Don't Let Others Trade Your Secrets
TRUCKSTOP.COM, which matches products to be shipped with available trucks, was developed by Creative Computing so that trucking companies could maximize their loads and minimize “deadheading,” a term that means having to drive a truck on a return trip without hauling paid freight. The Web site is user friendly and allows a radius search so that a trucker in one geographic area can find a customer in the same area who wants to ship a product and vice versa.
To protect its investment, Creative Computing prohibited access to its site by competing companies. But another company, Getloaded.com, set up a similar load-matching site and embarked on a multipronged approach to retrieve Creative Computing’s information.
Getloaded’s president and vice president set up several false accounts at Creative Computing posing as individual truck drivers and trucking companies. This allowed them to see all of the information available to Creative Computing’s legitimate customers. Getloaded’s senior officers also hacked into the Creative Computing Web site and took the source code for the radius search feature.
Then, Getloaded hired away a Creative Computing employee who provided confidential information about thousands of Creative Computing customers. The employee also gave Getloaded’s executives access to the Creative Computing Web server so the executives could download customer lists at will.
Creative Computing discovered that Getloaded had been stealing information and sued under the Idaho Trade Secrets Act, seeking a restraining order to prohibit further theft and destruction of evidence. The restraining order was granted, but the company continued to seek out Creative Computing’s customer information and destroyed evidence that showed it had copied source code for its computer program.
Creative Computing sued for damages. A jury found that Getloaded had violated trade secrets law and awarded the plaintiff nearly $1 million in damages. Getloaded appealed the decision.
The U.S. Court of Appeals for the Ninth Circuit upheld the damage award and also prohibited Getloaded and its officers from accessing Creative Computing’s Web site—an unusual move used primarily in child pornography cases. According to the court, the decision was justified because of Getloaded’s “egregious conduct.”
This case illustrates the lengths to which a determined information thief will go to gain a competitive edge. The case also demonstrates various types of trade secret theft. The key to avoid being victimized is to have a comprehensive proprietary information protection program. As part of that overall program, companies need to ensure that all trade secrets are defined and properly protected. They need to limit access to trade secrets and implement agreements with employees and others to protect such information.
Trade secrets are based on state law. Accordingly, the definition of a trade secret may differ among states. However, most states have adopted the Uniform Trade Secrets Act (UTSA), a model law that defines trade secrets and trade secret theft.
According to the UTSA, a trade secret is information, such as a formula, technique, or process, that has independent economic value, actual or potential, from not being generally known, and for which reasonable efforts are made to maintain secrecy.
A factor considered in determining whether information is a trade secret is the extent of the measures taken to guard the secrecy of the information. If reasonable efforts are not used to keep the information secret, the courts will not regard it as a trade secret. Under such circumstances, an employee who takes information cannot be sanctioned for violating trade secret protections.
For example, in one case (Auto Channel, Inc. v. Speedvision Network, LLC, U.S. District Court for the Western District of Kentucky, 2001), a company planning to launch a new cable television channel filed a lawsuit after a rival took the idea and launched its own channel. The court determined that the plaintiff could not pursue a lawsuit against its competitor.
The court noted that the information could not be considered a trade secret because the plaintiff sent all of its materials, unsolicited, to other companies in the cable industry. The materials were not marked “confidential” and at no point did the plaintiff require anyone to sign a nondisclosure agreement.
In a similar case (Rogers v. Desa International, Inc., U.S. District Court for the Eastern District of Michigan, 2002), the plaintiff brought suit against a manufacturing company for allegedly stealing a design for a new chainsaw. However, the court ruled that the plaintiff’s design did not qualify for trade secret protection because he did not take reasonable efforts to maintain its secrecy. Specifically, a videotape detailing the new chainsaw had been sent to potential manufacturers without confidentiality labels.
To meet the trade secret requirements, the holder of trade secret information should restrict access to the trade secrets, use agreements to restrict others from using or disclosing the trade secrets, and provide notice of the trade secrets.
The company must also restrict general access to the information even among employees. In one case (Dicks v. Jensen, Vermont Supreme Court, 2001), a company kept its customer list in an unlocked drawer. As a result, when some employees stole the customer list and began their own company, the court determined that the customer list could not legally be considered a trade secret.
In another case (United States v. Lange, U.S. Court of Appeals for the Seventh Circuit, 2002), a court ruled that a company had taken sufficient precautions to keep its information safe. In that case, a former employee stole drawings and manufacturing data that contained company secrets and attempted to sell them to a competitor. However, the company was able to prove that it had kept all drawings and manufacturing data in a room protected by special locks, an alarm system, and a motion detector. Thus, they were able to successfully sue the employee.
When trade secrets are maintained in a computer database, firewalls, cryptography, and passwords can likewise be employed to restrict access.
Visitors. Courts have recognized that controlling visitor access is another factor in any information protection program. This can be done by requiring that visitors log in at the front desk and be accompanied by an escort while in the building.
In addition, visitors should never be allowed to access areas where trade secrets are kept or where protected processes occur. Companies that have such a policy are more likely to be granted a finding of trade secret status. Conversely, companies without these procedures are more likely to lose in court.
For example, in Hildreth Mfg., L.L.C. v. Semco, Inc. (Ohio Appeals Court, 2003), the court ruled that efforts to maintain secrecy were not sufficient because employee family members and visitors were allowed in the building where trade secret methods were practiced.
Employees. To ensure that trade secrets are legally recognized, companies should restrict trade secret information to only the staff who have a need to know. For example, in one case (Infinity Prods, Inc. v. Quandt, Indiana Court of Appeals, 2004), a salesperson left his employment and went to work for a competitor. He took sales information, such as manufacturing costs and price summaries.
The company sued for misappropriation of trade secrets. The court found in favor of the company because to obtain the information, the salesperson had to bypass locked offices, locked file cabinets, and computer passwords.
To the extent that employees, contractors, or others need to know or access a trade secret, the company should not give complete information to any one party. When possible, information about a process, for example, should be divided among employees, contractors, or others to prevent any one party from easily replicating the secret.
The classic example is the method used by KFC Corporation to protect its “secret recipe” fried chicken seasoning. The company had one supplier supply one part of the recipe and another supply the other, with neither having knowledge of all of the components.
This issue also figured prominently in the Lange case. The company divided work among subcontractors so that no one subcontractor held the full schematics of the trade secret. The practice was considered by the court to be a reasonable secrecy measure.
Documents. Companies should also limit the number of confidential information documents and securely destroy all unnecessary copies. Also a factor in the Lange case, the company prevailed on its claim in part because it minimized the number of copies of sensitive information and shredded surplus copies.
In general, two types of agreements may be used to protect trade secrets—employee agreements and agreements with others given access to trade secret information, such as contractors and potential customers. The failure to have such agreements in place can lead to the loss of trade secret protection. For example, in the Hildreth case, the absence of nondisclosure agreements was a factor in finding that the plaintiff had failed to take reasonable precautions to protect trade secrets.
Employees generally have an implied duty not to use or disclose an employer’s trade secrets. However, employee agreements directed to the trade secrets of a business are useful to clarify ambiguities regarding trade secret status and provide notice of trade secret ownership.
Employee agreements—often referred to as confidentiality or nondisclosure agreements—typically restrict an employee from using or disclosing the trade secrets of a business. All employees who might be exposed to the trade secrets of a business should be required to sign an agreement.
The agreement can be in the form of a contract or included in an employee handbook acknowledged by signature as having been read and agreed to by the employee. Annual or other periodic reminders of an employee’s obligations are also recommended practices.
The possible use or disclosure of trade secrets may be further protected through noncompete agreements, which restrict a former employee from engaging in competitive activities for a reasonable period of time within a reasonable territory.
Third parties. Third parties who must be given access to trade secrets should also be required to sign an agreement restricting use or disclosure of trade secrets. This might include contractors, suppliers, vendors, professional consultants, customers, potential licensees, and potential buyers of the business. For such persons, and for all visitors allowed into areas where a trade secret might be viewed, it is recommended that a business employ, at minimum, a standard confidentiality or secrecy agreement restricting use or disclosure of trade secret information.
Even verbal recognition of a trade secret is better than nothing and may, in some circumstances, offer protection. For example, in Learning Curve Toys, Inc. v. PlayWood Toys, Inc. (U.S. Court of Appeals for the Seventh Circuit, 2003), the court ruled that trade secret protection could apply to a verbal agreement made between two competing companies.
In the case, the owners of a fledgling company, PlayWood Toys, met with established toy maker Learning Curve Toys. During the discussions between the two companies, during which PlayWood offered an idea on how to build a distinctive wooden train track, each side verbally asserted that the information being exchanged was confidential and should not be shared with outside parties.
Without PlayWood’s knowledge, Learning Curve took the train track idea, manufactured a product based on the idea, and began selling it. PlayWood’s owners learned of the deception when they saw the track on toy store shelves.
PlayWood sued Learning Curve for trade secret violations. The U.S. District Court for the Northern District of Illinois ruled that Learning Curve did not steal the idea for the toy, in part, because the company failed to guard the secret of its product idea through formal confidentiality agreements.
The federal appeals court disagreed, finding that all parties had agreed that the ideas being exchanged were confidential, so no written agreements were necessary to protect the idea as a trade secret. Despite the result in that case, it is strongly recommended that written confidentiality agreements be used.
Under UTSA, misappropriation occurs when a person acquires the information while knowing or having reason to know that it was acquired by improper means. It also occurs when there is the disclosure or use of a trade secret without the owner’s express or implied consent by a person who knew or had reason to know that knowledge of the trade secret was derived from or through a person who had used improper means to acquire it or who had acquired it under circumstances giving rise to a duty to maintain its secrecy.
The critical point in these definitions is that the person who steals the trade secret must generally know or have reason to know that it was a trade secret before he or she can be held responsible. Therefore, companies should make sure to designate trade secrets and to remind employees of their obligations to safeguard them.
Documents and other items that include trade secret information should be provided with legends or signs denoting that they are proprietary trade secrets. This can make a difference when a court is determining whether a company’s information can be considered a trade secret. For example, in the Hildreth case, the plaintiff’s contention that its stolen information was a trade secret was contradicted by the fact that no legends were used on documents containing trade secret information.
Also, notices such as signs can be used on any portals to trade secrets or areas in which trade secret information is kept. Such portals could include doorways, file cabinets, drawers, and computer files.
A rarely used opportunity to reinforce trade secret protection arises when departing employees go through exit interviews. Companies should conduct exit interviews with all departing employees.
Obligations. During this interview, the employee should be reminded of the obligation not to disclose trade secrets even if he or she was not previously asked to sign a confidentiality agreement. The employee might also be asked to sign a document acknowledging the continuing obligation. The interview should be documented and the obligation confirmed in a follow-up letter sent to the exiting employee’s home address.
These oral and written warnings should identify all trade secrets of which the employee has knowledge. Such precautions will make it difficult, if not impossible, for the employee to later claim that he or she had no reason to know that the information was a trade secret or that it was acquired by improper means.
Additionally, the employee should be requested to return all property and information of the business. The request should specifically refer to the return of anything potentially comprising trade secret information.
Employer information. If the employee leaving a business has been required to disclose his or her next employer, that employer can be contacted and informed that the employee is restricted from using or disclosing trade secrets.
Without identifying the specific trade secrets, the former employer can tell the next employer that the employee was privy to trade secrets in a specific field, such as manufacturing or sales, for example. Such notice could also be provided in writing to avoid any later denials. This step prevents the next employer from later claiming that it did not know the particular information was a trade secret and that the employee was restricted from sharing it or applying it at the new job.
However, employers should be aware that once they have instituted a policy to review intellectual property policy during the exit interview, they must follow these protocols. Failing to do so could prove costly in court.
For example, in a recent case (IKON Office Solutions, Inc. v. American Office Products, U.S. District Court for the District of Oregon, 2001), although an exiting employee had signed a noncompete agreement, the agreement was not in the employee’s personnel file at the time of his departure. As a result, the employee’s supervisor did not go over the terms of the agreement during the employee’s exit interview. The supervisor, after failing to find the agreement, mistakenly told the employee that he was not subject to a noncompete agreement.
The employee went to work for a competitor, and the former employer began losing business. At this point, the company uncovered the noncompete agreement and sued the employee and competitor, raising a number of allegations, including trade secret misappropriation.
The court ruled that the company had waived the right to enforce the noncompete agreement when it misplaced the agreement and then compounded that error by advising the employee that he was not subject to any such agreement. The court ruled in favor of the employee and competitor.
While trade secrets are among the most valuable assets owned by any business, most businesses do not take sufficient precautions to protect them. By implementing the measures discussed here, companies can help prevent intellectual property theft and maintain their market advantage.
John M. Halan is an attorney specializing in intellectual property law with Brooks Kushman in Southfield, Michigan.