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Safeguarding Your Trade Secrets II: Misappropriation

Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP

The law of intellectual property seeks, as a general rule, to protect and reward creative firms, innovators or entrepreneurs for their efforts by prohibiting misappropriation or infringement by competitors. It is therefore crucial that the legal considerations to protect these "crown jewels" are incorporated into the strategic marketing plan of any emerging business. If proper steps are not taken to protect new products, services and operational techniques, it will be extremely difficult to maintain and expand the company's share of the market, because others will be free to copy these ideas as if they were their own.

Misappropriation refers to the wrongful taking of your trade secrets by those who had a duty not to take or use this information for their own competitive advantage. Therefore, in order to be able to bring an action for misappropriation, you must establish that those who come in contact with the information have a legal duty not to disclose or use it.

The simplest way to create this duty is by agreement. Owners of small or growing businesses should have a written employment agreement with each employee who may have access to the employer's trade secrets. The employment agreement should contain provisions regarding the non-disclosure of proprietary information, as well as covenants of non-exploitation and non-competition applicable both during and after the term of employment. These covenants will be upheld and enforced by a court if reasonable, consistent with industry norms and are not overly restrictive. Such agreements will go a long way toward proving to a court that the owner intended to and, in fact, took reasonable steps to protect the trade secrets in the event of any subsequent litigation.

The agreement should be only the beginning, however, of an ongoing program to make employees mindful of their continuing duty to protect the company's trade secrets. In some states, the unauthorized removal or use of trade secrets may also be a felony under criminal statutes.

Employment is not the only context in which this duty of non-disclosure might arise. An entrepreneur submitting proposals or business plans to prospective investors, lenders, licensees, franchisees, joint venturers, lawyers, accountants, or other consultants should take steps to ensure confidentiality at the commencement of any such relationship where trade secrets may be disclosed in presentations, meetings and documents.

Protecting Trade Secrets

In order to win a lawsuit against another party for trade-secret misappropriation, the plaintiff must demonstrate existence of a trade secret, communication to the defendant while defendant was in a position of trust or confidence (some duty not to disclose) and also that information constituting the trade secrets was used by defendant to the injury of the plaintiff.

In analyzing whether these essential elements are present, the court will consider the following factors:

  • Was there any relationship of trust and confidence, either by express agreement or implied, that was breached?
  • How much time, value, money and labor was expended in developing the trade secret?
  • Had the trade secret reached the public domain? Through what channels?
  • Has the company maintained a conscious and continuing effort to maintain secrecy (such as agreements of non-disclosure and security measures)?
  • What were the mitigating circumstances surrounding the alleged breach or misappropriation?
  • What is the value of the secret to the company ?

Remedies for Misappropriation

The most important and most immediate remedy available in any trade-secret misappropriation case is the temporary restraining order and preliminary injunction. This remedy immediately restrains the unauthorized user from continuing to use or practice the trade secret, pending a hearing on the owner's charge of misappropriation. Prompt action is necessary to protect the trade secret from further unauthorized disclosure. If the case ever makes it to trial, the court's decision will address the terms of the injunction and may award damages and profits resulting from the wrongful misappropriation of the trade secret.

However, there are certain risks to evaluate before instituting a trade-secret lawsuit. The company may face the risk that the trade secret at issue, or collateral trade secrets, may be disclosed during the course of the litigation. Certain federal and state rules of civil procedure and laws of evidence will protect against this risk to a limited extent. The prospective plaintiff should also consider that trade-secret law is very unsettled and often turns on the facts of each case.

Establishing the "paper trail" needed to prove all of the elements of misappropriation may be virtually impossible in some cases. Such lengthy litigation is likely to be cost-prohibitive for the average small business owner. This is all the more reason why preventive and protective measures are a far more attractive alternative than litigation.

Protective Measures for Departing Employees

Growing companies must be aware of their rights and obligations when attempting to protect intellectual property in connection with a departing employer. For example, if an employee had threatened to leave the company if certain plans were not implemented, could that person leave and take the intellectual property along? No employer can prevent an enterprising employee from using his or her personal skills and experience in the launch of a new venture or in a new job. The law does not mandate nor will it enforce an agreement requiring employees to "clean their mental slate" upon departure. There is a fine line between what knowledge belongs to the employee and what belongs to the former employer. Courts have attempted, relatively unsuccessfully, to develop some objective standard for what an employee in that position would have learned regardless of where he might have been employed.

Growing companies should note, however, that a few states such as Pennsylvania have determined that an employee may use trade secrets that he or she created while still employed by the former employer. About a dozen states severely limit or even prohibit the nature and scope of non-competition agreements.

In analyzing a claim against an employee were he/she to leave, the company should consider the following factors:

  • what information was the employee exposed to which truly constituted a trade secret,
  • the terms of any employment or non-competition agreements, steps taken by the company to protect the secret,
  • the extent to which this secret could have been discovered through "reverse engineering,"
  • the extent to which the employee used any company assets or resources to form his or her own business,
  • the extent to which the employee acquired this knowledge independent of the company,
  • the extent to which the employee contracted current vendors or customers of the company during or after his/her employment with the company,
  • the similarity of product or service to be offered, and
  • the proximity of the new business to the former employer.

Overall, the courts will be hesitant to stifle competition and the entrepreneurial spirit of the employee, absent some express agreement or foul play. However, clear breach of an agreement, a breach of a noncompete clause, or misappropriation of a customer list or proprietary data should be pursued.

Show-How and Know-How

Certain types of intellectual property are treated as such primarily because some third party is willing to buy or license them from an individual or company that possesses a particular expertise. In such cases, show-how consists of training, technical support and related educational services, whereas know-how usually takes the form of information that has been expressed in written rather than spoken form. Know-how and show-how usually arise in the context of a licensing agreement where the licensee is requesting support services, in addition to the tangible technology or patent which is the central subject matter of the agreement.

To the extent that the know-how or show-how is confidential and proprietary, it will generally be governed by the law of trade secrets unless otherwise covered by a patent. To the extent that the know-how or show-how is non-proprietary and constitutes common knowledge, it will be governed by the terms and conditions of the agreement between the parties.

Business owners need to pay attention to these details because the proper protection and, where possible, registration of intellectual property is essential to building and sustaining a company's growth. The procedures and expenses necessary to protect these valuable intangible assets are crucial to the company's continued well-being and its ability to survive in a competitive marketplace.

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