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The information contained the Articles
is not intended to provide legal advice. There may be legal developments
since the date of the Article which may significantly affect the
information and analysis provided. These Articles have not been
updated. Readers should not act upon any information or analysis
contained in any of these Articles without consulting legal counsel.
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1.
Trade Secrets
1.1.
Defined
1.1.1.
Under former Restatement of Torts § 757 and comment b
1.1.1.1.
{A trade secret consists of} information which is used in one’s
business and which gives him an opportunity to obtain an advantage
over competitors who do not know or use it… A substantial element
of secrecy must exist, so that, except by use of improper means,
there would be difficulties in acquiring the information…Protection
is not based on a policy of rewarding or otherwise encouraging
the development of secret processes or devices.
The protection is merely against breach of faith and reprehensible
means of learning another’s secret. (emphasis added).
1.1.2.
Under Uniform Trade Secrets Act (USTA) which has been adopted
by 42 states (not including Massachusetts) and the District of
Columbia,
1.1.2.1.
Trade secret means information,
including a formula, pattern, compilation, program, device, method,
technique or process, that:
1.1.2.1.1.
derive 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, and
1.1.2.1.2.
is the subject of efforts
that are reasonable under the circumstance to
maintain secrecy.
1.1.3.
Under the Restatement of the Law of Unfair Competition § 39 a
trade secret is “any information
that can be used in the operation of a business
or other enterprise and that is sufficiently valuable and secret to
afford an actual or potential economic advantage
over others.”
1.1.3.1.
The Restatement has removed the misappropriation concept found
in the USTA from the definition of trade secret but at § 40 provides
liability for use or disclosure only if the use or disclosure
is made under circumstances where the appropriator has reason
to know that the information is a trade secret of another for
which no use or disclosure authority has been given.
1.1.3.2.
Restatement of Unfair Competition § 42 specifically provides that
an employee or former employee who uses or discloses a trade secret
owned by the employer in breach of a duty of confidence is liable.
1.1.4.
Under Massachusetts Law
1.1.4.1.
Trade Secrets are protected from misappropriation under MGL c.93
§ 42 which incorporates the definition of trade secret from MGL c.
266 § 30.
1.1.4.2.
MGL c. 266 § 30 defines trade secret as “anything tangible or intangible or electronically
kept or stored, which constitutes, represents, evidences or records
a secret scientific, technical, merchandising,
production or management information, process, procedure, formula,
invention or improvement.”
1.1.4.2.1.
MGL c. 93 § 42 provides for tort remedy and double damages if
a trade secret is embezzled, stolen, unlawfully taken, carried
away, concealed or copied, or by fraud or deception obtained with
intent to convert.
1.1.4.2.2.
MGL c. 93 § 42A provides for injunctive relief.
It provides for preliminary injunctive relief against a
former employee if
1.1.4.2.2.1.
the “conversion” of the trade secret is in
violation of a written employment agreement, and
1.1.4.2.2.2.
it is shown that the former
employee is working in a directly competitive capacity in violation
of the agreement, and
1.1.4.2.2.3.
the employee is using the
trade secret in competition.
1.1.5.
Under New Hampshire Law.
1.1.5.1.
New Hampshire has adopted the Uniform Trade Secrets Act. See RSA
350-B.
1.1.6.
Under California Law
1.1.6.1.
California has adopted the Uniform Trade Secrets Act. See Cal.
Civ. Code §§ 3426.1 to 3426.11.
1.1.7.
Under English Law.
1.1.7.1.
English trade secret law is entirely non-statutory common law.
1.1.7.1.1.
Case law has developed from the common law of the duty of confidence
and loyalty owed by a servant to the master.
1.1.7.1.2.
Parallels the doctrines embodied in § 41 and § 42 of the Restatement
of Unfair Competition discussed below at 1.3.2.5.
1.1.7.1.3.
The English courts have made a clear distinction between protectable
trade secrets and confidential information.
Trade secrets are protected during and after employment. Confidential information is protected only during employment.
1.1.7.2.
Drawing the boundaries of protected trade secrets is no easier
- and in practice more difficult- under English law since there
is no statutory codification of definitions or precedent.
It appears that the English courts are alert to the same
balancing of the competing interests of the employers development
of intellectual capital through the employment of skilled technical
people and the interests of the skilled employees to be able to
fully use their skills and be gainfully employed. Therefore, the English courts will address
their attention to the same types of inquiries as the American
courts as discussed below.
1.1.7.3.
The concept of trade secret is no more expansive under English
law than under US law. “In our judgment the information will only
be protected if it can properly be classed as a trade secret or
as material which, while not properly to be described as a trade
secret, is in all circumstances of such a highly confidential
nature as to require the same protection as a trade secret eo
nomine.” Faccenda Chicken
Ltd. v. Fowler (1986) 1 ALL ER 617. (Only the English would have a case where a
chicken company is suing a f o w l e r).
1.1.7.4.
There is an interesting exposition of the English trade secret
common law in Jager, §2.01 Trade Secrets Law, Clark, Boardman,
Callaghan, 1997. It is noted that “[t]he surprising fact is that, regardless of the
large number of decisions over the last century, the concept of
trade secret protection in England is not well defined.” Jager,
at page 2-5. Jager, quoting an English author, defines trade
secrets under English law as information
which is a) secret either in an absolute or relative sense; b)
has been intentionally and demonstratively treated as a secret;
c) is capable of industrial or commercial application; and d)
involves interests, generally economic, worthy of protection under
equity principles.
1.1.7.5.
The implication of the case law is that the scope of definition
of trade secrets under § 757 of the Restatement of Torts would
be appealing to a English court. Whatever the limits to trade secret protection,
it is clear that they will be defined case by case.
1.2.
Interpretation
1.2.1.
The modern view is that it is the propriety or impropriety of
the conduct in obtaining and using the information which is the
touchstone of any claim. Earlier
cases framed the issues as property issues.
Today, courts view liability as arising from a general
duty of good faith. See Jet Spray Cooler, Inc. v. Crampton,
385 N.E. 2d 1349 (MA. 1979). In addition, the impropriety of the conduct
in obtaining the information is an important element of the level
of secrecy and security which surrounds the information.
1.2.2.
Although the Restatement of Unfair Competition definition appears
to be broader (by referencing any information) than the
definition under the USTA (which recites a list of included types
of information), the commentators have stated that the § 39 definition
is intended to be consistent with the definition of trade secret
under the USTA.
1.2.3.
As a general notion, Massachusetts definition of trade secret
is consistent with both the USTA and the Restatements. Interpretive reference to the Restatement of
Unfair Competition has been made by Massachusetts courts. See Augat, Inc. v. Aegis, Inc. , (1991)
409 Mass. 165, 565 N.E.2d 415, 422.
1.2.3.1.
The Massachusetts definition is both more and less expansive.
It does not include the phrase “any information” and yet
in its delineation of included types of information it refers
to “merchandising” and “management” information.
1.2.3.2.
Where there is no controlling precedent under Massachusetts law,
it is appropriate to turn to cases under the USTA or comments
to the Restatements.
1.3.
Required Elements to Any Trade Secret Claim
1.3.1.
It must be a trade secret.
The subject matter of the claim must relate to a trade secret
as distinguished from “general business information and routine
data” See Augat, 565 N.E.2d 415, 418; New
England Overall Co. Inc. v. Woltmann, (1961) 343 Mass. 69,
176 N.E.2d 193. Distinguishing whether the material constitutes
a trade secret or whether it is only general business information
leads to confusing and inconsistent results. There is also confusion
about whether there is any difference between a trade secret and
so-called confidential information and if there is whether confidential
information is accorded protection.
1.3.1.1.
The trial court in Chomerics v. Ehrreich, 421 N.E. 2d 453,
456 (Mass App. 1981) found the defendant violated a restrictive
covenant contained in an employment agreement which prohibited
the use or disclosure of trade secrets or “any confidential record,
data or information…” when he used ideas that were considered
but not acted on by his former business. The SJC held that information
is protectable based only on the conduct of the parties and the
nature of the information. It went on to find that the information
had no present trade value and therefore could not be protected.
The court found that the contract prohibiting the use or
disclosure of confidential information provided plaintiff no help
since the contract provided no notice of an intention to protect
valueless information and the restriction with respect to confidential
data, if read to prohibit use or disclosure of valueless information,
would be unenforceable. Thus the Chomerics court seemed
to say that confidential information was co-extensive with trade
secrets.
1.3.1.2.
In USM Corp. v. Marson Fastener Corp., 393 N.E. 2d 895,
903 (MA. 1979), however, the SJC noted in dicta that there may
be a remedy for the misappropriation of confidential business
information even if it fails to rise to the level of a trade secret.
This ruling certainly was influenced by the defendant’s
egregious conduct (use of 100 pages of blue prints and technical
drawings in the design of a machine). Whether this case can be read to stand for
the proposition that there is a separate body of law protecting
confidential information is, however, less clear after Chomerics. Nevertheless, courts and lawyers writing contracts
seem inclined to create or follow this tangent.
1.3.1.3.
It seems that the better understanding of any distinction between
the concepts embodied in trade secrets and confidential information
relates to the technical or non-technical nature of the information.
Processes and formulae are clearly commonly understood
as trade secrets. Confidential data is more likely to describe
information relating to customers, finances and marketing plans. To be protected this ‘confidential data’ must
meet the same definitional standards as a protectable trade process
and should be considered indistinguishable from trade secrets.
1.3.1.4.
To distinguish a trade secret from general business information
will require examining the business practices relating to information.
The practical effect in the first instance is to require definiteness
in pleading and proof of the type of information involved.
The burden of defining what is secret and what is not secret
is on the plaintiff.
1.3.1.4.1.
It is said that “trade secret law ratifies …business practice
by enforcing the expectations of confidentiality established by
the parties.” Nimmer, Computer Law, ¶
3.02[2]. Thus, in defining what is protected a court will look
at the practices of the owner to identify and protect particular
information.
1.3.1.4.2.
Nimmer also notes that the clear delineation of what information
is sought to be protected is critical.
“…[T]rade secret status is often denied to broad or vaguely
defined secrets. In contrast, a particularized, narrowly defined
secret is more often protected, both because of its enhanced distinctiveness
of definition and because enforcement of the plaintiff’s claim
will leave the defendant with a wider range of future discretionary
activity.” Nimmer ¶
3.04[2].
1.3.1.5.
While Milgrim on Trade Secrets provides an extensive list of the
types of information that courts have found to be or not to be
trade secrets (See Milgrim on Trade Secrets ¶
1.09), it is more a process of review of practice, relationship
and effect of enforcement or non-enforcement on the parties that
controls the determination. It
is not a matter of legal precedent as much as a matter of “enforcing
business practice.”
1.3.1.6.
It is essential that the trade secrecy claim is capable of being
concisely articulated in the pleadings and to the court and that
it has also been articulated in practice to the business’ employees.
1.3.2.
Secret. The information
must be relatively secret. It
cannot be widely available in the public domain.
1.3.2.1.
External Secrecy- Has the information
been distributed outside the company? Is there disclosure in company
brochures or user manuals? If
so, have confidentiality and non-disclosure notices and agreements
been used? If information is published unrestrictedly such as in a scholarly
journal or in a speech to the profession there can be no claim
of secrecy. See Dynamics Research Corp. v. analytic Sciences
Corp., 400 N.E. 2d 1274 (Mass. App. 1980); Jostens, Inc.
v. National Computer Systems, Inc., 318 N.W.2d 691(Minn. 1982)
(Article by employee explaining "theoretical concepts"
of computer-aided design/computer-aided manufacture system resulted
in loss of trade-secret rights in system). In addition, if product has been delivered is it possible for the
buyer to reverse engineer the specifications and derive the information
directly? It should be
noted, however, that where information is capable of being gotten
through reverse engineering but has in fact been misappropriated,
the misappropriation has given an economic advantage for which
there is liability. The fact that something has been on the market
for a long time without successful reverse engineering is evidence
that reverse engineering has not been feasible. See Curtiss-Wright Corp. v. Edel-Brown Tool & Die Co. Inc.,
(1980) 381 Mass. 1, 407 N.E. 2d 319, 11 A.L.R. 4th
1.
1.3.2.2.
Internal Secrecy. How widely known within the confines of the
company is it? If it is
widely known then it will be difficult to assert that the information
is not general business information.
Describing the limited circle privy to the information
is an essential element of proof. It is clear that unrestricted access or dissemination
of information to low level employees will terminate any trade
secret rights which might otherwise have existed. In Shatterproof Glass Corp. v. Guardian Glass Co., 322 F.Supp.
854 (E.D. Mich. 1970) aff’d, 462 F.2d 1115, cert.denied, 409 U.S.
1039 (1972) disclosure of the secret process to two $2.50 per
hour mold makers without any warning terminated any further trade
secret rights.
1.3.3.
Novelty- A corollary
of secrecy (and value discussed below) is novelty. The value of the information must come at least
in part from the fact that it is not generally known. Efforts
within a company to keep information, which is otherwise routine,
secret will not make the information protectable. The concept
of novelty, however, does not include patentable inventiveness.
Rather it is more an inquiry about how widely known the
particular information may be. The inquiry really is whether the subject matter
may give rise to a reasonable expectation of confidentiality. In the first instance there must be a demonstration
that the plaintiff did in fact have an expectation of confidentiality
that it communicated by words or deeds with respect to the particular
subject matter of the litigation.
Nevertheless, it is a basic tenet of trade secrets law
that one cannot impose a duty of secrecy on commonly known information
so the inquiry also includes an assessment of the extent to which
the information is known both within and outside the business
and the ease or difficulty with which the information could be
properly acquired or duplicated. Novelty then is intended to exclude self evident variants of known
art.
1.3.4.
Security- It must be
the subject of some reasonable -under the circumstances- effort
to keep the information secure. Protection depends on the extent
(and success) of efforts to maintain secrecy.
“The degree of effort and the nature of the security protections
adopted have direct relevance to factual decisions about whether
a misappropriation occurred, as contrasted to an acquisition by
lawful means.” Nimmer, ¶ 3.05
1.3.4.1.
Internal Procedures-a) Use of employee
non-disclosure agreements b) physical security measures c) marking
as proprietary or confidential d) informing employees that particular
matters are secret during their employment and reinforcing notice
at hiring and exit interviews e)limiting access to those people
who must use the information. See USM Corp. v. Marson Fastener
Corp., 393 N.E. 2d 895, 900 (1979).
1.3.4.1.1.
The single most important element of the security process is Notice. Lack of security is
deemed a lack of notice. Could
the employee have known from the words and deeds of the employer
that a claim of confidentiality was being asserted with respect
to the information in question?
1.3.4.1.2.
If security is an essential element of any claim, must it be pleaded
with particularity or may it be pleaded in a conclusory fashion?
In Morton v. Rank America, Inc., 812 F.Supp. 1062 (C.D.
Cal. l993) the court held that security is an element of a trade
secret claim, and the factual basis for the allegation must be
pleaded. This will not open up the pleadings to attack in most
cases, since most judges would not adjudicate what is "reasonable
under the circumstances" at the pleadings stage. But a practical
effect will be to force a plaintiff to identify its "theory
of security" at a time when the pleadings are often being
prepared in haste. The absence of mention of security measures
in the Complaint may be a potent avenue for cross-examination
if security measures not identified in the Complaint are claimed
later. This means that
the drafter of the Complaint should be both knowledgeable about
the security measures employed and careful in drafting any complaint.
1.3.4.2.
Value-The trade secret
must have value in the sense that it provides some actual or potential
economic advantage. Value
can be established circumstantially by demonstrating the amount
of resources invested in development, in security or the willingness
of others to pay for access to it under licensing agreements.
Use of the information in the plaintiff’s operations is
some evidence of value. If there are identifiable and quantifiable
benefits derived from use then there is direct evidence of the
value. Efforts to maintain secrecy also demonstrate
the value assigned to the information by the owner. “High cost coupled with steps to retain secrecy for the resulting
information indicates that the company possessing the information
considers it to be important.
Given this combination, a court should not second guess
the parties actually involved in the creation and protection of
the information.” Nimmer ¶ 3.04
1.3.4.2.1.
Whether the value has to be presently realizable although not
actually applied is an unresolved issue. Does a trade secret include an idea never acted
on?
1.3.4.2.1.1.
Under Massachusetts law a trade secret can not be something representing
ideas to pursue or speculation. It must go beyond the “state of imaginative
muddled suspense which precedes successful inductive generalisation.”
Chomerics, Inc. v. Ehrreich, 421 N.E. 2d 453, 457-458 (Mass.
App. 1981).
1.3.4.2.1.2.
But see Intermedics, Inc. v. Ventritex, Inc., 152 F.R.D.
188 (N.D. Cal. l993). A magistrate judge, acknowledging a split
of authority, rejected the contention that to be a trade secret
an idea had to be commercially feasible. A similar issue was raised
in U.S. Surgical Corp. v. Origin Medsystems, Inc., 27 U.S.P.Q.2d
1526 (N.D. Cal. 1993), where the court granted a preliminary injunction
enjoining use of a design idea to which a former officer of the
plaintiff's licensor had been exposed, notwithstanding evidence
that the design was never reduced to a functioning model, only
a few hours were spent working on the idea, and the design was
never used and just sat in a file cabinet for six years. Apparently,
according to these cases so long as the company derives economic
value from competitors not being exposed to and exploiting the
idea, mere ideas pass muster as trade secrets.
1.3.4.2.1.3.
Under the Restatement of Torts definition, one of the distinguishing
features was the requirement that the information be susceptible
to continuous or long term use in the operation of the business
and unprotected general information was considered short term
or single use type information such as impending business announcements
or secret bids. USTA and
the Restatement of Unfair Competition do not include the concept
of continuous usability.
1.3.4.2.1.4.
Under the Restatement of Torts there was also the requirement
that the information be in actual use.
This actual use requirement has also been eliminated.
Thus a trade secret could under modern definition include
information about what not to do.
1.3.4.3.
Appropriation- In addition to establishing
the quality and character of the information, it is also essential
that the information is used, disclosed or converted under circumstances
which are improper in light of some legally articulated duty. This duty may sound in trespass or it may sound
in good faith and fair dealing. Direct theft is easy and will
not be discussed further.
1.3.4.4.
Confidential Relationship- The essence
of a trade secret claim is that the secret information is used
without the consent of the owner under circumstances where the
appropriator knows or should know that the owner has reposed confidence
in the appropriator or one from whom the appropriator has gotten
the information or the appropriator knows or should know that
the information has been disseminated by mistake. In the case of indirect defendants, there is
a quasi bona fide purchaser defense i.e. the information was acquired
without knowledge of any breach of confidence or mistake. This
defense was acknowledged to apply in Massachusetts, but the court
found that if there was reason to know that there is a claim of
secrecy then one is on inquiry duty to determine the other’s authority
to disclose the information.
See Curtiss-Wright Corp. v. Edel-Brown Tool & Die
Co. Inc., (1980) 381 Mass. 1, 407 N.E. 2d 319, 323-324, 11
A.L.R. 4th 1.
1.3.4.4.1.
The Restatement of Unfair Competition at § 41 delineates the circumstances
giving rise to a duty of confidence which include
1.3.4.4.1.1.
an express promise of confidentiality
1.3.4.4.1.2.
there is a relationship between the parties for which it is justifiable
to believe that the person learning the information would know
that the disclosure was intended to be in confidence and the person
making the disclosure would infer that there was consent to maintaining
confidentiality.
1.3.4.4.2.
The Restatement of Unfair Competition at § 42 makes specific provision
for the employment relationship. § 42 clearly provides for the
continuation of the duty of confidentiality after the termination
of employment. See also New England Overall Co. Inc. v. Woltmann,
343 Mass. 69, 176 N.E. 2d 193 ( 1961). Thus, while § 41 and § 42 are relatively coequal
in their effect on current employment relationships, § 42 as it
relates to former employees dispels any question of continuing
duty. It does not, however, attempt to alter the
balancing of relative rights and interests of the former employer
and former employee.
1.3.4.4.3.
Although there is a general recognition that employment creates
a confidential relationship, the essence of a trade secret claim
is that the employee was on Notice that the information was imparted in confidence. See Mercer
v. C.A. Roberts, Co., 570 F.2d 1232 (5th Cir. 1978).
2.
Employees
and Trade Secrets Claims
2.1.
Overview of Former Employee’s Use or Disclosure of Trade Secrets
2.1.1.
Most frequently litigated trade secret claims involve employees.
There is an extensive body of law.
2.1.2.
The doctrine developed attempts to balance the competing interests
of
2.1.2.1.
The employer to develop commercial technology and competitively
advantageous processes which serves the social interests of a
vibrant and growing economy.
2.1.2.2.
The employee to develop commercial and technical skills and to
be free and able to independently choose new employment or to
start a business.
2.1.2.3.
To the extent that there are trade secret restrictions imposed,
an employee’s ability to use information, select employment or
to use knowledge and skills for personal gain are limited.
Absent any protection, an employer would be required to
adopt expensive and inefficient restrictions on access to information,
there would be a disincentive to invest in improvements to process
or to develop a highly skilled workforce.
2.1.3.
An employer asserting rights in information against a former employee
has the burden of proof of both the existence and the ownership
of the secret.
2.1.4.
An employer may not use a claim of trade secret as a method to
avoid competition.
2.2.
Nature of Employer/Employee Relationship
2.2.1.
Under both the common law and the Restatement of Unfair Competition
§ 42 there is a presumption [See Integrated Cash Management
Servs., Inc. v. Digital Transactions, Inc. 732 F. Supp. 370
(SDNY 1989) protection granted against programmer even though
copying not intentional] or at least an inference (Restatement
§ 42, Comment c.) that there is a confidential relationship in which the employee
has consented to a duty of confidence with respect to “any information
acquired through the employment that the employee knows or has
reason to know is confidential….If an employer establishes ownership
of a trade secret and circumstances sufficient to put the employee
on notice that the information is confidential, the employment
relationship will ordinarily justify the recognition of a duty
of confidence.” Restatement of Unfair Competition, page 480-481.
The duty of confidentiality arises from the employer/employee
relationship. American
Stay Co. v. Delaney, (1912) 211 Mass. 229, 97 N.E. 911.
2.3.
The Employee’s Status or Rank
2.3.1.
Courts have considered the status and level of discretion of the
employee within the organization in determining both the existence
of a duty of confidentiality and an awareness of the confidential
nature of information. The
higher the pay and level of authority the less physical security
and actual notice practices are deemed important.
2.3.2.
The Commentators to the
Restatement opine that the better reading of the cases involving
the issue of whether a duty arises from employment alone is to
view these cases as determining no trade secret rather than no
duty of confidentiality. Accord Chomerics, Inc. v. Ehrreich,
421 N.E. 2d 453, 457 (making no distinction between the duties
of officers and line employees).
2.3.3.
Executive Officers may also have a general fiduciary duty as a
corporate officer which provides an additional claim of responsibility.
2.4.
Employee Skills and Knowledge
2.4.1.
The courts have attempted to distinguish information which makes
up the general skill, knowledge, training and experience of the
employee from information for which trade secret protection will
be permitted.
2.4.1.1.
The general skills and knowledge of an employee include information
which may be directly attributed to training by the employer or
to the experiences an employee may have had while employed.
General knowledge includes ideas which might be fruitful
to pursue but which have not been made presently effective.
See discussion of Chomerics v. Ehrreich 421 N.E.
2d 453 (Mass. App. 1981) at § 1.3.1.1.
2.4.1.2.
An employer may protect itself from having to face the difficulty
of proving that the matter is in fact a trade secret as distinguished
from the employee’s general skills and knowledge by negotiating
a covenant not to compete.
2.4.1.3.
An employer may protect itself by providing notice of claims of
confidential information. Without notice that particular information,
methods, or processes are proprietary, the employee has reason
to believe that skills or knowledge acquired during employment
become a part of his or her general background. Dynamic Research
Corp. v. Analytic Sciences Corp., 400 N.E. 2d 1274 (Mass. App. Ct. 1980). See also Jostens, Inc. v. National Computer
Sys. Inc. , 318 N.W. 2d 691 (Minn. 1982).
2.4.2.
Where the employer employs highly skilled employees who bring
advanced skills to the job, it is necessary to provide greater
specificity in proving the existence and misappropriation of a
trade secret. In such a situation the court will feel obliged
to identify, select out and protect valid claims of secrecy without
infringing on the employee’s ability to continue professional
employment. Dynamics Research Corp. v. Analytic Sciences Corp.
400 N.E. 2d 1274, 1283 (Mass. App. 1980).
2.4.3.
The practices of the employer in hiring people with access to
‘secret’ information and using the information gained from prior
employment will limit that employer’s ability to claim that an
employee should know that similar information learned in the course
of employment with that employer is confidential. In Mercer
v. C.A. Roberts Co., 570 F.2d 1232, 1238 (5th Cir.
1978) the court held that the employer should “not be heard to
complain now that the shoe is on the other foot.”
In that case, the employee appropriated a customer data
book containing an alphabetical listing of customers, cross referenced
for amounts and types of purchases and lists of suppliers.
The court concluded that the employee did not know that
the employer intended to keep this information secret since the
employee’s ability to keep many of the customers he had served
in his previous employment with a competitor was an asset when
he was hired and the competitor’s customer information had, in
fact, been used to the employer’s benefit.
2.4.3.1.
Employers with valuable trade secrets should discourage new employees
from using similar confidential information from prior employers.
This is good trade secrets practice.
It also avoids claims for tortious interference and conspiring
to breach confidentiality.
2.4.4.
Memorization
2.4.4.1.
Where there is no evidence that an employee used written or physical
records of the employer, it is more likely that the court will
find that the employee relied on the employee’s general skills
and knowledge. As a corollary,
it is easier to prove misappropriation when you can demonstrate
that the employee took physical records. If the information is easily isolated and is a trade secret, the
mere fact that the employee memorized it, however, will not be
a defense.
2.4.4.2.
Nevertheless, where it is possible to show that the information
was memorized (rather than learned as an ongoing part of the job
function), such as by the duplication of substantial parts of
the information or use of information other than names and addresses
of former customers, it may be possible -assuming that one can
show that the information is a trade secret- to distinguish the
memorized use of information from an employee’s general skills
and knowledge.
2.4.5.
Employee’s Part in Discovery or Development of the Trade Secret.
2.4.5.1.
As a general proposition, it is an easier case to make out where
the employee has played no part in the development or discovery
of the secret and where the employee was exposed to the information
developed by others.
2.4.5.2.
Where an employee has developed the trade secret, the threshold
issue is the ownership of the secret. Courts often follow similar
analysis to that of patent ownership. More often than not the
information/secret belongs to the employer, especially
where the employee was hired to invent the specific thing or things
in that general field, but also when hired to do general R&D.
2.4.5.3.
Even if the employer owns the secret, the employee
may be accorded rights to use the information. Unless the claim can be framed specifically,
the use and application of information developed in the process
may be part of the employees general knowledge, skills and experience.
See Structural Dynamics Research Corp. v. Engineering Mechanics
Research Corp., 401 F. Supp. 1102, 1111-1112 (E.D. Mich. 1975)(where
employee’s own skills, talents and experience were instrumental
in developing the trade secret, the employee has unqualified right
to use and disclose the secret unless the employee has contracted
not to do so); Mercer v. C.A. Roberts, 570 F.2d 1232 (5th
Cir. 1978).
2.4.5.4.
See also Wexler v. Greenberg, 399 Pa.
569, 160 A.2d 430 (1960). While
the Wexler case can be (and probably should be have been)
decided on other grounds such as the existence of no trade secrets
or capacity to reverse engineer) it has often been cited for the
proposition that an employee has rights to that which the employee develops or discovers.
Greenberg was a chemist employed to reproduce the chemical formulas of competitors products to permit
duplication and marketing of competing products. Greenberg was hired away and the new employer soon started manufacturing
product that it had previously purchased from Wexler. The Pennsylvania court relied on the fact that
the plaintiff had not disclosed its secrets to Greenberg
but rather he had developed them.
2.4.5.5.
This distinction has been rejected by the Uniform Trade Secrets
Act and cases under it. See Basic Chemicals, Inc. v. Benson,
251 N.W.2d 220 (Iowa 1977); Affiliated Hospital Products, Inc.
v. Baldwin, 373 N.E. 2d 1000 (ILL. 1978).
2.4.5.6.
See Employee’s Duty Not to Disclose or Use in
New Employment Special Skills or Techniques Acquired in Earlier
Employment, 30 A.L.R. 3d 631 (1970).
2.5.
The Inevitable Disclosure Rule.
2.5.1.
One of the doctrines developed by the courts to justify the entry
of injunctive relief to protect against the threatened disclosure
of trade secrets is called the "inevitable disclosure doctrine."
This doctrine was first developed and used in B.F. Goodrich
v. Wohlgemuth, 137 U.S.P.Q. 804, 192 N.E.2d 99 (1963) to enjoin
an ex-employee from working as the "Technical Director"
for a competitor because the Court found that it was inevitable
that Wohlgemuth would disclose Goodrich trade secrets during development
work on space suits for his new employer. Despite the fact that
there was no evidence before the Court that Wohlgemuth had actually
disclosed Goodrich trade secrets, the Court, nevertheless, found
that there was a "substantial threat of disclosure"
of trade secrets and therefore affirmed the trial court's entry
of a permanent injunction.
2.5.2.
Subsequent cases around the country have relied upon the "inevitable
disclosure" doctrine to protect trade secret owners against
the threatened misappropriation of trade secrets by ex-employees.
See, e.g., E.I. duPont de Nemours & Co. v. American Potash
& Chem. Corp., 200 A.2d 428 (Del. Ch. 1964) (Fact that
ex-employee had signed agreement with the new employer not to
use or disclose proprietary information acquired from others was
not controlling since new employer advertised position in geographic
location of plaintiff’s plant; had unsuccessfully tried to negotiate
license to use technology; and plaintiff was the only one with
a successful process for the business defendant was trying to
break into. Court found a high degree of probability that the subsequent competitive
employment would lead to disclosure); Allis-Chalmers Mfg. Co.
v. Continental Aviation & Eng'g Corp., 255 F. Supp. 645
(1966); Standard Brands, Inc. v. Zumpe, 264 F. Supp. 254
(E.D.La. 1967); National Starch & Chem. v. Parker Chem.,
530 A.2d 31 (N.J. Super. 1987); Baxter Inter., Inc. v. Morris,
976 F.2d 1189 (8th Cir. 1992).
2.5.3.
The inevitable disclosure doctrine was recently followed by the
Seventh Circuit Court of Appeals in upholding the trial court's
entry of injunctive relief to prevent threatened misappropriation
in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).
In this case, the trial court issued an order enjoining Redmond
from assuming employment at Quaker for six months and permanently
enjoined him from disclosing PepsiCo's trade secrets and confidential
business information. Redmond and Quaker appealed and the Seventh
Circuit affirmed the district court.
2.5.3.1.
PepsiCo ("All Sport") and Quaker ("Gatorade")
are fierce competitors. The record established that Redmond, a
PepsiCo manager, had detailed and intimate knowledge about PepsiCo's
1995 strategic business plans, annual operating plan (AOP) and
"attack" plans for various markets.
Quaker and Redmond asserted that they have not and do not
intend to use any of this confidential PepsiCo information. Quaker
argued that Redmond had already signed an agreement with Quaker
not to disclose any trade secrets or confidential information
from his previous employment.
2.5.3.2.
However, the Seventh Circuit held that the issue was not threatened
misappropriation but whether the new employment will inevitably
lead the employee to disclose or use his former employer's trade
secrets -- whether consciously or unconsciously. The Court cited
the previous 5th Circuit decision on the "inevitable disclosure"
doctrine in FMC v. Varco Int'l, Inc., 677 F.2d 500, 504
(5th Cir. 1982): "Even assuming the best of good faith, Witt
will have difficulty preventing his knowledge of FMC's 'Longsweep'
techniques from infiltrating his work." Of course, the Court
recognized the basic tension in trade secrets law between the
Company's right to protect its trade secrets and the employees'
right to pursue their livelihoods when they leave their current
positions. "This tension is particularly exacerbated when
a plaintiff sues to prevent not the actual misappropriation of
trade secrets but the mere threat that it will occur."
2.5.3.3.
In PepsiCo, the record established that Redmond would be
assigned duties and responsibilities that threatened to compromise
PepsiCo's trade secret rights. Redmond and Quaker conceded that
Redmond might be faced with decisions that could be influenced
by Redmond's knowledge of PepsiCo's confidential information.
The court found evidence of untrustworthiness leading one to conclude
that disclosure was forseeable from Redmond’s own conduct and
from the fact that the Quaker Oats employee who hired Redmond
was himself an ex-PepsiCo employee who had interviewed only PepsiCo
people for the position Redmond ultimately filled, thus suggesting
that Quaker had targeted PepsiCo employees for their knowledge
of PepsiCo's marketing strategies.
2.5.3.4.
The Seventh Circuit held that the trial court must be given wide
discretion to balance the rights of the respective parties in
trade secret cases. The witness' credibility and demeanor under
oath play a key role in trade secret cases. Here, the trial court
found based on the testimony of the witnesses at the preliminary
injunction hearing that certain actions by Redmond in pursuing
and accepting his new job at Quaker demonstrated a lack on candor
on his part and evidence of Redmond's willingness to misuse PepsiCo's
trade secrets. The Seventh Circuit upheld the trial court's right
to make these findings in a trade secret case: "Thus, when
we couple the demonstrated inevitability that Redmond would rely
on [PepsiCo] trade secrets in his new job at Quaker with the district
court's reluctance to believe that Redmond would refrain from
disclosing these secrets in his new position (or that Quaker would
ensure Redmond did not disclose them), we conclude that the district
court correctly decided that PepsiCo demonstrated a likelihood
of success on its statutory claim of trade secrets misappropriation."
2.5.4.
The standards for obtaining injunctive relief under an inevitable
misappropriation theory can be condensed into a three-part test,
in which the ex-employer must prove:
(1) the former employee has knowledge of the first employer's
trade secrets [knowledge test]; (2) the employee's new job duties
(and the products or technology she is working on) are so similar
or related to those in the former position that it would be extremely
difficult for her not to rely on or use the first employer's trade
secrets [similarity of jobs test]; and (3) the former employee
and the new employer cannot be depended upon - for any number
of reasons ranging from ignorance or carelessness to bad faith
- to avoid using the trade secret information [dependability test].
2.5.4.1.
The bad faith issue. While Pepsico opined that bad faith
or untrustworthiness was not required, there can be little doubt
that the trial court’s findings of untrustworthiness were influential. See also FMC Corp. v. Cyprus Foote Mineral
Co., 899 F. Supp. 1477 (W.D.N.C. 1995) where court refused to enjoin an employee from working for its former
employer's competitor under the doctrine of 'inevitable disclosure'
absent some showing of bad faith, underhanded dealing, or employment
by an entity so plainly lacking comparable technology that misappropriation
can be inferred."
2.5.4.2.
Some courts have eliminated the dependability test altogether,
finding that "[e]ven in the best good faith, [defendant]
can hardly prevent his knowledge of this former employer's confidential
methods from showing up in his work. The only effective relief
. . . is to restrain [defendant] from working for [the new employer]
in any capacity related to [his old job capacity]." Weed
Eater, Inc. v. Dowling, 562 S.W. 2d 898 (Tex. Ct. App. 1978);
see also Air Products & Chemicals v. Johnson, 442 A.
2d 1114 (Pa. Super 1982); FMC Corp. v. Varco, Int'l, Inc.,
677 F.2d 500 (5th Cir. 1982).
2.5.5.
The PepsiCo court, as well as other courts that have recently
applied the doctrine, base the injunctive relief on the Uniform
Trade Secrets Act, which provides for injunctive relief upon "threatened"
misappropriation. These courts have found that the circumstances
presented a threat of misappropriation that was so great as to
be "inevitable." See, e.g. Lumex, Inc. v. Highsmith,
919 F.Supp. 624 (E.D. N.Y. 1996). Since 1995, numerous courts
have granted preliminary injunctive relief based on an inevitable
disclosure theory. See, e.g., Ackerman v. Kimball Int'l. Inc.,
652 N.E. 2d 507 (Sup. Ct. Ind. 1995); Branson Ultrasonics Corp.
v. Stratman, 1996 U.S. Dist. LEXIS 4590 (D. Conn., Feb. 28,
1996); Uncle B's Bakery, Inc. v. O'Rourke, 1996
U.S. Dist. LEXIS 4754 (N.D. Iowa, April 1, 1996); Lumex, Inc.
v. Highsmith, 919 F. Supp. 624 (E.D. N.Y. 1996), Merck
& Co. Inc. v. Lyon, 1996 U.S. Dist. LEXIS 14645
(M.D.N.C. Sept. 11, 1996). Several courts have declined to do
so, however. See, e.g., FMC Corp. v. Cyprus Foote Mineral
Co., 899 F. Supp. 1477 (W.D.N.C. 1995).
2.6.
Claims relating to Non-Disclosure Agreements.
2.6.1.
Non-Disclosure provisions, whether as part of the employment package,
or separately obtained, are an important part of the security
program and are evidence that the employer took steps in ensuring
secrecy and notice. Thus,
the absence of a non-disclosure agreement may be compelling evidence
of the lack of adequate security or notice in many closer cases.
2.6.2.
The actual enforcement of a non-disclosure agreement is less certain.
Since they are often obtained as a condition of employment
they are not bargained for or negotiated between parties of equal
power.
2.6.2.1.
“But the restrictive clause may be more reasonable in the case
of a key employee… A key executive’s bargaining status does not…remove
the reasonableness of his promise from consideration; it does,
however, enlarge judicial tolerance of restraints by an employer
which might be seen as unreasonable between parties of unequal
bargaining strength.” Kroeger v. Stop U Shop Companies,
13 Mass. App. 310, 432 N.E. 2d 566, 571.
2.6.3.
Non-disclosure agreements may be viewed as simply redundant restatements
of trade secret law. See
Chomerics, Inc. v. Ehrreich 421 N.E. 2d 453 (Mass. App.
1981); Dynamics Research Corp. v. Analytic Sciences Corp.400
N.E. 2d 1274, 1288 (Mass. App. 1980)(the non-disclosure agreement…can
only affirm the intent of the parties to be bound by the common
law of trade secrets); Motorola
Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp.
1173 (D. Ariz. 1973). As
a result it is necessary to establish that the agreed upon information
as described is in fact a trade secret.
Of course, if particular information is not identified
in the agreement then demonstrating that the information is intended
to be part of the non-disclosure undertaking is also required.
Since one must prove the existence of the trade secret,
then the proof will come not from the contract but from proof
of security, notice and secrecy.
2.6.4.
Other courts have been more expansive and have enforced the non-disclosure
provisions of an employment agreement and extended the information
protected to matters less clearly trade secrets.
2.6.4.1.
“Some courts have held that such express contracts create a confidential
relationship [but they] use the doctrine of trade secrets in the
decisional process. This court finds such an approach too restrictive,
especially in an area of knowledge and rapid technological change
such as the computer field. The
express contracts in issue apply not only to trade secrets but
also to privileged, proprietary and confidential information…
even though such information, knowledge or technology is not itself
a trade secret.” Structural Dynamics Research Corp. v. Engineering
Mechanics Research Corp., 401 F. Supp. 1102 (ED Mich. 1975).
2.6.4.2.
The existence of a non-disclosure agreement was important in helping
a court decide a close case between use of trade secrets and application
of general skills and knowledge.
Former employees were skilled programmers.
They claimed to have independently developed a competing
software program. The court in Integrated Cash Management
Services, Inc. v. Digital Transactions, Inc., 732 F. Supp.
370 (SDNY 1989), aff’d, 920 F2d 171 (2d Cir. 1990) found that
although there had been no intentional copying, the former employees
had benefited from their knowledge of the architecture and detail
of the former employer’s programs. The agreement had weight.
2.7.
Restrictive Covenant Claims are beyond the scope of this memo.
2.8.
Employee and Unfair Competition Claims
2.8.1.
Overview.
2.8.1.1.
An employee has an obligation not to compete with the employer
while still employed. Restatement
of Agency 2d. § 393. Preparation
to compete is permissible subject to the considerations discussed
at § 2.8.4.
2.8.1.2.
As a general matter, claims relating to so-called competitive
or predatory hiring are not recognized.
An employment at will contract can not be the subject of
a contractual interference claim.
See Restatement of Torts 2d § 768.
2.8.1.3.
The rights of an employer and the continuing duties of an employee
to the former employer in cases involving in a change of employment
are severely circumscribed.
2.8.1.3.1.
Augat, Inc. v. Aegis, Inc., 409 Mass 165, 565 N.E.2d 415,
419 is the leading Massachusetts case defining the scope of rights
and duties.
2.8.1.3.1.1.
An at-will employee has the right to go into competition with
a former employer. The employee may plan and take active steps
to compete while still employed.
2.8.1.3.1.2.
An employee has no duty to disclose his future plans.
2.8.1.3.1.3.
An employee may join with other employees in the planning and
preparation of the competitive business.
2.8.1.3.1.4.
An employee may even intend to harm or cripple the employer’s
business and unless such intent is acted on in some way which
violates one of the specific duties the employee owes there is
no liability.
2.8.1.3.1.4.1.
“We reject, as an independent basis for liability, the judge’s
conclusion that the defendants intended to cripple Isotronics
in order to ease Aegis’s entry into the market.
We have already identified the circumstances under which
the defendants are liable for [the employee’s] breach of duty.
There is no other significant respect in which the defendants
may be held liable. They had an absolute right to compete with
Isotronics. The possibility
of crippling, or even destroying, a competitor is inherent in
a competitive market. The defendants’ state of mind in engaging in
competition does not alone provide a basis for liability. “ Augat,
585 N.E. 2d 415, 422.
2.8.1.4.
Courts in a number of jurisdictions, including Massachusetts have
recognized that there are several colorable claims that may apply
to the predatory hiring/ leaving to start competing business event.
2.8.1.4.1.
An employee may not appropriate an employer’s trade secrets.
2.8.1.4.2.
An employee may not solicit the employer’s customers
while still working for the employer.
2.8.1.4.3.
An employee may not divert the employer’s business opportunities
to his future employer while still employed. See Energy Resources Corp., Inc. v. Porter,
438 N.E. 2d 391 (Mass. App. 1982). An employee cannot capitalize
on a corporate opportunity the employee had been working on for
the prior employer. See Chelsea Industries v. Gaffney, 389
Mass. 1, 449 N.E. 2d 320 (1988); Group Ass’n Plans, Inc. v.
Colquhoun, 466 F. 2d 469 (D. C. Cir. 1972.The Chomerics
v. Ehrreich, 421 N. E. 2d 453 (Mass. App. 1981) case raises
an interesting and problematic issue. What if the employee surpresses a product development
plan which the employee desires to use in the employee’s own business?
Compare Sperry Rand Corp. v. Rothlein, 241 F.Supp.
549 (D. Conn. 1964)
2.8.1.4.4.
An employee may not use the employer’s funds, property or personnel
for his own present or future gain.
2.8.1.4.5.
In jurisdictions other than Massachusetts an employee has a duty
of loyalty which he may not violate by trying to cause his employer
harm. But see Augat
585 N.E. 2d 415
2.8.2.
Officers and Senior Management
Positions have heightened duty. The Massachusetts Court has
found that the general manager of a company’s duty of loyalty
to his employer includes a duty to assure that when the general
manager leaves, his employer will retain sufficient management
staff and ability. Thus, when the future employer and the general manager recruited
management personnel to join the new employer while the general
manager was still employed, it was found that the general manager
and his future employer were liable for damages.
Augat, Inc. v. Aegis, Inc., 409 Mass 165, 565 N.E.2d
415, 419.
2.8.3.
Inducing an employee to
breach a duty of confidentiality is actionable. Where the claim is tied to one of disclosure or misappropriation
of trade secrets, a claim of tortious interference with a contract
claim can be made out against the new employer. A claim of conspiring
to induce the breach of a non-disclosure agreement also lies.
See Dozier & Gay Paint Co. v. Dailey, 518 So.
2d 946 (Fla. 1988) (investor may be liable for conspiracy).
2.8.3.1.
While an employee may not be liable to an employer under MGL c.
93A (Manning v. Zuckerman, 388 Mass. 8, 12-15, 444 N.E.
2d 1262 (1983), those who participate with the employee(s) may
be liable under 93A. Augat 585 N.E. 2d 415, 419 and 422
footnote 7.
2.8.4.
Hiring to obtain trade secrets.
Where it is possible to demonstrate a pattern of hiring of
a competitors employees it may be inferred that the hiring is
intended to obtain trade secrets.
In Telex Corp. v. IBM, 510 F2d 894 (10th
Cir. 1975) Telex routinely hired IBM employees involved in particular
projects. Substantial
and disproportionate raises may indicate that an employee is being
hired for more than the employee’s general skills.
2.8.4.1.
In the case of Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th
Cir. 1995) discussed at length under the section on inevitable
disclosure, the court found indicia of untrustworthiness to support
the grant of a six month injunction against a former employee
taking up his new job because Quaker Oats employee who hired Redmond
was himself an ex-PepsiCo employee who had interviewed only PepsiCo
people for the position Redmond ultimately filled, thus suggesting
that Quaker had targeted PepsiCo employees for their knowledge
of PepsiCo's marketing strategies.
2.8.4.2.
This type of claim is also augmented by evidence that there had
been efforts to develop a product or process either by reverse
engineering or by invention without success and by hiring away
employees with access to information about the process, the competitor
is able to bring the product to market. See Rohm & Haas
Co. v. Adco Chemical Co., 689 F.2d 424 (3rd Cir.
1982).
2.8.4.3.
The case of Sperry Rand Corp. v. Rothlein, 241 F. Supp.
549 (D. Conn. 1964) illustrates both the Telex and the
Augat rules. Rothlein
was the head of the semiconductor group for Sperry. After deciding
to leave and start his own company but before resigning Rothlein
recruited a group of 28 people to go with him. This was kept secret.
The court concluded that Rothlein’s conduct was actionable
as both an effort to misappropriate Sperry’s semiconductor trade
secrets and as a violation of his duty to maintain a viable workforce.
The Sperry court found a duty not to unfairly disrupt
or destroy the employer’s ability to compete which view has been
questioned by Augat.
2.8.5.
Antitrust Claims. There
was a significant line of cases which stood for the proposition
that a dominant competitor which engaged in the practice of hiring
key employees to obtain trade secrets was in per
se violation of Section 1 of the Sherman Act.
Albert Pick-Barth Co. v. Mitchell Woodbury Corp.,
41 F.2d 148, 57 F.2d 96 (1st Cir. 1930) cert. denied,
286 U.S. 552 (1931). While not directly overruled, this case has
been viewed as no longer good law either in the First Circuit
or elsewhere. See Whitten
v. Paddock Pool Builders, Inc., 508 F.2d 547 (1st
Cir. 1974) cert. denied, 421 U.S. 1004 (1975).
While there may be no per
se violation, there is a possible claim under the Sherman
Act if there is proof of unreasonable restraint.
The courts, however, are reluctant to find such proof.
The court in Universal Analytics, Inc. v. MacNeil-Schwendler
Corp., 707 F. Supp. 1170 (C.D. Cal. 1989) rejected an antitrust
claim involving a systematic hiring pattern. The competitor was alleged to be attempting
to monopolize particular software market based on hiring practices. The court found that although the hiring practices
created strong competitive advantages, there was no proof of conspiracy
and the employees, who where skilled, were needed and valuable
to the defendant independent of any anti-competitive motive.
2.8.5.1.
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