CUSTOMER LISTS/ TRADE SECRETS OR NOT?

PART II

Three critical questions that must be answered when delving into this arena of the law:
1- one has to define ‘misappropriation’ under the UTSA;
2- one has to understand how it is that misappropriation can occur?
3- one must understand ‘who can be liable’ if the elements of the claim are established;

Under the USTA, a prima facie claim for misappropriation of trade secrets require the plaintiff to prove that:

1) The plaintiff owned a trade secret;
2) The defendant acquired and disclosed or used the plaintiff’s trade secret through improper means;
And 3) the defendant’s actions damaged the plaintiff.

Thus in any case, in order to prevail in this area of the law, the claiming party must demonstrate that the subject information was misappropriated, and that the information that was copied rose to the level of being a protectable trade secret.

On the issue of ownership simply proof of ownership should suffice.

As for misappropriation, the USTA defines that as: ‘acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means’;
And, ‘disclosure or use of a trade secret of another without express or implied consent’;

And, the person who has acquired the same must be established to have known:

The secret was derived from or through a person who had utilized improper means to acquire it;
Further it was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use;
Or, Derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.

A classical example is where one has acquired the initial authorization to use the TS as part of his job duties, and then leaves employment with that company, goes on to another company where the new employer encourages the new employee to copy, download and transfer proprietary business information of the old employer to the new employer. In this event the courts will hold not only the old employee but also the new employer in violation of the USTA.

Additionally, one must simply apply the sniff test to review the means through which the person possessing the trade secret obtained that possession. If there is any indication that it was obtained through fraud, deceit, or false pretenses then such will constitute unlawful ‘misappropriation’.

WHO CAN BE HELD RESPONSIBLE FOR TAKING A TRADE SECRET?

So, the law (UTSA) includes, as part of its provisions ‘joint and several liability’ for violations of the act. Thus, not only is the person who took the secret culpable, but too, others including new employers or other third parties who knowingly authorize the misappropriation or who directly benefit from the misappropriation will very likely be held liable for the violation and the damages caused by the same;

It is important to keep in mind that the ‘net of liability’ that can be cast around
Third persons could and does apply to: vendors, customers, suppliers, licensees, licensors, and potentially against both parties to acquisitions and mergers.

So, what is the resolve? Make sure when disclosing this inviolate information to any of the above , or others logically included in the disclosure circle , that you secure the parties agreement to not disclose the information to others without your express consent and then have that agreement memorialized into a NON-DISCLOSURE AGREEMENT.

POSSESSION VS USE

An important fact to know is the MERE POSSESSION of the TS does not , in and of itself, equate to a violation of the law; it is the USE of the TS that triggers the application of the law for liability and damages caused by such use. Suffice to say however, employees leaving and going to other jobs; employers hiring those employees, and all other third parties to whom TS’s have been disclosed, really have no legitimate purpose for keeping possession of the TS past the intended use to be effected at the time of discloser- SO BETTER TO BE SAFE THAN SORRY- and our recommendation is that you jettison such information (shred) once the project has been concluded; the employment terminated etc.

REVERSE ENGINEERING EXCEPTION

Side note—Reverse Engineering, in and of itself is not a violation of the law;
As most people are aware, reverse engineering is the process by which another starts with a known product and works backwards to discover the method by which the product was developed. Learning TS by reverse engineering is not misappropriation. Thus, learning a TS by legitimate means (buying product in open market) and then discovering the TS through reverse engineering of the product, is a lawful method of competition.

AVOIDING MISAPPROPRIATION WHEN HIRING COMPETITOR’S EMPLOYEES

This particular arena, i.e. the employment of persons coming from a competitor company is a hot bed of activity. Usually the hiring of the employee itself is not a violation of the act. Thus a stable of well trained at-will employees does not constitute an employer’s TS. The Courts do not expect the highly trained employees to ‘wipe their minds clean’. However, if in that new employment, an employee uses that prior employer’s TS learned during that prior employment, to the detriment of the former employer, a cause of action will arise pursuant to the provisions of the TS laws.

There are many times when the duty is on the new employer to vett the new employees knowledge vis a vis the prior employer to make sure that at the new employer there will be complete avoidance of any use of that prior employer’s TS/ information.

NEED OF SECURITY MEASURES TO PROTECT TS

Examples of misc. methods to protect information considered TS and or proprietary and confidentiality agreements

Examples of what one company used to protect its’ trade secrets (it was an engineering company) are as follows:

1-extensive internal controls ( visitor logs/ sign in and sign out sheets at strategic locales)

2-required use of locked storage cabinets in the engineering departments;

3- strict security control measures where TS were necessarily disclosed to various third parties and competitors.

(Also a recommended approach would be the use of employment agreements and confidentiality agreements to spell out the rules and identify a good deal of the TS and have the employee sign off on the same)

YET ANOTHER KEY POINT IN YOUR APPROACH TO TS—

When hiring a new employee, the new employer will want to assure itself that the new employee will not be using TS’s that belong to the former employer.

Even if the employer does not request the employee to use the prior employer’s information, the simple use of the information alone, will expose the new employer for liability vis a vis misappropriation.

So, as a new employer, how do you protect yourself?

The best advice would be to have an ‘offer letter’ prepared by the new employer, to the new employee setting forth the basic rules. At the same time the new employer will educate the new employee on its’ own set of rules vis a vis TS of the new company. A failure to do so could be viewed by a future court as that employer not using ‘reasonable measures’ to maintain secrecy.

This agreement would also be a good place for the employee to disclose any inventions and or products/ ideas etc. which he/she is bringing to the new employment relationship, but clearly stating that these particular items are not owned by the former employer and are not intended to be owned by the new employer unless the agreement is to the contrary. In sum, use of these types of agreements is mutually beneficial for both the employer and the employee.

So, hopefully the reader has been able to get a quick glimpse of the type of legal exposure one can encounter if violations of the TS laws occurs; how to set up legal barriers to protect against the same; what really is meant by ‘misappropriation’; who’ responsible it there is a violation; the nuances of possession vs. use; how to avoid liability from new hires; needs for security and lastly the use of a ‘hiring letter’.

Good luck on you venture.
Steven H. Wilhelm APC © 2014

Respectfully submitted,

Steven H. Wilhelm
Steven H. Wilhelm APC © 2014

By | 2017-08-07T12:30:45+00:00 December 11th, 2014|