Twas the night before Christmas, when all through the company;
A disgruntled employee kept saying “please jump with me.”
She was trying to line up a grand, mass departure;
Of which she was certain no one could outsmart her.

Her files had been copied, her clients all contacted;
She’d consulted a lawyer ‘bout things she had contracted.
He said that her covenants were quite overbroad;
Of this she was certain, they’d all be deemed flawed.

She proceeded to upload the secrets she’d learned;
On to flash drives, and emails and discs she had burned.
With not one regret, she reamed out her boss;
Quite sure she’d not erred, it would soon be his loss.

With eyes all upon her, out the door she receded;
Two colleagues joined with her, at least that's what she tweeted.
The office was stunned, and management surprised;
No one had foreseen that they’d soon be downsized.

“Let’s call up the lawyers. What options have we?
We’ll file a lawsuit, and then she will see!
Without our permission, our computers she hacked!
This must run afoul of the Computer Fraud & Abuse Act.”

“We must stop her now, her acts are illicit.
Without an injunction, our clients she’ll solicit.
And don’t forget the others who joined her, you see;
Together they formed a civil conspiracy.”

“Hold your horses," say the lawyers, "don’t get carried away.
Let’s pull out their contracts and see what they say.
But where are they kept? We’ve got piles and piles.
For sure they’ll be found in personnel files.”

“Let’s draft the complaint, and seek an injunction.
The defendants, you see, acted without compunction.”
The Court set a hearing, the plaintiff went first.
“Your Honor, it’s horrible, obscene and the worst!!”

“She’s taken our staff, our trade secrets, purloined;
She must be shut down, she must be enjoined!
In her contract she promised, she swore, she agreed.
The protections we seek are all guaranteed.”

“She may not solicit. It’s in simple prose.
She may not take secrets, or use or disclose.
But even without the help of contract;
Her conduct defies the trade secrets act.”

The lawyer sat down, feeling smart, feeling pleased;
The defense will be begging, they’ll get down on their knees.
So the court turned to the left where defense counsel sat;
And asked, “My dear sir, what do you say to that?”

“Your Honor, you see, they’ve got it all wrong.
Just hear me out, this won't take too long.
The data at issue are far from trade secrets.
You’ll find it in public, in brochures and on leaflets.”

“The contract is void, it lacks consideration.
And the covenants purport to cover the nation.
My clients, they acted at all times with great reason.
In contrast, the plaintiffs use contracts adhesion.”

Defense counsel sat, while the court thought about it;
Parsing through the arguments each party had spouted.
And finally the court was ready to rule;
To give its decision at this time of Yule.

“First let me address the non-compete clause;
Please wait ‘til I’m finished; please hold your applause.
The non-compete is too onerous, it’s unreasonable;
But I find that the covenants are quite severable.”

“Defendants have breached the clause nondisclosure;
Confidential information – indecent exposure.
And let’s not forget the non-solicitation;
That covenant is of reasonable duration.”

“So I’m going to issue a restraining order;
Please take this down, my dear court reporter;
A bond shall be posted at ten thousand dollars;

I say this to both parties and their legal scholars:

Explore resolution. Think how not to fight.
Merry Christmas to all, and to all a good night.”

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed

The New Jersey Legislature recently passed its version of the Uniform Trade Secrets Act and has sent the bill to the Governor.  Here are some of the highlights from the New Jersey Trade Secrets Act:

• Injunctive relief may be sought and obtained for actual or threatened misappropriation of a trade secret.

• Damages may be awarded for both actual loss and for unjust enrichment

• Punitive damages, no greater than twice that awarded for actual damages, may be awarded in cases involving willful and malicious misappropriation

• Attorney’s fees may be awarded in cases involving willful and malicious misappropriation

• A "Trade secret" is defined to mean information, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process, that: (1)   derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

• “Reverse engineering”  is defined to mean the process of starting with the known product and working backward to find the method by which it was developed so long as the acquisition of the known product was lawful or from sources having the legal right to convey it, such as the purchase of the item on the open market

• The Act contains a statute of limitations: An action for misappropriation shall be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.

• A person who misappropriates a trade secret cannot defend the case by arguing that proper means to acquire the trade secret existed at the time of the misappropriation.

• Courts “shall” preserve the secrecy of an alleged trade secret by reasonable means consistent with the Rules of Court, which essentially means that courts may issue protective orders to protect trade secrets during discovery.

Interestingly, the statute does not include a provision found in many other states that says: "This Act shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this Act among the states enacting it."  Perhaps New Jersey is signaling that it differs with respect to trade secret enforcement.  Exactly how it differs, if at all, remains to be seen.

In passing this statute, New Jersey joins 46 other states and the District of Columbia, which haved passed a version of the Uniform Trade Secrets Act.  The Act shall take effect immediately upon signing by the Governor, but it only applies to misappropriation occuring after the effective date.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

On paper, the restrictive covenant law in Mexico looks a bit like California, but on closer examination it may be easier for a company to achieve certain goals in Mexico.  For U.S. practitioners, Mexico offers an interesting example of just how different employment laws in general – and restrictive covenant law in particular – can be in a different legal system.  In Mexico, the first principles from which all restrictive covenant law derives are found in the Mexican Constitution.  The Constitution of the United Mexican States contains prohibitions and guarantees intended to protect all Mexican citizens and the Mexican economy. 

Article 5 of the Mexican Constitution expressly prohibits enforcement of any contract by which a person renounces his or her right to exercise a given profession or industrial or commercial pursuit:

 . . . The State cannot permit the execution of any contract, covenant, or agreement having for its object the restriction, loss or irrevocable sacrifice of the liberty of man, whether for work, education, or religious vows. . . .  Likewise no person can legally agree to his own proscription or exile, or to the temporary or permanent renunciation of the exercise of a given profession or industrial or commercial pursuit.  A labor contract shall be binding only to render the services agreed on for the time set by law and may never exceed one year to the detriment of the worker, and in no case may it embrace the waiver, loss, or restriction of any civil or political right.  Non-compliance with such contract by the worker shall only render him civilly liable for damages, but in no case shall it imply coercion against his person.

Article 123(aa) of the Constitution guarantees employment rights:

The following conditions shall be considered null and void and not binding on the contracting parties, even if expressed in the contract: . . . .

h. stipulations that imply waiver of any right designed to favor the worker in the laws of protection and assistance for workmen. . . .

In a more general way, Article 28 preserves business competition in Mexico.  See Constitution of Mexico (Text translated from Constitución Política de los Estados Unidos Mexicanos, Trigésima Quinta Edición, 1967, Editorial Porrua, S. A., México, D. F. Originally published by the Pan American Union, General Secretariat, Organization of American States, Washington, D.C., 1968).

In light of these constitutional pronouncements, the baseline rule in Mexico is that covenants not to compete are unenforceable.  In addition, the courts have consistently held unenforceable even the lesser restraint of a covenant not to solicit customers.  On the other hand, confidentiality and non-disclosure covenants that are designed to protect a company’s confidential business information are enforceable.  In addition, trade secrets are protected under Mexico’s Industrial Property Law, which is similar in concept and structure to the Uniform Trade Secrets Act adopted by so many jurisdictions in the United States.  In all of these ways, the law in Mexico resembles the regime that exists in California.

There is, however, an approach that some companies have taken in Mexico that allows them to create financial incentives for a former employee to abide by bargained-for post-employment restrictions.  Some employers have included post-termination covenants in employment agreements, and then assigned a specific and separately enumerated payment of lump sum consideration in exchange for the employee’s agreement to the restrictive covenant.  This money must be paid ahead of time, and may not be deferred until termination or the post-employment restrictive period.  If a departing employee competes or declares his intent to compete, the employer may be able to sue the former employee to seek return of the consideration previously provided for the restrictive covenant.  Essentially, the employer goes to the court and seeks invalidation of the illegal covenant, which entails the former employee returning to the employer the money the company had previously paid for the covenant.  Many employees will not wish to risk the possibility that a judge will order them to repay money previously received, and instead will react to these economic incentives and elect to comply with the post-termination covenant, even though it is a covenant that could not be enforced in court.   This approach, of course, can be seen as a bit of an “end run” around the Mexican proscriptions against non-compete agreements, and although it may have worked at times in the past, there is no guarantee that courts in the future will not at some point reject the argument that the “illegal” covenant should be stricken down and the parties returned to the status quo ante.

Next up….China. 

Christopher P. Stief is the chair of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group.  To receive notice of future blog posts either follow Christopher P. Stief on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

The recent decision in Decision Insights, Inc.  v. Sentia Group, Inc., No. 09-2300 (4th Cir., Jan. 28, 2011), features two reversals of district court decisions involving a bedrock trade secrets principle: just because a secret recipe uses publicly available ingredients, it does not necessarily mean that the recipe is not a secret. 

As in the recent cases involving Goldman Sachs and Société Générale covered by this Blog, the crux of the of corporate espionage claims in Decision Insights involve the purported pilfering of computer source code against the familiar backdrop of sharp competition between two companies and employee defection.  As described in the appellate court’s opinion, Decision Insights developed and owned software called the “Dynamic Expected Utility Model.”  It is an analytical tool used to prepare negotiating strategies using modeling techniques similar to game theory analyses: the application “assesses risk, compares the impact of different operating positions, and details the relative effects of selecting various alternatives.”  Id. at pages 3 – 4.  Three of the Decision Insight employees who developed the software formed a competitor, Sentia.

According to the appellate court, Sentia initially tried to obtain a software license from Decision Insights that would allow Sentia to use the software, but this effort failed.  Sentia then hired a former Decision Insights consultant, who worked on the source code for Decision Insights’ software, to develop a product that would compete directly with Decision Insights’ software.  The consultant completed this task in approximately six weeks, which Decision Insights alleged was impossible unless Sentia used Decision Insights’ source code.  Id. at page 5.  Also, Decision Insights claimed that its software was nearly identical to Sentia’s, in terms of its analytical methodology and the results obtained when the two programs were run.   This alleged misuse of Decision Insights’ source code was the basis of Decision Insights’ claims under the Virginia Trade Secrets Misappropriations Act.

The disposition of Decision Insights’ claims took the scenic route through the federal courts, but this aspect of the case is instructive as to the substantive law and the procedural stages of litigation for companies who might one day be involved in a trade secrets action.  The case involved several decisions by the district and appellate courts.  Initially, the district court granted Sentia summary judgment, which dismissed all of Decision Insights’ claims.  This decision was reversed in part, and affirmed in part, by the appellate court.  It held that alleged “production of source code is an acceptable method of identifying an alleged compilation of a trade secret.” The appellate court sent the case back to the district court in order to determine whether Decision Insights’ software application, as a total compilation, could qualify as a trade secret under Virginia law focusing on three factors: whether the compilation has independent economic value, is generally known or readily ascertainable by proper means, and is subject to reasonable efforts to maintain its secrecy. 

In its analysis of these three factors, the district court held that aspects of the source code were generally known or ascertainable.  Decision Insights conceded that certain elements of its source code, for example, the mathematical formulae and algorithms, were publicly available.   The district court concluded that under Virginia law, this public availability meant that the application could not qualify as a trade secret. 

This decision was reversed by the appellate court.  It noted that “a trade secret ‘might consist of several discrete elements, any one of which could have been discovered by study of material available to the public.’”  However, the compilation of these publicly available ingredients can still qualify for trade secret protection “if the method by which that information is compiled is not generally known.”  Id. at page 11 (emphasis added).  The appellate court observed that testimony offered in the case established that the source code was protected from disclosure, proprietary to Decision Insights and not available to the public.   A current Decision Insights employee and co-author of the source code testified that “many aspects of the source code, and hence the compilation of the source code as a whole, were not public knowledge or readily ascertainable by proper means.”  Citing this and related evidence, the appellate court concluded that the district court committed reversible error in holding Decision Insights failed to show its software was not generally know or readily ascertainable by proper means.    

A copy of the Fourth Circuit's opinion is available in pdf format below.

Brent Cossrow is a member of Fisher & Phillips' Employee Defection & Trade Secrets Practice Group.  Mr. Cossrow's practice focuses on e-discovery and other electronically stored information issues in the employee defection and trade secret context.  As always, please feel free to share your thoughts and questions in the comment space below.

Decision Insights v. Sentia.pdf (43.87 kb)

The difference between having a trade secret and not can come down to the steps that a company takes to protect its secrets.  The Uniform Trade Secrets Act, a version of which has been adopted in 46 states, provides that information qualifies for trade secret protection only if the owner takes steps that are reasonable under the circumstances to protect its secrecy.  Employers commonly take the obvious steps to protect their trade secrets – for example, requiring employees to sign confidentiality agreements or restrictive covenants, implementing electronic controls; and let’s not forget sending demand letters and threatening litigation.  These steps are obvious and therefore widely observed.  But what about proactive monitoring?  If you have a trade secret, you ought to keep an eye and ear out to make sure it’s not being used or disclosed.  But, be careful; doing so is not without its risks.

With recent (and not so recent) advances in technology, employers have substantial means at their disposal to monitor their employees’ conduct and communications.  Available options range from reviewing employees’ email communications and computer usage to monitoring telephone discussions.  In general, these tactics are lawful unless specifically prohibited by statute or the employee has a reasonable expectation of privacy under the circumstances. 

Surveillance of Employee Email

The Electronic Communications Privacy Act, 18 U.S.C. § 2510 (“ECPA”) was originally enacted to address the interception of wire, oral and electronic communications.  The statute was specifically amended to cover email communications. Under the ECPA, electronic communications may be intercepted with the consent of one party to the communication, or under certain conditions, by a service provider if necessary incident to the provision of the service or to protect the provider’s rights and property.  Some courts have held that a “service provider” includes an employer who provides email access to its employees.  The “service provider” exception becomes even stronger if the employer is monitoring emails once they are in storage (as opposed to during transmission) because such communications are subject to Title II of the ECPA, known as the Stored Communications Act (“SCA”). 

Despite these employer friendly exceptions under the ECPA/SCA, employers can make life easier for themselves by obtaining the express written acknowledgment and consent of employees.  To this end, employers should provide employees with clear and simply written policies noting the employer’s right to monitor all employee communications that involve the use of employer-provided technology.  It is a good idea to require employees to sign a written statement that they have been advised of the employer’s right to monitor communications.  Employers might even consider providing employees with electronic notification of these rights that requires employees to manually acknowledge receipt of the employer’s policy and understanding of its content through the clicking of certain boxes on screen.  Posting open and conspicuous notices throughout the work area will likewise serve to establish that employees lacked a reasonable expectation of privacy in their electronic communications.  (While you are at it, a well written policy may make the difference between having and not having a claim under the Computer Fraud & Abuse Act.)

Monitoring Use of Computers

Employers often provide employees with computers to use for work purposes that are capable of accessing workplace computer networks via direct and/or remote internet access.  Employees commonly can access the internet from workplace computers enabling them to receive and transmit information related to the employer’s business.  Employers should reserve, and just as importantly, employers should exercise, the right to monitor employees’ activities on these networks and via the internet.  The need to do so is heightened when there is cause to believe an employee has engaged in misconduct.  As with email communications, it is prudent to unambiguously advise employees that their activities are subject to monitoring, and to require their express acknowledgment.

Surveillance of Telephone Communications

Interception of telephone communications is yet another way to monitor the use and potential misuse of your trade secrets, but it is here that the ECPA has great potential to apply.   The ECPA generally prohibits interception of telephone calls, but a number of notable exceptions leave employers well positioned to monitor such calls.  The most notable includes interception with prior consent.  Consequently, if an employer intends to monitor telephone calls, the strongest form of consent is express consent.  Consequently, the best practice requires that employees should be informed and their consent obtained in writing.  This will leave little room to doubt whether employees had a reasonable expectation of privacy in their communications.  As noted below, some state laws require consent of all parties to the communication.  For this reason, we have all heard at one time or another the prerecorded message that “this call may be recorded for quality assurance purposes.”  In the absence of express written consent, other exceptions may apply.  Consult your counsel for details.

A Final Thought

As noted at the beginning of this article, employers are generally free to monitor their employees unless specifically prohibited by statute.  Federal statutes such as the National Labor Relations Act (NLRA) and the Labor Management Relations Act (LMRA) impose significant restrictions on employers’ abilities to monitor the union organizing activities of employees.  In addition, the ECPA does not preempt more stringent state laws, and accordingly, many states offer greater protection.  For example, California, Delaware, Florida, Massachusetts, and Pennsylvania are a handful of the many states that require “two-party consent” before an employer can intercept or record a telephone call in real time.  Similarly, Delaware and Connecticut have enacted statutes that address email monitoring.  Consequently, employers operating in multiple states or communicating with third parties from other states are wise to consider state law.

The bottom line?  If you have a trade secret, proactive monitoring of employees to protect your trade secret rights is worthwhile, but not without risks.  Consult your counsel and come up with a plan that balances your need to police use and disclosure of your trade secret, on the one hand, with the statutory rights and reasonable privacy expectations of your employees, on the other hand. 

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

The American Bar Association’s Commission on Ethics 20/20 (the “Commission”) is examining whether technological advances are placing clients’ confidential information at risk, and if so, what should be done about it.  The Commission recently released an Issues Paper that identifies various risks presented by the increasing use of technology by the legal profession and solicits feedback on how to address these risks.

Once upon a time, this was a paper-based world.  We took notes by hand, or typed letters on typewriters.  But the world has changed, and it has changed dramatically.  Data are increasingly generated, transmitted and retained in electronic form, and this has important implications for attorneys and clients involved in matters involving trade secrets and confidential information. When clients entrust their trade secrets and confidential information to their attorneys, they send it via e-mail or on a disc.  What used to be maintained securely in a file cabinet under lock and key is now stored electronically either locally on devices such as servers, laptops, flashdrives or blackberries, and sometimes it is stored remotely on the internet via online storage vendors or internet email providers. 

Remote storage of client data presents several concerns including unauthorized access to confidential client information by a vendor’s employees or by hackers, a failure to adequately back up data, or insufficient data encryption.  These risks are seemingly outside of a lawyer’s control.  In contrast, electronic storage of data on so-called “local” devices is subject to greater attorney control.  For example, attorneys can utilize physical protections, passwords, and methods for deleting data remotely in the event that a device is stolen.  Lawyers also can install appropriate safeguards against malware, and they can encrypt sensitive information. 

Through its Issues Paper, the Commission is reaching out to solicit input from the legal profession about the issues identified in the paper and to ask what obligations attorneys have to investigate and address these types of risks.  Some attorneys, such as Larry Bodine at Apollo Business Development, are concerned because the Issues Paper on confidentiality risks was released concurrently with another paper addressing risks presented by lawyers' use of social media for marketing and advertising purposes.  Bodine has criticized the Commission arguing that it is “quietly gathering support to choke off lawyer marketing” by having the Commission distribute its Issues Paper.  According to Bodine, “We don’t need more regulation, we need less.”  Bodine is concerned that ‘[n]ew ethics rules always start with little-known ABA committees that appear to be pursuing input.  What they are actually doing is collecting emails and letters in support of the Model Rules they want to promulgate.”

The Commission could not disagree more.  In a recent podcast created by Commission Reporter Professor Andrew Perlman of Suffolk University Law School, Professor Perlman emphatically rejects the “belief that the papers were in some way designed to build support for new restrictions on lawyer advertising or were a first step to stifling lawyers’ use of social media as a form of marketing.”  Noting that he was a primary drafter of the Issues Papers, Professor Perlman states that the Commission’s goal is merely to identify problems arising from the increasing use of technology by the legal profession and to seek “guidance as to possible solutions.”  According to Perlman, the Commission promised to engage in significant outreach to the profession, and lawyers are encouraged to read the papers and send comments to the Commission.  Instructions on how to submit comments are in the Issues Papers themselves. 

Perlman adds that the papers do not contain any particular proposal at this time.  There is no interest in keeping lawyers from using these types of technology.  Rather, the Commission states that depending on the input received, its possible steps could range from drafting a white paper to provide lawyers with guidance to creating an online resource that periodically updates and describes existing practices and emerging standards.  The Commission also acknowledges that it may propose amendments to the Model Rules of Professional Conduct.

Although the Issues Paper addresses items of obvious concern for practicing attorneys, it touches upon an issue that businesses should be asking themselves:  Can your attorneys keep a secret?  More importantly, can your attorneys keep a ‘trade secret’ secret?

Ensuring that your trade secrets are kept secret is not a new requirement.  Forty-six states plus the District of Columbia have enacted a version of the Uniform Trade Secrets Act, which provides that in order to be considered a trade secret, the owner of such information must make “efforts that are reasonable under the circumstances to maintain its secrecy.”  While this legal rule is not new, perhaps its application in this context is novel.  After all, clients rightly assume that lawyers will take steps to protect their confidences.  As the Commission and this blog have recognized, the body of law concerning data privacy is rapidly growing.  For example, Masachusetts recently adopted regulations establishing minimum standards for the protection of consumer data. 

In short, businesses need to think about the many ways their confidential information is at risk.  Internal controls on use and dissemination of confidential information may not be entirely sufficient.  Businesses need to recognize that risks sometimes involve the handling of their data by third parties specifically entrusted for that purpose.  Go ahead and ask your lawyer, can you keep a (trade) secret?

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or subscribe to this blog's RSS feed.

Many employers consider their customer list to be a trade secret.  As this blog has previously noted, 46 states plus the District of Columbia have enacted a version of the Uniform Trade Secrets Act.  In some states, the statute goes so far as to expressly provide that a customer list may qualify for trade secret protection.  For example, in Colorado, a trade secret may include “names, addresses or telephone numbers, or other information relating to any business or profession which is secret and of value.”  See Colo. Rev. Stat. Ann. § 7-74-102(4).  Other states are more generic and do not expressly mention customer lists.  Rather, generally speaking, a trade secret is a (1) compilation of information, (2) that derives independent economic value to the owner, (3) because it is not generally known or easily ascertained by others through proper means.  It is important to note, however, that trade secret status is not automatic in any state.  Stated differently, although a customer list may qualify for trade secret protection, the trade secret owner will bear the burden of showing that the information is in fact a secret and valuable.

There is no magic “formula” for achieving trade secret status for a customer list, but there are many different steps a company can take to improve its odds.  Here are five:

1. Establish Ownership. Contractual clarity is helpful.  Employment agreements should require employees to acknowledge that customer records and information, specifically including their identities and other data about their preferences, contact information and the like belong solely to the employer and are considered to be the company’s trade secrets.  This may even mean taking steps to ensure customer information is not disclosed through social media such as LinkedIn, Facebook or Twitter.

2. Prohibit Misuse Through Nondisclosure Agreements. Employment agreements should contain nondisclosure agreements with language stating that employees may not use or disclose customer information except for the sole purpose of conducting business on behalf of the  employer.

3. Maintain Computer Security. Customer information should be protected in all forms, including on computers.  Maintaining a secure computer system is not a simple task, but the following steps should be considered: require passwords; limit employee access to certain information on a need-to-know basis; implement controls on what can be downloaded; make sure your system has all of the latest security patches and fixes installed; and if the company’s system is on the internet, use a firewall and routinely audit servers for security gaps. 

4. Remind Employees. Don’t let employees forget that your customer information is company property and may not be disclosed. Flag computer systems with messages and dialog boxes with reminders. Include confidentiality language in policy manuals and handbooks. Send written reminders in annual compliance or business practice updates.  Remind employees during meetings and review sessions.  Periodic emails can be used.  In short, take advantage of natural opportunities to remind employees.

5. Limit Access. In addition to protecting computer systems, carefully monitor and limit access to customer files. Do not store customer records in areas that are accessible to the public or to all employees. Limit employee access to information only about the customers they personally service.

For more details on protecting your trade secrets, see our prior post regarding implementing a trade secrets protection program.  And as always, please feel free to let us know your thoughts and questions in the comment section below.

In today's competitive business environment, it is imperative that companies take steps to protect their intellectual property, including trade secrets, customer relationships, proprietary computer software, and business methods.  Taking appropriate steps will enable companies to protect and leverage their own intellectual property and to manage the risk from claims that they are improperly using the intellectual property of others.   To this end, this post summarizes some of the primary types of intellectual property protections available: contracts, trade secrets, copyrights; trademarks; and patents. 

Contracts

The most widely-recognized contractual restriction is the “non-compete agreement.”  A “non-compete agreement” technically refers to a contract in which a person agrees not to engage in any acts of competition with a company for a certain period of time.  In common usage, however, the term often is used more broadly to refer to any contract by which someone has any type of competitive restrictions, including non-solicit, non-recruit, non-disclosure and confidentiality agreements:

• A non-solicitation agreement normally refers to a contract by which an employee agrees not to solicit customers for a period of time after termination of employment.  Sometimes the agreement will be broader and will prohibit the acceptance of business from certain customers, as well as solicitation of business.  Generally speaking, to be enforceable in court, such an agreement must be reasonable, and no more burdensome than necessary to protect the legitimate interests of the employer.

• A non-recruitment agreement refers to a contract by which an employee agrees not to recruit, or solicit for recruitment, employees of a company for a certain period of time following the termination of employment.  Sometimes the agreement will be broader and prohibit hiring, as well as solicitation of employees or recruitment.  Normally, courts do not subject these types of restraints to the same level of scrutiny applied to non-compete and non-solicitation agreements.

• A confidentiality agreement is a contract in which a party agrees to maintain certain information as confidential and not to disclose the information to third parties.  It often is used to prohibit employees from disclosing certain information they learn as a result of their employment.  Normally, courts do not subject these types of restraints to the same level of scrutiny applied to non-compete and non-solicitation agreements.

• A non-disclosure agreement, which is similar to a confidentiality agreement, is a contract in which a party agrees not to disclose certain information to third parties.  The agreement typically covers certain types of information gained by the employee in the course of employment.  The agreement also frequently has a prohibition on “using” information, as well as disclosing it.  Normally, these types of restraints are not subjected to the same level of scrutiny applied to non-compete and non-solicitation agreements.

For a discussion of the issues presented when using non-compete agreements in multiple jurisdictions, click here.

Trade Secrets

Generally, a trade secret is information, including a formula, pattern, compilation, customer list, program, device, method, technique or process that derives independent economic value to the owner or gives the owner an advantage over competitors from not generally being known and not being easily ascertained by others through proper means.  The recipe for Coca-Cola, for example, is a widely recognized trade secret.  Although the requirements for trade secret eligibility vary from state to state, 46 states plus the District of Columbia have enacted a version of the Uniform Trade Secrets Act.  Generally speaking, any valuable business information that one tries to keep secret from competitors is subject to trade secret protection. Although some trade secrets may also be subject to copyright or patent protection (as discussed below), some information can only be protected as a trade secret .  For example, because a customer/client list is not a creative work of authorship, it cannot be protected through copyright; because it is not a novel and non-obvious invention, it cannot be protected through a patent.  However, because such lists do derive value for their owners if they are maintained in secrecy, they are eligible for trade secret protection.

Unlike trademarks, copyrights, and patents, registration for trade secret protection is not required.  Nor do trade secrets need to be reduced to a tangible form to be protected.  Generally, to protect a trade secret, the owner simply needs to make reasonable efforts to keep the information at issue confidential.  Trade secret protection can be perpetual, so long as the secret is kept a secret. 

To see our prior post regarding implementing a trade secrets protection program, click here.

Copyrights

A Copyright is the exclusive right to (i) reproduce a work and copy it, (ii) prepare derivative works based on the copyrighted work, (iii) distribute copies to the public; and (iv) publicly perform/display the work – if applicable.  Any original work of authorship in a tangible form (i.e., in writing, in film, in a sound recording, saved onto a computer hard-drive, or otherwise recorded) is eligible for copyright protection.  Ideas cannot be copyrighted, but the expression of ideas in a tangible form is subject to copyright protection.  For example, the idea of a lovable, drunken, dimwitted male is not protectable, but the expression of such an idea that is Homer Simpson is protectable. 

Generally speaking, a copyright is owned by the author of the work.  One exception is the “work made for hire” doctrine.  Under that doctrine, all copyrightable works created by employees in the scope of their employment are owned by the employer.  Also, certain types of works made by independent contractors can constitute works made for hire provided that they meet certain conditions.  Copyright protection begins when the work is created, and lasts for the life of the author plus 70 years.  Works made for hire are protected for 95 years from the date of the first publication, or 120 years from the date of creation of the work, whichever is shorter.

Trademarks

A trademark is a word, symbol, or other identifier (e.g., shapes, sounds, colors, etc.) that identifies one’s goods and distinguishes them from the goods of others.   A service mark is a word, symbol or other identifier used to distinguish one’s services from the services of others.  Anything that serves to indicate the source of one’s goods or services functions as a trademark.  Words and symbols (e.g., “Kleenex”) are subject to trademark protection.  Colors (the pink color of Owens-Corning fiberglass), shapes (the distinctive shape of the Coca-Cola bottle or Apple's iPod) and sounds (NBC’s three-tone chime) may also be subject to trademark protection.  A mark can be registered with the United States Patent and Trademark Office if it meets certain conditions.  Trademark protection is perpetual, but there are various post registration filing requirements, such as affidavits of continued use and filing for renewals. 

Patents

A patent is the grant of a property right to the inventor of a process or other invention, and it may be issued by the United States Patent and Trademark office.  A patent gives the owner of the patent the exclusive right to prevent others from making, using or selling the patented invention in the United States.  This right includes a right to prevent reverse engineering.  Patents cover “any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof”.  (35 U.S.C. 101).  In order to qualify for patent protection, a process, machine, or other invention must be novel and non-obvious, which means that it must never has been made or practiced before.  Non-obviousness is an even more difficult to establish because the new invention must be more than an obvious extension of past knowledge or invention. 

Patent rights apply as soon as the PTO issues the patent, and patents last for 20 years.  As part of the patent application process, the inventor must disclose the “best method” for practicing the invention.  Consequently, once the patent expires, with limited exceptions, anyone may make, use, sell, offer for sale, and/or reverse engineer the patented invention. 

In sum, it is important for companies to recognize and understand the difference between the types of protection outlined above.  Doing so will enable companies to protect and leverage their own intellectual property and to manage the risk from claims that they are improperly using the intellectual property of others. 

In 1979, the Uniform Trade Secrets Act (“UTSA”) was completed by the National Conference of Commissioners on Uniform State Laws, and it was amended by the Commissioners in 1985.  The purpose of the UTSA was to provide states with a comprehensive model piece of trade secret legislation.  To date, forty-six states plus the District of Columbia have enacted trade secret legislation, the vast majority of which substantially resembles the uniform act.  (Massachusetts, New Jersey, New York and Texas have not enacted the UTSA, but legislation has been proposed recently in all of these states except Texas.  Click here for more information on this pending legislation.)  Despite the “uniformity” of the UTSA, an often overlooked provision sits at Section 8 of the statute, entitled “Uniformity of Application and Construction.”  This section states:

"This Act shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this Act among the states enacting it."

What does this mean?  It means if you cannot find a case addressing a particular trade secret issue in your state, you should look to cases decided in other states.  Still yet, even if you can find a case on point in your state, the statute provides legislative support to you if you wish to urge the court to follow the decisions of other states.  This section of the statute can be of great help in those states where the body of available case law is underdeveloped.  But be forewarned – not all states enacting the UTSA have adopted section 8.  See e.g., the Maine Uniform Trade Secrets Act at Me. Rev. Stat. Ann. tit. 10, §§ 1541-48.

UTSA.pdf (12.49 kb)