You can leave, but you can’t take it with you
by Philip J. Siegel
Because of the increasing frequency with which the current work force moves from job to job, it is imperative companies take steps to keep confidential information from being leaked to competitors.
Although you may think roofing companies have little to fear with regard to company trade secrets, consider the case of a roofing estimator whose job responsibilities may include procuring contracts or preparing bids. Performing these types of responsibilities involves close contact with customers and requires access to sensitive bidding information and a company’s bidding structure. You can protect your company from a former employee disclosing this type of information by asking employees to enter into employment agreements.
Employment agreements
An employment agreement can explicitly define a company’s trade secrets and prohibit employees from disclosing such secrets to competitors or subsequent employers.
To be effective, employment agreements should include language that conveys an employee’s acknowledgement that the trade secrets and other confidential information of the company are the sole, exclusive property of the company. An employee also should be required to acknowledge that the company’s disclosure of its trade secrets to the employee does not give the employee any license, interest or rights of any kind regarding trade secrets or confidential information. The agreement should state the trade secrets are to be used by the employee solely for the benefit of the company while employed by the company.
An effective employment agreement also will state that an employee’s nondisclosure obligations remain in effect for as long as the information remains a trade secret under applicable law regardless of when the employee’s employment is terminated.
An employment agreement can include provisions, known as restrictive covenants, that prohibit former employees from disclosing trade secrets or other confidential information, including a company’s pricing structure and customer and supplier lists. However, for these provisions to be enforceable, certain requirements must be met.
Restrictive covenants must be reasonable and protect an employer’s legitimate business concern. When making these determinations, courts consider the following interests: Employers want to keep certain information they share with employees safe from competitors; employees have an interest in pursuing their livelihoods, developing and using their skills, finding satisfying work and bettering their lives; and the public has an interest in free, open competition among product and service providers.
Courts have found that employers have legitimate concerns to protect trade secrets that include customer and supplier lists, as well as sensitive bidding information. But what allows a trade secret to be protected often is a fact-sensitive issue.
What can be protected?
Although a trade secret generally is not known outside of a company, a trade secret need not be the subject of a copyright, patent or trademark to be protected.
A key difference between trade secret protection vs. patent law is that trade secret protection is not tied to information’s novelty. Moreover, trade secret law, unlike patent law, draws more from the principles surrounding confidential and fiduciary relationships as opposed to property principles commonly found in patent law.
Courts often look to the Uniform Trade Secrets Act (UTSA), which has been adopted in at least 43 states. Under UTSA, to qualify as a trade secret, company information need only be valuable by virtue of its relative secrecy and reasonably protected by a company.
Most courts also consider the following factors when determining whether company information can be protected as a trade secret:
- The extent to which the information is known outside of a company
- The extent to which the information is known by employees and others involved with a company
- The extent of measures taken by a company to guard the information’s secrecy
- The value of the information to a company and its competitors
- The amount of effort or money expended by a company in developing the information
- The ease or difficulty with which the information could be legally acquired or duplicated by others
Generally, whether a company has taken reasonable steps to protect its interests is the key factor in determining whether a trade secret can be protected. Some courts consider requiring employees to enter into employment agreements as a sufficient step to warrant protection. Other courts require employers to go a step further by marking certain documents as “confidential” or prohibiting the duplication of such documents, for example. Often, whether an additional step is required will depend on the distinction between obvious trade secrets, such as formulas (which generally do not require an additional step) and nonintuitive secrets, such as supplier lists (which may require additional protection).
Customer lists can be protected trade secrets depending on a list’s relative secrecy. Courts will look to the efforts and cost involved in compiling a list. For example, prospective customer lists generally are afforded less protection because such lists can be compiled from information readily available to the public from commercial means.
With regard to customer lists, courts will find a company’s interest in its customer list warrants protection if the company’s relationship with its customers is near-permanent and except for his association with his employer, an employee would not have had contact with customers.
The following factors are considered when determining whether a near-permanent customer relationship exists:
- The amount of time it took a company to develop its clientele
- The amount of money a company invested in developing its clientele
- The degree of difficulty involved in developing the clientele
- The amount of personal customer contact by employees
- The extent of a company’s knowledge of its clientele
- The amount of time customers have been associated with a company
- The continuity of the employer-customer relationship
If courts find that a trade secret is entitled to protection, the courts still will analyze whether a former employee’s new position or job responsibilities will require or permit him to use or disclose confidential information. All that courts require is that an employee’s subsequent work be substantially similar to his previous employment and then it will be presumed that a trade secret requires protection. Whether a trade secret actually will be readily usable is not a consideration.
Misappropriation of secrets
Misappropriation of trade secrets occurs when a trade secret is obtained by another party’s breach of either a restrictive covenant or confidential relationship or if trade secrets are obtained through improper means in the absence of a written nondisclosure or confidentiality agreement. Improper means may involve breaching the duty of loyalty most courts find is owed employers. This can be in the form of unauthorized copying and selling of sensitive company information.
When a company’s trade secrets are misappropriated, an injunction may be obtained to prohibit others from using or disclosing such trade secrets. A company also may be entitled to monetary damages.
Damages in cases involving trade secret misappropriation usually are measured by calculating net lost profits. Damages for lost goodwill and diminished trade secret value may be awarded if the damages are not speculative and are supported by hard evidence. These damages are computed by evaluating the cost of trade secret development, actual use by the defendants and loss of competitive advantage, among other factors. Subsequent employers may find themselves liable for damages if they benefit from the use of a trade secret they know has been misappropriated by an employee.
Keeping it private
To ensure your company’s most sensitive information is protected, you must be able to show steps have been taken to ensure the information remains secret. The first step is to require those employees who will have access to sensitive information to enter into employment agreements at the time employment begins. Additional steps may involve restricting employee access to sensitive information, marking sensitive information as “confidential,” and establishing a company policy regarding the reproduction of sensitive company information.
Taking these steps shows your company’s intent to protect its most sensitive information and the competitive advantage that results from the use of such information.
Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Schemm & Salzman.
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