Recently, I have seen in my employment law practice a substantial growth in disputes over employees competing with their former employers, often accompanied by charges of misuse of confidential business information and trade secrets.
Is it legal for employees to consider their employers´ business information and customers as "portable"? As is often the case in legal matters, the answer is: "It depends." On what? On several things, such as:
- Whether the employer´s information is a trade secret.
- The existence of a contract restricting the employee´s post-employment competition, contact with customers, and/or use of the employer´s business information
- When the activity occurs.
- The nature of customers and efforts to cultivate them.
- Whether the employee engages in what courts have characterized as a breach of the duty of loyalty, unfair competition, "raiding" of the workforce, conversion (i.e., taking of property), or interference with contractual rights.
Items 1, 2 and 3 listed above all encompass various forms of post-employment restrictive covenants. Item 4 encompasses business torts. These four items are beyond the scope of this portion of this article and will be covered in Part Three of this series.
The 5th item, "trade secret", addressed herein, is a legal term of art. It has a generally-accepted meaning developed over the years via court decisions (the so-called "common law"). Currently, these principles have been codified into statutes since most states have adopted variations of the Uniform Trade Secrets Act. [Maryland has adopted the UTSA, contained at § § 11-1201 through 11-1209 of the Commercial Law Article, Annotated Code of Maryland.] Whether something is a trade secret requires an analysis of the nature of the information and efforts at secrecy. While a detailed definition and discussion of a trade secret is beyond the scope of this article, its essential elements include information: (1) with economic value; (2) not generally known or easily ascertainable; and (3) that is the subject of efforts to maintain secrecy.
A trade secret is one of several species of business goodwill which enjoys legal protection from competitors. Other species include patented devices or processes, trademarks and trade names, and copyrighted material. All of these are rendered untouchable from competitors by virtue of statutory protection. But there is a fundamental difference between trade secrets and the above-listed items. That is, patents, trademarks and copyrights contain publicly-disclosed information. But trade secrets contain privately-held information.
For example, a copyrighted literary work or a movie is obviously known to any competitor, and indeed to the general public. The components and operation of patented items -- be they complex like intricate chemical formulae, gears and tolerances of machinery, etc., or simple like the "Post-It" notes -- are available to the public and competitors at the U.S. Patent Office. Trademarks or trade names like Big MacTM are protected from having their names, or confusingly similar ones, misappropriated. For example, it is unlikely that a restaurant owner could call his business "The Big Mack", even if Mack is his given name.
The U.S. Supreme Court has acknowledged the niche for protection of trade secrets as well, and explained the rationale for legal protections afforded to them. In the case of Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 493 (1974), the Court stated:
"Trade secret law encourages the development and exploitation of those items of lesser or different invention than might be accorded protection under the patent laws, but which items still have an important part to play in the technological and scientific advancement of the Nation. Trade secret law promotes the sharing of knowledge, the efficient operation of industry; it permits the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it. Congress, by its silence over these many years, has seen the wisdom of allowing the States to enforce trade secret protection."
Thus, the "wisdom" underlying this public policy is to encourage, stimulate and develop R&D so as to improve products or methods. Without legal protection, improvements generated by R&D could be pirated and the creator´s investment in his asset - or, more typically, his employer´s investment -- would immediately evaporate. Obviously, that scenario would greatly chill R&D endeavors.
In recognition of the desirability of a public policy to encourage evolution of increased knowledge, more efficient methods, and better products, the doctrine of trade secrets developed in state law.
As stated above, essential components of trade secret status include, obviously, secrecy, as well as information that is inherently valuable and not generally known in the industry, or not easily ascertainable. Stated most generally, the types of information/data that are potentially valuable after have included:
- devices not patented or patentable;
- manufacturing or preparation processes;
- chemical or other formulae; technical or scientific processes, and the like;
- nature and extent of components or ingredients;
- in appropriate cases, information such as customer lists, buying habits, pricing, and costs.
Litigation may ensue when an employee, typically a key one, leaves and is suspected of transferring assets such as those described above to his new employer.
Employment law disputes often arise in this area of the law because of the struggle between competing legal interests: (1) an employee´s freedom of mobility and the right to earn a livelihood in the profession of one´s choosing; and (2) an employer´s the right to protect business assets such as trade secrets/confidential business information/longstanding customer relationships.
The general presumption is that an employee is free to use his experience, skills and abilities when transferring to a different employer. A conflict arises if the employment experience included the acquisition of trade secrets from the former employer.
A substantial body of law has been created as a result of courts attempting to draw lines between (a) allowing an employee´s experience, skills and abilities to be portable, and (b) legally-protectable employer trade secrets.
The second part of this Article will explain how to establish and preserve trade secret status. Employers may wish to consider whether they possess any of the listed legal protections for their potential trade secrets. The third and final part will discuss how employers can attempt to protect good will even if information does not rise to the level of trade secret status.
About The Author
Pat Pilachowski graduated from Johns Hopkins University and received his law degree, with honor, from the University of Maryland. He joined the Shawe & Rosenthal firm in 1977. Pat has represented employers in a wide range of labor relations matters, such as contract negotiations and litigation involving executive employment contracts with non-competition, confidential business information and/or trade secret provisions, as well as union contract, EEO, Wage and Hour, NLRB and OSHA matters.
