The factor that often proves fatal to an employer in bringing a trade secret case is the inability to demonstrate that it undertook appropriate measures to maintain the secrecy of the information.

In a household name example of ironclad protective measures, the U.S. District Court in Delaware described the efforts made by the Coca-Cola Company to avoid detection of "one of the best-kept trade secrets in the world." The Court explained that although most of the formula is public knowledge, "the ingredient that gives Coca-Cola its distinctive taste is a secret combination of flavoring oils and ingredients known as ´Merchandise 7X.´" It is tightly guarded, known by only 2 persons within the Coca-Cola Company, and the only written record of the formula is kept in a security vault at the Trust Company Bank in Atlanta, which can be opened only via a resolution from the Board of Directors of Coca-Cola. Coca-Cola Bottling Co. of Shreveport v. Coca-Cola Co., 107 F.R.D. 288, 289 (D. Del. 1985).

While such measures are not always necessary, secret information should be available only on a "need to know" basis. A handbook or manual statement that your manufacturing processes are proprietary, though practiced by many firms, by itself does not settle the security issue.

In some firms, techniques for maintaining secrecy have included:

• A manufacturing unit is isolated from other parts of the plant, with doors locked and blinking red lights warning that the area is restricted to authorized personnel only.

•  

• Need-to-know disclosure is made only to those who have a business reason to obtain the information.

•  

• Requiring management personnel to be at certain locations at all times.

•  

• The use of nondisclosure agreements for key salaried or supervisory and especially research personnel.

•  

• Appropriate restrictive markings to identify confidential information.

•  

• Fenced or sealed areas, separate manufacturing areas for certain items, perhaps windowless rooms, and alarms.

•  

• Computer security measures limited to those with a need to know and "red flags" alerting upper management when confidential computer information is accessed.

•  

• An employee handbook contained an express statement that employees shall not use or disclose secrets or confidential information, including customer lists, subsequent to their employment.

•  

• Several signs on entrances to manufacturing plants and associated properties denying admittance.

•  

• Manufacturer replacing labels of components with its own labels, or replacing standard colors of components with its own colors.

•  

• Formulae strictly and elaborately guarded on plant premises and kept in locked safes, or even safety deposit boxes, or labeled in code.

•  

• Control of visitors, i.e., everyone required to sign plant visitation agreements prohibiting disclosure or use of information gleaned in the course of a visit.

•  

• Visitors had to be registered, wear badges, and accompanied by an employee during their visits,

•  

• Access to R&D areas restricted and access given only to employees and consultants who had signed secrecy agreements.

•  

Among other measures suggested by various legal commentators are: security checks of all new employees, review of all speeches and papers prior to delivery or publication, debriefing procedures for departing key employees, educational efforts regarding trade secrets, written advice to new employees concerning what is confidential, prohibiting duplication of documents, plant security, licensing and sales agreements, requiring all appropriate employees to sign employee invention agreements, requiring sales employees and other key employees who had technical or engineering background to sign restrictive non-compete covenants.

Security can be a very expensive matter, but from a legal point of view is necessary.

Case Examples

Whether information sought to be protected in these cases is confidential or secret depends on the conduct of the parties and the nature of the information. Cases illustrate the difficultly of determining whether a device, process, or other compilation of information should be classified as a trade secret, or as a matter of general knowledge. Accordingly, a number of courts have concluded that examples are more helpful than attempting to formulate a precise definition fitting all cases.

For example, a company cannot announce warnings about security and then allow the materials to be available to a broad audience. Numerous cases have ruled that companies abandoned any claim to treat secret status through public disclosure, even if inadvertent. Relevant testimony might come from former employees, supervisors, plant security personnel, engineers, subcontractors, or even reporters. For example, in a New York federal case, the Company´s general counsel lectured on the secrecy of material that a former employee already had published.

The Supreme Court of Ohio has catalogued "reasonable and active" steps to secure trade secrets, to include: locking devices, a receptionist to screen visitors, a buzzer lock system on the door to the processing area, prohibiting the general public and competitors access to the plant, limiting the availability of drawings to only those suppliers and employees with actual need, marking documents with proprietary stamps, and routinely shredding outdated documents. The court found these efforts sufficient and entered a permanent injunction.

In another case, the security for a chocolate chip cookie recipe was adequate where the company kept the recipe in the company safe, broke the formula down into separate baking ingredients, and kept the gross weights of bulk ingredients on separate cards.

The facts of another federal case decided in Chicago revealed a manufacturing business with no formal agreement regarding secrecy or nondisclosure, no security personnel employed, a plant unlocked during business hours, suppliers and others not denied entry into the manufacturing areas, and no exit interviews of departing employees. The company kept significant parts of the formula (for simulated brick paneling) posted in the plant.

In another case, a company kept files concerning its process in a locked cabinet in an office subject to restricted access. Each employee worked on one manufacturing step without knowing anything about the other steps. Only five people, the family members of the business, knew the entire complex process. Nevertheless, conflicting evidence included a failure to mark certain documents as confidential. The court found security inadequate to afford protection to the secret. The fatal error was the failure of family members to reach a specific secrecy agreement among themselves, leaving them no remedy against a renegade from their ranks who opened a competing concern.

Extent To Which Information Is Not Generally Known In The Trade Or Industry

Even if a company undertakes extensive security measures, the extent to which the information is known -- in the trade as opposed to within the Company -- is a factor to be considered in determining whether information is legally protectable. Many of the "business information" cases involve customer lists.

Customer List Cases

Most courts, including the Maryland Court of Appeals, have held that information such as a list of customers whose names and addresses are easily ascertainable or generally available to the public or potential competitors in the trade cannot be trade secrets or confidential information.

Home Paramount Pest Control Companies v. FMC Corp., 107 F. Supp. 2d 684 (D. Md. 2000) involved two companies selling pest control products manufactured by FMC. A trade secret action was brought because one company acquired and disseminated the other´s customer list. The federal court ruled that Maryland Law does permit some customer lists to be trade secrets, but in this case the names and addresses of the top 50 customers were available via trade associations. In addition, the information was not especially valuable to competitors, since the defendant did not reveal more detailed information such as price and volume of each product sold.

On the other hand, a "screened" list of names or preferred customers may be created at considerable effort and expense and otherwise would be buried in a multitude of other names and identities in a telephone or trade directory. In one case, a plaintiff in the business of selling investment grade diamonds and gemstones compiled a list of approximately 4,200 financial planners who would be interested in selling diamonds. The list was compiled over a three year period after screening some 12,000 known planners. As a result of its efforts, the plaintiff signed 1,850 planners to be dealers. The cost to the plaintiff to distill the original list of financial planners down to those who signed was $800,000 - incurred in mailing solicitations, advertising in various magazines, newspapers and trade journals, setting up information booths at conventions, conducting training programs and seminars for prospective dealers. Only 274 of the 1,850 signed dealers actually sold product in the 18 months prior to the lawsuit, and 18 of those 274 generated 43 percent of all sales.

Labeling Items As Confidential

One factor bears mentioning: while labeling information as "trade secret" or "confidential" does not conclusively establish that the information has such legal status, it is nonetheless an important piece of evidence. It at least suggests the value which you place on the information and that it cannot be readily derived from publicly available sources. Therefore, employers should take steps to identify, label and then protect their valuable confidential information. So as not to erode credibility and devalue there selections, employers should undertake a reasoned scrutiny and analysis rather than a knee-jerk inclusion of everything.

The other side of this coin applies as well: your truly confidential information should not be presented at trade shows, in trade literature, at seminars, in journals, textbooks, magazine articles, or other publications.

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.

To read Part 1, click here.