- Protecting your Trade Secrets
What have you done to protect your business from walking out the door?
What will you do if you wake up one morning to find that your key technical, sales and financial employees have set up shop across the street in direct competition?
The first thing that you probably will do after realizing that you are actually awake and not trapped in a nightmare is call your lawyer. She will tell you that there are all sorts of laws that protect companies from this type of behavior. There are trade secret laws, laws that protect against unfair trade practices, causes of action that penalize breaches of loyalty and fiduciary duty. Your non-competition agreements can be enforced. Your lawyer will assure you that "We'll shut them down!"
To start, your lawyer will ask you what you have done to protect your business against this kind of action. She will want to know about your patents, trademarks, copyrights and confidentiality agreements. She will want you to specifically describe what it is you are trying to protect.
You answer (trying not to treat her like an idiot): "It's the way we do business. Acme Resources is the only company that does what we do, we have a special way of doing it, for special clients, based on my original idea that blossomed into my livelihood and lots of jobs for others."
Fortunately, your attorney knows too well what a court is going to look for before it issues an injunction and puts your new competitor out of business. This article is designed to help you begin thinking through these issues so that if the time ever comes, you have a well-developed plan that has been implemented, not left on the drawing board.
There ought to be at least two major steps to protecting your proprietary information.
First, have a "Trade Secret Identification Program."
Second, implement a "Trade Secret Protection Program."
I. The Trade Secret Identification Program.
It may seem overly simplistic for your company to devote resources to identifying your trade secrets. But, this preliminary step is crucial.
Under Connecticut law, as well as many other states, there are a number of factors that define a trade secret. The first prong of the statutory definition says that a trade secret is "information, including a pattern, compilation, program, device method, technique, process, cost data or customer list." But, it crucial that your consideration of this issue not stop there. A court will consider such information as a trade secret only if it (i) has economic value because it is not known by or ascertainable by others who could use it to obtain economic value; and (ii) "is the subject of efforts that are reasonable under the circumstances to maintain secrecy." Conn. Gen. Stat. § 35-51. So, you can protect your information if it is valuable because others don't have it and can't get it; AND you take reasonable steps to make sure that it stays confidential.
One common mistake is to think that all of your company's processes, plans and ways of doing business are trade secrets. But, for example, you will have a hard time keeping your customer lists confidential if you tout your clients on your website. Also, a closely guarded detail about your manufacturing process won't enable you to get protection for the way your entire assembly line works. One's overall method of operation might be considered a trade secret even when some of the components of a plan or method are publicly known. On the other hand, components of an otherwise confidential plan might not have trade secret protection if they have been publicly disclosed. Lydall, Inc. v. Ruschmeyer, 282 Conn. 209, 240-41 (2007). It is therefore crucial to consider all of the various aspects of your business:
· Is it possible to obtain patent, trademark or copyright protection?
· What key information is publicly known through, among other things, sales presentations and mandatory financial reporting?
· What key information is known by employees, consultants, vendors, customers?
· Can the information easily be duplicated or properly acquired by others through methods such as reverse engineering?
· How much money and/or effort has been expended to develop the information?
Once the key information has been identified it is important to implement a plan to maintain confidentiality.
II. The Trade Secret Protection Program.
After you have identified the important, secret information you must develop a strategy to keep it confidential. You need to consider who has access to the information and take steps to limit the dissemination of the information. A recent case highlights the importance of maintaining tight controls over important information.
In United States Machine Tools Corp. v. McClellan, 2009 Conn. Super. LEXIS 1551 (J.D. New Britain 2009), the defendant McClellan was a receptionist/clerical assistant for United States Machine Tools Corp. ("USMT"), which was in the business of rebuilding and retrofitting machine tools. McClellan worked for USMT for about three years and then was hired by USMT's competitor. Questions arose as to whether McClellan accessed USMT's computer to obtain confidential information and whether she gave such information to her new employer. The court found that the identity of USMT's existing and target clients; its client contact information and its shipping logs were not trade secrets because the company did not undertake adequate measures to safeguard the information. For example, neither McClellan nor any other USMT employee entered into a confidentiality agreement or a covenant not to compete. And, not surprisingly, the names of USMT's customers were not kept secret from its own employees. The court also noted that none of its documents stamped "secret" or "confidential." Also, even though USMT's shipping logs were protected in its computer system, the password to the computer was written on a post-it note stuck to McClellan's terminal. See also Delcath Systems, Inc. v. Foltz, 2007 Conn. Super LEXIS 101 (J.D. Stamford-Norwalk 2007)(no trade secret protection for information stored on consultant's home computer with knowledge of employer).
This case can be contrasted with General Reinsurance Corp. v. Arch Capital Group, Ltd., 2007 Conn. Super. LEXIS 2629 (J.D. Stamford-Norwalk 2007). In that case, the plaintiff proved that it took appropriate steps to protect the confidentiality of its business information. While the plaintiff "did not require non-compete agreements from its employees, there was evidence that they were obligated to annually acknowledge the stricture of [the company's] Code of Business Conduct which stated that [its] business operations and client information were confidential and must be kept secure and protected." Certain other information was maintained in computers requiring a special password. User manuals with key information were kept confidential and distribution of the manuals were limited to numbered copies.
There is no cookie cutter formula for protecting your confidential information and a program should be tailored to each company's specific needs. But some of the factors to consider include:
· Consider whether your key employees are parties to a confidentiality and non-competition agreement. Generally, in the absence of a restrictive covenant a former employee can compete with her former employer, but remains subject to the duty not to use trade secrets. Elm City Cheese Co. v. Federico, 251 Conn. 59, 69 (1999). Therefore, having agreements in place serves the dual purpose of restricting the ability of former employees to use any information against you; and helping to establish that certain information was maintained as confidential and therefore qualifies as a trade secret. While a former employee has a duty not to use trade secrets, the dispute about what information constitutes a trade secret becomes more difficult when agreements are not in place. The annual review of, and agreement to, nondisclosure agreements has been cited by the court as an indicia trade secret protection. Aetna, Inc. v. Fleugel, 2008 Conn. Super. LEXIS 326 *14 (J.D. Hartford 2008).
· Consider whether your vendors and customers possess important information about your business and whether they should execute non-disclosure agreements. If you don't have such agreements in place will you be able to prove to a court that you have a "working relationship" with your suppliers and customers that incorporate an implied agreement to keep information confidential.
· Is access to confidential information restricted? Do you have procedures so that employees only have access to trade secrets on a need-to-know basis? Are confidential documents marked? Are sensitive electronic documents password protected and encrypted?
· Do you have annual employee training concerning your company's intellectual property? Does your new employee orientation program cover intellectual property and confidentiality?
· Have you taken steps to be able to document the effort and cost of developing your proprietary information? Being able to produce this information will be an important aspect of demonstrating the economic value of the information, which is a key component to establishing trade secret protection.
This article is intended to raise questions about how you handle your most important business information. The solutions to these issues can only be developed through a detailed review. The Michaud Kinney Group can perform a trade secret audit and develop a protection for you. Contact us to set up an appointment.
Does your company protect their trade secrets? Should you or your company have a Non-Disclosure Agreement pertaining to your Patent? To learn more, download a Free Sample Non-Disclosure Agreement.
