits in keeping with competitive markets, sell and create necessary selling force, and otherwise be responsible for all details of” Basic Chemicals, Inc. After quitting, Mr. Benson became employed by Berman Chemical Company, which began selling products that Mr. Benson asserted to customers would have “physical and performance constants … identical to those purchased from me in the past.” However, in light of “letters written by Benson to salesmen and customers during his employment by Basic in which he recognized that the various formulas involved were secret and confidential. …Benson praised the ‘know-how’ of Basic.” the court found that the trades secret formula, though developed by Benson were not available for his use in latter employment. This aspect of the case seems to have hinged on how Benson had characterized the trade secrets, and not by the proactive actions (i.e., employment agreements) of Basic. But this line of reasoning begs the question, what if Benson had not characterized the formula in a way that could be held as an admission that he knew they were confidential?
Though both of these cases occurred prior to the adoption of their version of the Uniform Trade Secrets Act by Pennsylvania and Iowa, but they highlight the differing outcomes that can occur based on slight tweaks to the facts of the case in the absence of written contractual agreements. Trade secret law, a creature born of cases argued before the various state courts, are always fact-intensive. Basically, they revolve around the old who-done who wrong made-for-TV melodrama format.
In certain circumstances, a court may wind up splitting the baby in two regarding ownership of a trade secret created by an employee under the shop rights doctrine. The shop rights principal finds its home in various state court patent case law where an employee conceives an invention while using an employer’s resources, such as using equipment or materials. An important difference here though is the factor that the employee was not hired to develop the invention that was conceived. Under this doctrine, the employee owns the invention (or trade secret), but the employer has the right to use it without paying a royalty. But, to clearly establish a shop right exists requires a judge deciding so after the hassle of a court case. And the employee is free to use the trade secret as a competitor.
However, if you are in California, an employee may have a harder time using this or other types of arguments to gain ownership of work related trade secrets. The Golden State’s Labor Code Section 2860 explicitly states – “Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment.” Well, that seems helpful. On the flip side, California statues generally ban non-competition agreements that we have previously discussed as a way to limit potential misuse of trade secret information by former employees. And California statutes, as well as those of some other states, explicitly prohibit an employment agreement from becoming overly ambitious by requiring assignment of an invention made using the employee’s own time and resources, which arguably carries over to trade secrets.
To make things even murkier, what happens if in the above examples, if it was not an employee, but an independent contractor involved?
The Massachusetts Superior Court recently ruled in C.R.T.R., Inc. v. Lao, et al. that an independent contractor who had taken customer names, prices, accounting records and business relationship information about another company could not be sued for trade secret misappropriation. Some of the facts that seem to weigh most against the plaintiff was the lack of confidentiality agreement with the independent contractor, and the depositions of employees that one “know the customer lists were confidential, though no one had ever told her so” and another employee stating that “on one occasion, she was told not to bring work out of the office” as being inadequate evidence that “any measures were taken to protect its purported trade secrets.”
However, for creation of a trade secret by an independent contractor working for a client, the U.S. District Court in Colorado in Computer Assoc. Int’l, Inc. v. American Fundware, Inc., applied extension of trade secret common law employer ownership to an employee created trade secret to an independent contractor stating that “status as an employee or an independent contractor … is irrelevant to the ownership of a trade secret.” This case is often cited in other federal district court cases.
Sorry to tell you this, but this area of laws protecting your trade secrets is literally “50 shades of Grey” as that’s the number of stars in old glory. The take home message is you should check with your local counsel familiar with the state laws that may come into play in protecting your trade secrets. Though almost all states have now adopted versions of the Uniform Trade Secrets Act, there may be differences between the versions from one state you do business in with another’s. And each state may have very specific statues and past case law history that may influence the outcome of litigation. With that in mind, your legal team should without fail draft legal agreements that most advantageous for you to match the likely jurisdictions where lawsuits may be filed, and minimalize the shadows cast by state law effects’ on your claim to ownership of the trade secrets created in the conduct of your business.
