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Nov 03, 2014

Does your company have trade secrets?

By: Paul Ebeltoft

In North Dakota, and in many states, a trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

a. Derives 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 or use; and

b. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Parsing this intimidating definition and extending it to its broadest meaning, a trade secret is:

• Information
• Not generally known
• Not easily found
• That your company tries to keep secret because it might be valuable to others.

Does your company have information it considers a trade secret? Probably.

Wrongful use of trade secrets

What happens if an employee leaves your company and takes what you consider to be a trade secret with her? Most companies contact a lawyer. Most lawyers write a threatening letter to the former employee demanding that the information be returned and trying to extract promises that it will not be used. If this doesn’t work, some companies begin suit seeking a court order to enjoin the use of the information and for damages for the theft. Even though damages are always claimed, the primary goal of these lawsuits is to prohibit the use of the secret information, not to get a damage award. Actual monetary loss may be hard to prove and even more difficult to collect.

Does this work?

The answer is: not well. Most often the lawyer’s threat letter is ignored. Suits to enjoin the use of the information often fail. The reason for this is that, even when the theft is blatant and of an acknowledged trade secret, the courts prefer not to restrain commercial conduct where money-damages is an available (if not good) remedy. Another reason that a goodly number of these suits fail is because, while your company may claim something to be a trade secret, the courts can easily disagree. Here is a real-life situation

A company entered the market for selling and servicing specialized equipment in Dickinson, North Dakota by opening a field office here. It hired experienced local employees from a competitor. The employees were encouraged by their new bosses to solicit business from the competitor’s clients. The employees did so and their new company landed a lot of business that way. After several years, the employees decided to form their own company. They quit and started competing. Their former employer was not happy, arguing that it had made substantial investments to train in market strategies and other parts of the operation, to develop business in the Dickinson area, and to develop trade-secret customer-based information that the departing employees, it was claimed, used to the economic advantage of the breakaway business. The former employer identified customer lists, customer contact information, business strategies, customer repair and purchase histories, and CDI pricing information as trade secrets.

The departing employees responded that their former company took no great pains to ensure the information in dispute was kept secret. The court agreed and did not enjoin the use of the claimed trade secrets.


Why should you know about the Computer Fraud and Abuse Act (CFAA)?

As shown above, state law may not help protect businesses where trade secret status of appropriated information may be challenged. The CFAA might. The CFAA is a federal law originally intended to protect government information stored on computers. However, its scope has been extended to provide the possibility of injunctive relief (and damages) to private civil litigants. Unlike the definition of a trade secret, which places a burden on your company to show how it protects its secrets, the elements of proving a case under the CFAA are directed differently. They are more focused on the action of a disloyal employee, asking whether the employee (i) intentionally accessed a company computer, (ii) without or exceeding the employee’s authorization; (iii) and took data for the purpose of private financial gain.

As you can see, the key phrase in the definition above is (ii). What is “without or exceeding authorization”? Some courts are taking a broad view of this. They are holding that any access to data that is contrary to the interests of the employer is “without or exceeding authority.” There are opposing views, however, and the federal court of which North Dakota is a part has not yet spoken.

What is the HR takeaway?

As with so much else in HR, the protection you can provide your company occurs at the policy level. Make sure that you have a computer access policy. Make sure that it clearly defines the scope of access and prohibits any access (even if okay while the employee is doing her job) that has an improper purpose.

Our interest in serving you

My law firm’s goal is to give understandable information and to foster discussion about real-life issues facing human resource professionals. If we are not achieving that goal or if you would like us to address other employment law issues, please email me at pebeltoft@ndlaw.com We promise to take your comments and ideas to heart.

Disclaimers
(Otherwise known as “the fine print”)


I make a serious effort to be accurate in my writings. These articles are not exhaustive treatises, though, so do not consider them complete or authoritative. Providing this information to you does not create an attorney-client relationship with my firm or me. Do not act upon the contents of this or of any article on our homepage or consider it a replacement for professional advice.

Reprinted with permission from an article submitted for publication in the November, 2014 Southwest Area Human Resource Association newsletter.