If you find yourself inadvertently in possession of someone else’s trade secret that you are accused of misappropriating, what are your options to defend yourself?  As always, it is circumstance specific. 

Your first defense against trade secret misappropriation includes showing that the trade secret was not a trade secret due to failure to take reasonable efforts to maintain the secrecy of the information.  For example, someone losing a briefcase or laptop containing trade secrets that lack sufficient security protections in a public place generally is not taking reasonable efforts to protect the information’s secrecy, and thus disqualify it for trade secret protection.  Additionally, use of the trade secret by the finder of the lost documents or computer information may be argued as occurring innocently rather than improperly if the information is readily viewable / displayed (i.e., the 1st files and programs visible) to the finder.  In other words, if you find someone else’s (now no longer) secret formula lying in the street due to their carelessness, and you capitalize on it, you probably just won the lottery.  Go you! 

The internet is the biggest “public street” in the world.  And generally, anything posted there is available for your use, sans other types of intellectual property protection, as it is no longer a trade secret but now is publically available.  Injunctions to stop dissemination of the trade secret are pretty much moot in this scenario.  However, the person who originally posts the trade secret on the internet, if they misappropriated it, typically wind up paying damages if sued.

People like to brag, and the newbie trade secret creator will try to market or license his idea to a known company, typically in the same field.  So now someone sends you an unsolicited copy of his trade secret.  And if you wind up marketing a similar product, such as one you independently created, this guy will naturally say you stole his idea.  To avoid getting sued or have a strong pre-position prior to being sued by this guy, first have a designated receiver of such correspondence (e.g., your legal department) to quarantine the idea from contaminating your R&D department that could develop a similar product.  Then send a response back to the newbie trade secret creator that the information was received unsolicited and as such the company has no confidentiality duty to the creator, that it will not enter into one with the creator, nor does it accept unsolicited ideas.  If the idea seems related to a product being developed by your company, make sure the product’s independent development process is well-documented.  Also consider having a policy statement that restates the position of the response letter, and that such a submission is considered the receiver’s property that can be used without any obligation of compensation to the sender.  This all sounds a bit of a tough stance, but you really can’t get bogged down with lawsuit after lawsuit if you have a high profile and people are continuingly sending you their ideas.

But what if someone discloses to you, under a confidentiality agreement, a third party’s trade secret?  With the infinite spider’s web of non-disclosure agreements between various companies, there will be times when a company that has a trade secret disclosed to them in confidence from a third party may blab it to you.  But you very likely don’t know that the confidential information belongs to the third player!  How liable are you for trade secret misappropriation?  Well, you can defend yourself as innocently receiving, rather than misappropriating, the trade secret information.  And generally, in that circumstance, you will often wind up having to abide by an injunction placed against you for future use of the trade secret, but not have to pay damages for misappropriation.  The company that disclosed the third party’s trade secret will be the one in trouble though. 

You may take proactive steps to insulate yourself from such fire-fights, such as having your confidentiality agreements stipulate that the company you are sharing information with will not disclose to you other party’s confidential information.  Consider seeking a clause providing that you be indemnified against claims by a third party.  Looking at it from the third party’s perspective, you probably want to have a clause in your non-disclosure agreements that the information being disclosed may contain trade secrets, and state that the information should not be disclosed to other parties.  Additionally, mark such disclosed materials as “trade secrets” and “not for forwarding” as appropriate.

Other circumstance where you may find yourself in possession of or using another’s trade secret is when you hire a contractor or employee that has misappropriated someone else’s trade secret.  The new hire uses the misappropriated information in the course of work for you.  Are you liable?  Well, maybe.  Individual state law, such as the local flavor of the uniform trade secret act (if adopted) that the state uses, can produce varying outcomes to this question. 

For example, in Infinity Products, Inc. v. Quandt, an employee of T.E. Scott, Inc., Herbert Quandt, was fired right before the company was sold, trade secrets and all, to Infinity Products, Inc.  Mr. Quandt took customer information with him, and was hired by Fabri-Tech Inc., a competitor of T.E. Scott.  Fabri-Tech Inc. asked Mr. Quandt whether he was under a non-compete agreement, which he wasn’t.  During his duties as a salesman, Mr. Quandt did make use of Infinity Products customer lists and pricing information (trade secrets purchased from T.E. Scott by Infinity Products) to underbid Infinity Products and poach some of their customers.  Infinity Products sued both Mr. Quandt and Fabri-Tech for trade secret misappropriation in an Indiana court.  Mr. Quandt was found liable, but not Fabri-Tech.  The court ruled that there was a lack of enough evidence that Fabri-Tech had participated in or had knowledge of the misappropriation. 

But lawyers like billing hours, so the case went to the Indiana Appellate Court which reversed the finding and held that Fabri-Tech was vicariously liable under the doctrine that an employer is responsible for the action of its employees during their employment (respondeat superior, for Latin fans), regardless of the knowledge the employer had at the time of their actions.  So, off to the Indiana Supreme Court we go, which reversed the decision again, because under the Indiana Uniform Trade Secrets Act (Indiana UTSA), there needs to be sufficient evidence that a misappropriator “knew or should have known” of the misappropriation, and that the Indiana USTA superseded the common law’s respondeat superior doctrine. 

A similar set of circumstances occurred in Central Trust & Inv. Co. v. SignalPoint Asset Mgmt. LLC, 422 S.W.3d 312 (Mo. 2014), but with an independent contractor.  Mr. Kennedy was an employee of a financial management company and left when it was purchased by Central Trust to set up his own investment management company, ITI, and began using his former employer’s client list.  Mr. Kennedy became an independent contractor for another company, Signal Point, to solicit orders for securities from clients.  And began, of course, Central Trust suit against Signal Point, as well as Mr. Kennedy and his company, for trade secret misappropriation.  The Mississippi Supreme Court found that, besides the lack of evidence that Signal Point has used, acquired, or disclosed Central Trust’s trade secret information, Signal Point was not vicariously liable for Mr. Kennedy’s indiscretion under respondeat superior due to his status as an independent contractor rather than an employee. 

Bottom line:  Check with an attorney familiar with the nuances of the jurisdiction(s) where you operate and in which a potential case may be tried.  Then have the attorney draft you agreements accordingly to reduce the chances of being dragged down by a rouge employee via a state specific legal doctrine.  And fire all your employees and only hire independent contractors (just kidding, maybe).

A possible way to proactively add to your protective wall of paper is to have a new employee sign a statement along the lines that trade secrets from prior employers will not be used during their employment.  And the employee’s execute a non-disclosure agreement that stipulates they will not disclose other’s trade secrets to you.  You thus exclude use or disclosure of others trade secrets from actions that would fall into the respondeat superior domain.  And, if they are under a non-compete agreement, have your attorney determine if what issues exist, if any, which may cause you not to hire them to avoid trouble.

However, a note of caution.  Now that we got you all jumpy to avoid getting blindsided by someone else’s misappropriation, don’t go bananas with your protective agreements.  Going overboard in your non-disclosure or non-compete agreements can open lead to them being invalidated under certain circumstances.  An agreement may be found void if made under duress, such as the employee being threatened with being fired if he does not sign.  Adding unexpected contract clauses at the last moment may be viewed as “unfair surprise,” and thus invalidate the contract.  And, if the agreement is too broad, such as non-compete agreement that, in the eyes of a court, lasts too many years, covers too much geographic area in which the employee is precluded from working, and/or prevents too many types of work activity for a former employee, then the court may find the agreement is an unconscionable agreement and unenforceable. 

Your employees are not you enemies, usually.  And, with reasonable care you can prevent or limit the occasional “bad apple.”  You’re the good guy.  Wear a white hat and have a Hollywood smile for everyone.  But, don’t shut the eyes in the back of your head …. lest you get smacked by a legal beanball tossed by the occasional rouge.