Can You Keep A (Trade) Secret?

Many companies fail to realize the value of information they have developed and accumulated and are not aware of the extent this information is protectable under the law. Companies that fail to take sufficient steps to protect against inadvertent disclosure and outright theft of trade secrets often are throwing money away and assisting their competition. Failure to institute appropriate protective measures not only engenders unauthorized dissemination of vital information, it all but insures that if litigation is necessary, the former employer will be operating from a defensive position. A company cannot ask a court to give the company’s trade secrets more respect than the company has given them. Therefore, the manner in which trade secrets are developed and handled, and not merely the subject matter of the information, often determine whether information qualifies as a protectable trade secret.

Every company should consider the importance of identifying, taking inventory of and implementing a plan to protect its trade secrets. The process of identifying and inventorying trade secrets requires a working knowledge of the type of information that arguably is protected by law, as well as a practical assessment of what information is reasonably related to a company’s competitive advantage. This process is best carried out by a team consisting of an attorney experienced in this area and a person at the company who has comprehensive knowledge of the information crucial to the company’s success. After trade secrets have been identified and inventoried, a comprehensive strategy should be developed, to afford maximum protection. This process involves the implementation of various procedures and strategies that will maximize the protection and confidentiality of trade secrets remain confidential, as well as assuring that the company will be able to proceed from a position of strength if the need arises to seek judicial intervention.

While the danger in failing to protect a company’s essential trade secrets is obvious, an overbroad approach which generically refers to large groups of information as "confidential" also can have a negative effect. Generic references in employment contracts that merely state that the employee acknowledges that he or she is dealing with confidential information that is vital to the company’s competitive advantage, often result in desensitization, apathy and carelessness in protecting what is truly important. Even when proprietary information qualifies as a protectable interest, there may not be a practical reason to preserve the confidentiality of that information.

An efficient starting place for identification of trade secrets lies in the answer to the question, "What information has our company developed which gives it a competitive advantage over our competition and would harm us if it was known by others in our field?" Next, ask whether the information is commonly known or easily discernable by others in your line of business. A relevant inquiry in this regard is whether the information is really the type of knowledge that any employee would learn as a normal consequence of performing the job. In Follmer, Rudzewicz & Co, PC v Kosco¹, the Michigan Supreme Court stated that:

For example, a customer list that ultimately can be "discovered" by consulting a telephone book or other known sources is almost never afforded trade secret status. However, in professions such as accounting or insurance, where an employee "acquires an intimate knowledge of the business of the client³," this knowledge is generally held to be confidential. Similarly, formulas or processes that are readily discernable through reverse engineering are not considered trade secrets⁴. Ultimately, the designation of information as a trade secret must be reasonable. As the Follmer Court aptly stated, "an employer cannot state that he is going to confide something unique and hush-hush, and then merely disclose the A-B-C's or Mother Goose Rhymes, and make that the basis of irreparable injury⁵."

Michigan is not among the 40 states have adopted the Uniform Trade Secrets Act (UTSA). Michigan relies upon common law definitions and protections, which are essentially what has been codified in the UTSA. §1(4) of the UTSA defines a trade secret as:

In Hayes-Albion Corp v Kuberski⁶, the Michigan Supreme Court adopted the definition of a trade secret set forth in the Restatement of Torts⁷:

The Restatement of the Law⁸, defines a trade secret as:

All of these authorities agree that a trade secret is proprietary information, developed by a company and not known or easily discernable by others, which is valuable to its owner because it gives the company a competitive advantage over its competition. In Hayes-Albion⁹, the court cited six non-exclusive factors which should be considered in the determination of whether information qualifies as a trade secret. Analysis using these factors as a guide provides an effective basis for determining what information is protectable.

1. The Extent to Which the Information Is Known Outside of The Business;¹⁰.
2. The Extent to Which it Is Known by Employees and Others Involved in the Business;
3. The Extent of Measures Taken to Guard the Secrecy of the Information¹¹;
4. The Value of the Information to the Company and its Competitors;
5. The Amount of Effort or Money Expended in Developing the Information;
6. The Ease or Difficulty with Which the Information Could Be Properly Acquired or Duplicated by Others¹².

After trade secrets have been identified, they should be classified into meaningful categories. Useful divisions include the following:

• the type of information (i.e., customer list, research & development)

• persons having access to the information

• the method of storing the information

• the importance of maintaining the confidentiality of the information to the company’s well-being.

The inventory process will facilitate the establishment of a trade secret program or may help inspire modifications or improvements to an existing program.

Several measures may be taken which will afford maximum protection of a company’s trade secrets, which can generally be categorized as physical protection, policy protection, and contractual/legal protection.

Physical Protection

The most obvious and efficient preventative measure involves physical segregation and protection of trade secrets. Confidential information should be dealt with differently than common information. Trade secrets should be conspicuously designated as "confidential" and should be stored with "need to know" access. Depending on the nature of the business and information, security personal, identification badges, passwords and restricted areas might be appropriate.

In addition to the practical protection that physical deterrents provide, they will psychologically reinforce the existence of trade secrets and minimize inadvertent disclosure. The necessity of using of passwords and keys to gain access to information underscores that special and valuable information is being handled. Physical protective measures also clearly identify which employees or third parties are permitted to deal with the information.

Reasonableness is the key in developing an effective policy. The establishment of overly strict physical protections may lead to a oppressive environment and carries the danger of demoralizing even the most loyal employees. Physical impediments must be necessary and conspicuous, but not overly intrusive.

Policy Protection

It is important for a company to implement policies that define, protect and reinforce the confidentiality of trade secrets. A policy should be in place which limits dissemination of confidential information on a "need to know" basis. A company’s trade secret policy should be included in an employee's handbook or a company policy manual. Issues that should be included are a definition of the type of information that constitutes a trade secret, persons specifically authorized to access confidential information, appropriate circumstances for accessing the information and procedures for accessing, disseminating or destroying copies of confidential information.

It is important that the trade secret policy is reasonably tailored to meet realistic goals. As is true with physical impediments, an over-inclusive policy carries the danger that it will have an numbing effect on employees, who will be more likely treat confidential information too casually. For instance, if employees are encouraged to stamp too many documents as trade secrets or as confidential, the beneficial impact of doing so will quickly disappear,

The trade secret policy should be reiterated periodically through meetings, memoranda and appropriately placed notices. It is essential that a departing employee be informed of his or her obligations regarding trade secrets at an exit interview and provide written acknowledgment of prohibited conduct. The period of time immediately following termination of employment involves an increased risk of unauthorized dissemination of trade secrets. A departing employee should not have any doubt regarding the company’s expectations, the departing employee’s contractual obligations regarding trade secrets, and the company’s willingness to enforce its proprietary rights.

Contractual/Legal Protection

• Nondisclosure Agreements

Employees and third persons who come into contact with confidential information should be required to sign non-disclosure agreements, which specify that the person is aware that he or she has been given access to confidential information and that the information must not be disclosed to or used for the benefit of others without written consent.

• Covenants Not to Compete

Covenants not to compete (CNC’s) typically prevent a former employee from competing against the previous employer for a specified time, in a specified area and in a particular line of work. Historically, CNC’s have been disfavored and strictly scrutinized by courts, as they have the practical effect of limiting a person’s ability to seek employment. In fact, CNC’s were illegal in Michigan prior to the passage of MCL §445.774a; MSA § 28.70(4a) in 1985. However, it appears that the trend is towards increasing acceptance of CNC’s.

The key to enforceability of CNC’s is that they must protect a reasonable competitive business interest and must be reasonable in terms of duration, geographical area and the type of employment or line of business that the CNC seeks to restrict. Under Michigan law, a court is permitted to adjust terms that are otherwise enforceable in order to place reasonable restrictions upon a departing employee. The fact that an employee voluntarily signs a CNC does not mean that a court will enforce its terms if they are unreasonable. Given the recent passage of MCL §445.774a, the law has not been fully tested and interpreted by state and federal courts.

• Antipiracy Agreements

Antipiracy agreements typically seek to prevent a departing employee from using trade secrets or confidential customer information of the former employer to solicit customers in general, or specifically to prevent solicitation of only those customers of the ex-employer with whom the departing employee had personal contacts. Antipiracy agreements also can prohibit the solicitation of other employees of the ex-employer.

Generally, antipiracy agreements are less restrictive, and thefore less disfavored CNC’s. In order to prevail on a request to have a court enjoin a former employee from contacting former customers, the former employer must demonstrate that a former employee has made personal, specific, and affirmative appeal for former clients. The duration of such agreements is also more closely scrutinized. Because antipiracy agreements interfere with the public’s freedom to conduct business, such agreements often contain liquidated damage provisions, which require payments based upon the annual revenue that the pirated client previous brought to the former employer. A reasonable damage provision likely will be upheld in court¹³.

• Intellectual Property Law Protections

Products that have anticipated market lives of less than 20 years are good subjects for patent protection, which provides a powerful deterrent to unauthorized use¹⁴. Secret technological information included in a patent application, as well as the application itself, remain confidential and can be protected as a trade secret until a patent is issued. The application process typically takes about two years. In order to determine if a patent is appropriate and economically justifiable, a company should consult with a patent attorney.

Copyrights protect the original tangible works of an author and give the author control over the first publication of the work and prevents duplication. "In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work.¹⁵" In many cases it is advisable to combine copyright registration with trade secret protection. Due to the interplay in these areas of law and the effect of filing an application relative to waiver of confidentiality, it is advisable to consult with counsel familiar with these issues.

• In General

Trade secret policies and all contractual protections minimally should be reviewed on an annual basis. Very often, policies and form contracts are inherited. In many cases, those responsible for creating them are no longer with the company. Further, many contracts contain "choice of forum" provisions, which dictate where, when and under which law disputes will be litigated. Therefore, it is important to be cognizant of any changes in applicable law. While a particular choice of forum might be appropriate for one contract, it may be detrimental for another. It is not uncommon for a company to discover defects in its policies and contracts during the course of litigation. Obviously, it is advisable to decide what is right for the company prior to litigation, rather than having opposing counsel demonstrate what is wrong.

Equitable Relief

In order successfully to enjoin a former employee from disclosing trade secrets, it is essential advisable to act quickly for obvious reasons. When the alleged unlawful dissemination of confidential information is involved, the passage of time can turn a prayer for injunctive relief into a moot point. Courts frequently hold that a trade secret, "once lost is lost forever"¹⁶.

Likewise, the best time to prevent an employee from violating the terms of a CNC is when the employee begins to work at a competitor’s firm. Generally, a court will be less inclined to prevent an employee from working for a competitor after the former employee has been working there for an extended period. If a company fails to vigorously enforce its proprietary rights, the urgency that typically forms the basis for a motion for a temporary restraining order or preliminary injunction is lost. The employer may be thwarted by the doctrine of laches¹⁷ or a claim that the status quo must be preserved. Assuming the employer properly has instituted procedures and acted to enforce its rights, courts will enforce CNC’s after a former employee has been working for a new employer for an extended period¹⁸.

The decision to grant or deny injunctive relief:

Employees who have misappropriated trade secrets often argue that once the information has been disseminated, monetary damages are the only adequate legal remedy thus precluding injunctive relief is precluded. However, in this regard, courts have held that injunctive relief is proper "[s]ince competitive injuries and loss of goodwill are difficult to quantify²⁰.

It is not necessary for the employer to wait until there is proof that a former employee has actually engaged in illegal dissemination of trade secrets. Under the "inevitable disclosure doctrine," an employer can prevail upon a claim of trade secret misappropriation by demonstrating that as a result of the employee's new employment, the employee will inevitably rely on the former employer's trade secrets²¹.

Legal Relief

In cases where the former employee has violated the company’s proprietary rights, the employer is entitled to sufficient damages to make it whole. "[T]he appropriate measure of damages for breach of a contract . . . is that which would place the injured party in as good a position as it would have been in had the promised performance been rendered²²." Under this principle, lost profits, if they arise from the breach and are properly proved, are an appropriate element of damages²³.

In the unfortunate absence of a signed agreement, legal action may not be precluded. The common law tort of misappropriation of trade secrets restricts employees and third parties who are privy to trade secrets²⁴. Additionally, a former employee owes his or her employer a fiduciary duty to protect the former employer’s interests²⁵.

Misappropriation of trade secrets may also give rise to a claim of tortious interference with a business relations if the employer can demonstrate the existence of a valid business relation or expectancy; the defendant’s knowledge of the relationship or expectancy; intentional interference inducing or causing a breach or termination of the relationship or expectancy; and resultant.²⁶ Damages for tortious interference can also include lost profits²⁷.

If the former employee uses confidential information in a manner which "casts an aspersion upon its honesty, credit, efficiency or other business character" and "the matter tends to prejudice it in the conduct of its business or to deter others from dealing with it" an action for business defamation may exist²⁸.

Criminal Liability

MCL §752.772; MSA§28.643(52), provides for criminal penalties for misappropriation of trade secrets ranging from a fine up to $1,000 and up to one year imprisonment. MCL §752.771; MSA§28.643(51) defines a trade secret as "the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula or improvement which is secret and of value." As is true in civil cases "a trade secret is considered to be secret when the owner thereof takes measures to prevent it from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.²⁹" Under Michigan Rules of Professional Conduct:

Implementing a trade secret policy is an essential endeavor that provides immediate and long term economic benefit. Once a company identifies its proprietary information and its value to the company’s viability, measures should be taken to maximize the likelihood that the information will remain confidential. Whether trade secrets are deliberately or inadvertently disseminated , a company that has taken reasonable steps to protect itself this information will have maximized its opportunity of prevailing in litigation.

1. 420 Mich 394; 362 NW2d 676 (1984).

2 id at n. 4.

3. id at 404-05.

4. See Phillips v. Frey, 20 F3d 623 (CA 6, 1994)(authorizing use a competitor's secret process if the process is discovered by reverse engineering applied to the finished product).

5. Follmer, at n.16.

6. 421 Mich 1170; 364 NW2d 609 (1984).

7. id at 181(citing Restatement of Torts, § 757, comment b (1939).

8. 3 Restatement of Law, Unfair Competition (1995).

9. 421 Mich at 182.

10 See Economation, Inc v Automated Conveyor Systems, Inc, 694 FSupp 553 (SD In, 1988)(finding that pricing information loses confidential status once it made available to customers).

11 See Lawson Products, Inc v Avnet, Inc, 782 F2d 1429, 1441 (CA 7, 1986)(denying protection where the information is not kept under "lock and key").

12 See n2

13 See Follmer v Kosco, n 1.

14 Prior to June 8, 1995, U.S. patents had an expiration date under 35 USC 154, which was generally measured as 17 years from the date the patent issued. 35 USC 154(a) currently provides that:

15 Atari Games Corp v Nintendo of America Inc, 975 F2d 832, 838-39 (CAF 1992)(citing 17 USC 102(b)). The Federal Circuit went on to state that:

16 FMC Corp v Taiwan Tainan Giant Industrial Co, 730 F2d 61, 63 (CA 2, 1984).

17 "Time alone does not constitute laches, but there must have been a change of conditions which would render it Inequitable to enforce the claim or a showing that the defendant was prejudiced by the delay" Van Antwerp v City of Detroit, 47 Mich App 707, 718; 210 NW2d 3 (1973)(citations omitted).

18 See Inflight Newspapers, Inc v Magazines In-Flight, LLC, 990 FSupp. 119, 124 (ED NY, 1997)(affirming magistrate’s rejection of laches defense because "despite a three month delay in seeking injunctive relief, the plaintiffs conducted an investigation in order to collect sufficient information to satisfy the demonstration of irreparable harm"); Moore Business Forms, In. v Wilson, 953 FSupp 1056 (ND Ia, 1996)(enforcing covenant where employer reminded former employees of covenant, but did not file action for five months); Novus Franchising, Inc v Taylor, 795 FSupp 122 (MD.Pa, 1992)(four month delay in filing).

19 Michigan State Employees Ass’n v Dep’t o f Mental Health, 421 Mich 152, 157-58; 365 NW2d 93 (1984).

20 Basicomputer Corp v Scott, 973 F2d 507, 512 (CA 6, 1992); Curtis 1000 Inc v. Suess, 9 IER Cases 942 (7^th Cir 1994); Chambers -Dobson Inc v Squier, 6 IER Cases 1127 (Neb SupCt, 1991).

21 PepsiCo, Inc v Redmond, 54 F3d 1262,(CA 7, 1995); Norand Corp v Parkin, 785 FSupp 1353 (ND Ia, 1990).

22 Jim-Bob, Inc v Mehling, 178 Mich App 71, 98; 443 NW2d 451 (1989).

23 id.

24 Hayes-Albion Corp v Kuberski, supra; O & W Thum Co v Tloczynski, 114 Mich 149, 72 NW 140 (1897); LA Young Spring & Wire Corp v Falls, 307 Mich 69; 11 NW2d 329 (1943).

25 Kubik, Inc v Hull, 56 Mich App 335; 224 NW2d 80 (1974).

26 Trepel v Pontiac Osteopathic Hosp, 135 Mich App 361, 374; 354 NW2d 341 (1984).

27 Lorenz Supply Co v American Standard, Inc, 100 Mich App 600, 612; 300 NW2d 335 (1980), aff'd. 419 Mich 610; 358 NW2d 845 (1984).

28 Northland Wheels Roller Skating Center, Inc v Detroit Free Press, Inc, 213 Mich App 317, 328; 539 NW2d 774(1995).

29 id