Can You Keep A Secret?

Proprietary information is the lifeblood of many technology companies. In these times of increased employee mobility, firms must vigilantly protect their proprietary information from competitors to preserve their position in the marketplace. At the same time, companies need to avoid the risk that an overzealous new employee might improperly divulge his former employer's confidences. A few simple steps can help your company a keep a secret.

Is It Really A Secret?

Companies often underestimate their right to protect their proprietary information. Misuse of proprietary information constitutes conversion and, when committed by an employee, a breach of his duty of loyalty. Disclosure or misuse of a trade secret is a tort and, in some cases, a crime. But what is a trade secret?

A common definition of a trade secret is: information that derives independent economic value from not being generally known to, and readily ascertainable by other persons who can obtain economic value from its disclosure or use, and which is subject to efforts that are reasonable under the circumstances to maintain its secrecy.1

That does not mean that the information must be novel or unique. The hallmark of a trade secret is secrecy, not novelty. Thus, a broad range of information may qualify for trade secret status, including customer lists, pricing information, marketing plans, and sales reports.2 Software source code may be a trade secret, as may object code.3 The Ninth Circuit has even held that religious scriptures can be trade secrets if they have commercial value.4 The key in each case is the extent to which the information is kept secret.

Absolute secrecy is not required. Instead, the company need only take reasonable steps to guard the information. Corporate counsel can provide a valuable service to her client by ensuring that the company takes these reasonable steps. Keeping proprietary information secret requires both careful planning and quick reactions.

Keeping It Secret

The careful planning starts with reasonable measures designed to prevent outsiders from learning or misusing the information. Every company should have a written policy that describes the information that the company believes is proprietary. The policy should give sufficient instructions to employees to ensure that they guard the secrecy of the information and to prevent accidental disclosure of proprietary information to competitors. Distribute the policy throughout the company and rigorously enforce it. Protections to consider include marking proprietary material with a confidential or other restrictive legend, and restricting access to the material through the use of a lock and key or special passwords for sensitive computer files.5 The policy should require licensees and subcontractors to follow the same practices. Another reasonable step may be requiring employees to sign covenants not to compete.

The business decision to require employees to sign a covenant not to compete is often a difficult one. However, once the decision is made, careful execution is required. Not just any covenant will do. For example, the choice of law can be critical, because some states prohibit such agreements except in certain narrow circumstances.6 Those states that permit covenants will only enforce them where the restrictions on competition are reasonable. Restrictions should be no greater than is necessary to protect the employer's legitimate business interest.7 They should not be unduly harsh or oppressive in curtailing the employee's legitimate efforts to earn a livelihood.

Some courts will reform an overbroad covenant and enforce a more reasonable restriction.8 Others employ an all or nothing rule and simply declare an overbroad covenant unenforceable.9 There are other traps for the unwary. For example, if the employer merges with another company, some courts will not allow the acquiring entity to enforce the noncompete agreement unless the employee agrees that the agreement may be assigned to the acquiring entity.10 The increasingly popular arbitration clause might trump the employer's right to obtain injunctive relief to prevent a breach of the covenant.11

Enforcing Your Rights

Because keeping proprietary information absolutely secret is sometimes impossible, companies often need to enforce their right to protect their proprietary information from departing employees and competitors. When this need arises, the company must act quickly.

The first enforcement step is self-help. Have each departing employee return all documents and electronic files in his custody or control and certify in writing that he has done so. Remind the departing employee of his obligation to maintain the secrecy of the company's information and his obligations under any noncompete, confidentiality, or nonsolicitation agreements. Reinforce this reminder with a letter to the employee. Notify his new employer that he was privy to confidential information and may not use or disclose it at his new company.

When self-help fails, the company must seek court assistance. The Uniform Trade Secrets Act allows a court to enjoin the actual or threatened misappropriation or use of a trade secret. A company can use this provision to enjoin a former employee from working for a competitor, even if the employee has not signed a covenant not to compete and has no intent to disclose the trade secrets. If it is inevitable that the employee will rely on the protected information in his new job, the court may enjoin that employment.12

The Economic Espionage Act makes the theft of a trade secret a federal crime, with stiff penalties.13 Various federal and state statutes make the unauthorized copying or destruction of computer data files a crime and provide a private right of action for the victim.14

If the company suspects misuse of proprietary information, counsel must investigate immediately. Review files for missing documents and data. Review computer records for unusual downloading of proprietary information. Ask other employees whether they are aware of missing files or unusual copying of files. Talk to customers to see if they were contacted about using the former employee on projects that might tempt him to divulge proprietary information. If the company's investigation reveals improper conduct, the company should consider filing suit immediately. The company that sits on its rights often loses the opportunity to obtain injunctive relief.

Counsel should take maximum advantage of the element of surprise by moving expeditiously and by controlling the timing of the lawsuit. The complaint and motion for injunction should provide a clear description of the company's trade secrets. Give the court a succinct affidavit showing the efforts the company has taken to maintain the secrecy of the information, and the danger of misappropriation if the court does not issue an injunction.

Although the requirements for obtaining an injunction vary slightly from court to court, the company must in every case be prepared to prove irreparable harm. The complaint and supporting affidavits should demonstrate that money damages are not adequate compensation and cannot replace trade secrets once lost. Do not underestimate the power of a preliminary injunction it can often lead to a quick and favorable settlement.

In addition to injunctive relief, the company may, of course, seek damages. Lost profits and reasonable royalties are common measures of damages for the theft of trade secrets. Willful and malicious misappropriation of a trade secret can yield punitive damages and attorneys fees.15 State statutes regulating unfair trade practices may provide treble damages and attorney's fees.16

Keeping Your Competitors Secrets Secret

Sometimes the shoe is on the other foot - the client can be accused of stealing a competitor's trade secrets. Corporate counsel should ensure that her client does not hire a lawsuit with a new employee. A few simple steps will help protect the company.

First, counsel should alert managers to the dangers of hiring applicants who had access to trade secrets or confidential business information. Second, counsel should review any noncompete, nonsolicitation, and confidentiality agreements the applicant may have signed. Third, the company should require the applicant to certify that he will not disclose his former employer's proprietary or trade secret information. The company should incorporate into its employment contracts and manuals an express prohibition against the use of competitors trade secrets. Where the new employee comes armed with his former employer's trade secrets, the company can defuse a potential lawsuit by placing the employee in a position where he will not inevitably use or disclose the trade secret.

Conclusion

Only careful planning and practices will protect a company's proprietary information and reduce the risk of being sued for using another company's information. Even taking those steps is sometimes not enough, so counsel must be prepared to act swiftly and decisively to prevent further damage to the company from the misuse of trade secrets.

Dan Johnson, a Partner at McKenna & Cuneo, L.L.P., is a trial lawyer and Chairman of McKenna's Trade Secrets Practice Group. Lora Brzezynski, an Associate at McKenna, specializes in complex commercial and business litigation.

ENDNOTES

1. Unif. Trade Secrets Act § 1 (amended 1985), 14 U.L.A. 437 (1990). Thirty-four states have adopted the Uniform Trade Secrets Act in one form or another. Other states have similar common law definitions of trade secret.

2. Economy Roofing & Insulating Co. v. Zumaris, 538 N.W.2d 641 (Iowa 1995) (customer lists); Northern States Power Co. v. North Dakota Public Service Comm'n, 502 N.W.2d 240 (N.D. 1993) (pricing information); Optic Graphics, Inc. v. Agee, 87 Md. App. 770, 591 A.2d 578 (Md. App. 1991) (marketing plans); Ecolab Inc. v. Paolo, 753 F. Supp. 1100, 1112 (E.D.N.Y. 1991) (sales reports).

3. Trandes Corp. v. Guy F. Atkinson Co., 996 F.2d 655 (4th Cir. 1993).

4. Religious Tech. Ctr., Church of Scientology Int'l, Inc. v. Scott, 869 F.2d 1306 (9th Cir. 1989).

5. Hoffmann-LaRoche Inc. v. Yoder, 950 F. Supp. 1348, 1360-63 (S.D. Ohio 1997).

6. See, e.g., Cal. Bus. & Prof. Code § 16600 (West 1987).

7. Advanced Marine Enter., Inc. v. PRC Inc., 256 Va. 106 (1998).

8. See, e.g., A.N. Deringer, Inc. v. Strough, 103 F.3d 243 (2d Cir. 1996).

9. See, e.g., Allen v. Hub Cap Heaven, Inc., 484 S.E.2d 259 (Ga. Ct. App. 1997).

10. Christian Defense Fund v. Stephen Winchell & Assocs. Inc, Ch. No. 156665 (Fairfax Co. Cir. Ct. 1998).

11. Compare Merrill Lynch, Pierce, Fenner & Smith, Inc. v.Bradley, 756 F.2d 1048 (4th Cir. 1985) with Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Hovey, 726 F.2d 1286 (8th Cir. 1984).

12. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

13. 18 U.S.C. §§ 1831-39 (1994 & Supp. 1996).

14. 18 U.S.C. § 1030; Va. Code Ann. § 18.2-152 (1995).

15. Unif. Trade Secrets Act § 3.

16. See, e.g., Va. Code Ann. § 18.2-500.

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