Tuesday, November 26, 2013

Non-Compete and Trade Secrets Overview: Part 2

Yesterday, we took a closer look at the oh-so-fascinating world of non-competes.  (Fascinating to me, maybe not to you, but as I’ve told you and will continue to tell you, this stuff is really important).  Today, the issue is trade secrets, which definitely has more sex appeal. 
What Is A "Trade Secret"?
Top secret liquid gold ...
When lawyers talk about “trade secrets,” we’re talking about business information that gives that business a major competitive edge.  Trade secrets are things like the Coca-Cola formula, Google’s proprietary search algorithm, and the method by which books are selected for the New York Times Best-seller List.  Trade secrets are what make businesses unique and make them a LOT of money.  Lawsuits ensue when departing employees or business owners take those trade secrets to a competing enterprise and use them to their former employer’s detriment.  Top-secret information and theft?  Folks, this is the stuff of commercial espionage!   
But here’s the problem with a trade secrets lawsuit: the plaintiff will NEVER be successful unless the “secret” it seeks to protect is truly, truly secret.  “Secret” means unknown to others.  I know this sounds obvious but I see people mess this one up all the time.  For example, consider the plaintiff-corporation that claims that the profit margins for its specialized machine are secret.  What happens when that same plaintiff publishes a price list and a list of suppliers?  The profit margin isn’t so secret any more.  Another example: a customer list downloaded by a departing employee the night before he quits.  That employee did a really bad thing for which he should be punished, right?  Think again.  While it’s true that taking something that doesn’t belong to you is morally wrong, if the information was downloaded from a personal computer that the employer allowed the employee to use to access all of this information, the law says that the information isn’t secret.  The key to a successful trade secrets lawsuit is how the employer treated the information before it was stolen.  Employers should be vigilant in protecting information they consider to be “secret.” 
It's Misuse, Not Possession That Matters.
Here’s another little hiccup I see in trade secrets cases – the information is truly secret and the employee took it, but there is no evidence the employee actually used it.  It is the “misappropriation” of a trade secret that is illegal, not necessarily the possession of it.  My favorite example of this is information that salespeople must – as a matter of job security – keep in their heads.  They could probably rattle off the names of thirty customers off the tops of their heads.  They know where customers are located, what those customers’ needs are, and how to best serve them.  What is a business to do when such a person leaves? 
Such was the case in a recent lawsuit I handled.  There was no evidence that my client had taken or used any information – but he had lots of business information in his head.  When I took the deposition of his former employer’s corporate representative, I asked very specifically what information my client had taken or used that belonged to his former employer.  Her response?  “He has knowledge!  So much knowledge!”  Her fear was that in order to perform at his new job, my client necessarily would use the information he learned while working for her.  It wasn’t any tangible information she was worried about – it was the knowledge he had in his head!     
Let me be clear: knowledge just isn’t enough.  There is a very famous case from a federal court based in Chicago, which stated that, “Any other rule would force a departing employee to perform a prefrontal lobotomy on himself ….”[1]  Employees get to take knowledge that is in their head with them when they leave.  And there’s little an employer can do about it.    
So what makes a good trade secrets case?  I’m going to give you the wishy-washy lawyer answer and tell you that it all depends on the facts.  It depends on how secret the information was kept in the first place, it depends on the role the departing employee had at the old company and what role he will have at the new company.  There is no right answer when it comes to trade secrets, which is why lawyers who practice in this area love it so much. 
But there are things businesses can do to protect their information.  For that little tidbit, you’ll have to come back tomorrow ….
Liza Favaro
Non-Compete Counsel
* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.

[1] AMP v Feishchacker, 823 F.2d 1199, 1205 (7th Cir. 1987). 

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