Identifying, Preserving, and Defending Trade Secrets

David E. Warden, Partner, Yetter & Warden, and Joe Phillips, Dongseo U.

Reported trade secret theft: 323% rise in the United States during the 1990s (Whaley 1999).

Annual employee turnover in business and professional services: more than 21% (Essex 1993).

These cautionary statistics, along with the currency of information in funding global success, require sophisticated businesses to routinely address the unwanted disclosure of trade secrets. Balanced against businesses’ desire to prevent this disclosure are the policies of free competition and the employee’s right to apply his skills and knowledge. Within this tension lies a body of law—preventive and compensatory—that technologically intense and information-dependent oil and gas companies should know.

The discussion that follows deals with trade secrets in the context of U.S. law, but many other countries have comparable underlying concepts. The Treaty of Rome, governing the European Union, similarly provides that a trade secret is something not generally known or easily accessible (Van Arnam 2001). English jurisprudence protects trade secrets in much the same way as they are protected in the U.S. but through court-made law rather than statutes (Lipton 2003). Japanese law parallels U.S. law by protecting technical or business information useful in commercial activities and that is kept secret and not publicly known (Harris 2002). China also defines a business secret as technical and operational information that is not known to the public, is capable of bringing economic benefits to the owners, has practical applicability, and has been subjected to measures to keep it secret (Bejesky 2004). The U.S. definition of a trade secret is mirrored in key international agreements: the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights and the North American Free Trade Agreement.

Nonetheless, this property right and punishment for its violation can differ across nations in important ways. Criminal law, in particular, may diverge on remedies, the elements of proof, and the right to seek relief. Useful analysis of law outside the U.S. and of international agreements can be found in Melvin F. Jager’s Trade Secrets Throughout the World (1994) and his Trade Secrets Law (1985) and in D. Campbell’s World Intellectual Property Rights and Remedies (1999).

What Is a Trade Secret?

Trade secrets are conceptual ideas, formulas, processes, product designs, customer lists, marketing plans, price lists, supplier lists, business policies, procedure manuals, and other commercial intangibles. Trade secrets also include knowledge of what not to do—negative trade secrets. An employee’s general skills, knowledge, and experience are not trade secrets even when the information directly results from the employer’s investment of resources in the employee. They arise without the need to file forms with government agencies, which is required for patents and copyrights. Instead, a trade secret comes into existence because of its intrinsic value and its owner’s behavior.

These are the general criteria that must be satisfied:

The information has some economic value. To be a trade secret, a competitor must be able to benefit materially from knowing the information and have to spend time and money independently to gain the same knowledge. Stated another way, the trade secret must provide the owner with some commercial advantage.
The information cannot be easily discovered by lawful means. Information is not a secret if the competitor can gather it from public knowledge, such as examining a publicly accessible company product. Courts will consider how much time and money were used to develop the information, and how much are needed to duplicate it, in deciding whether the secret could be easily discovered through lawful means.
The trade secret’s owner has taken reasonable steps to ensure secrecy. The owner need not maintain absolute secrecy. For example, confidential disclosures to employees do not destroy the information’s status as a trade secret. Factors determining if reasonable steps were taken include whether the documents were in locked files, whether entrances to the information were guarded, whether nondisclosure contracts with subcontractors and confidentiality agreements with employees were signed, and whether computer data were protected by passwords. Since Internet publication is by nature widespread, it can eliminate secrecy, but because information generally available on the Web may not be likely to reach specific competitors, secrecy still may legally exist.

What Legally Protects Trade Secrets?

The employee’s legal obligations to keep trade secrets confidential arise through contracts not to compete, confidentiality agreements, and the duties inherent in the employer/employee relationship. Litigation is triggered when the employee discloses trade secrets or threatens to do so; most commonly, this occurs when the worker accepts new employment in a similar position.

A contract not to compete. The employee may agree not to compete with the employer, including not working for a competitor, after his employment ends. Given the breadth of such an agreement, the employer usually can prevent the employee from disclosing information to a competitor without even establishing that the knowledge is a trade secret. The contract not to compete must have a reasonable expiration date and be limited to a reasonable geographical area (e.g., the area where the former employer does business). However, employment with a transnational company may mean no territorial restriction. The employee must be compensated for waiving his future employment rights, and, consequently, a contract entered into after the initial employment agreement usually requires a separate payment to the employee (Anenson 2005, Long 2005).
Confidentiality agreements. A confidentiality agreement (also referred to as a nondisclosure or limited-disclosure agreement) is similar to a contract not to compete in that it must have reasonable time and geographical limits (Pugh 2002). Unlike a contract not to compete, which simply bars the employee from working for any competitor, enforceable confidentiality agreements must cover a trade secret or at least proprietary and confidential information. Because of the difficulty defining a “trade secret” at the start of the employment relationship, particularly if the employer’s research is just beginning, these agreements should be viewed as partial protections. Their definitions of the covered trade secret may be incomplete.
The duty not to steal a trade secret. An employee’s duty not to steal or disclose a trade secret also arises from the employment relationship, independent of an expressed contract such as a confidentiality agreement. An employee who gains knowledge during, and as a result of, his employment has an unwritten legal obligation not to disclose or use the knowledge for his own or another’s benefit. More specifically, misappropriation occurs when the secret is acquired by a person who knows that it was obtained by improper means. It also occurs when a person discloses or uses the trade secret with knowledge that he learned it from a person who used improper means to obtain the information.

The term “use” includes directly copying another’s trade secret, altering the secret, or exploiting it as a starting point for a competing product. “Improper means” includes theft, bribery, misrepresentation, breach (or inducement of a breach) of a duty to maintain secrecy, and espionage. It is not necessary that these means be illegal. For example, in one court case it was determined that the aerial photographing of the construction of an E.I. du Pont de Nemours chemical plant was a legal, but improper, method of discovering du Pont’s trade secrets (1970). “Proper means” includes independent invention, “reverse engineering” after fairly and honestly acquiring a known product, discovery under license, observation of an item on public display, voluntary disclosure by the owner, obtaining information from published literature, and good-faith acquisition from a third party without notice that the information was a trade secret acquired through improper means.
The “inevitable disclosure” doctrine. A very broad application of the employee’s unwritten duty not to disclose a trade secret is found in the “inevitable disclosure” doctrine. This legal concept assumes that, because the employer’s trade secret and the former employee’s general knowledge cannot be separated in the employee’s mind, the employee will inevitably disclose the secret in his new employment position. Actual misappropriation is not required, nor is it necessary that the employee be threatening to disclose information. He may even intend to protect the trade secret in his new job. Regardless, when his knowledge and the circumstances of his former and new positions make disclosure “inevitable,” a court may prevent the employee from taking the new position (PepsiCo Inc. v. Redmond 1995).

Not all courts accept this doctrine, and the criteria for its application vary (Rowe 2005). Different courts have given different weight to whether the new employer is a competitor, whether the employee has been candid about the new position, whether the former employer has clearly identified the trade secret, whether trade secret misappropriation has occurred already, whether the employee signed a confidentiality or noncompetition agreement, whether the new employer has a policy against using others’ trade secrets, and the scope of the employee’s new job (Harvey 1998).
Criminal laws. Many U.S. states have criminalized trade secret misappropriation under specific trade secret and general theft statutes. U.S. federal law weighs in with the Economic Espionage Act (dealing with the theft of trade secrets); the National Stolen Property Act (criminalizing the transportation of goods, wares, and merchandise when the accused knows they are stolen); and the mail fraud statute (precluding the use of the mail for fraud). The criminal standard generally requires a specific intent to deprive the owner of the trade secret’s value, or at least knowledge that the appropriated information was a trade secret.

What Relief Is Available for Trade Secret Disclosure?

An employer can seek injunctive relief or damages if it thinks a trade secret has been disclosed.

Injunctive relief. The employer can seek an injunction, or similar court order, against the disclosure when there is evidence that an employee, or other person, is threatening to reveal the secret. If the “inevitable disclosure” doctrine applies, an injunction simply against the disclosure will be inadequate because that doctrine assumes that the employee cannot help but reveal the trade secret. Instead, the court may prevent the employee from working at all in a defined sector. The employee should then be awarded compensation for losing this right to work (the compensation would be based on surveying the payment that a similar employee would receive for entering into a noncompetition agreement). An injunction should be terminated when the information ceases to be a trade secret or after the time reasonably required for independent development of the information.
Damages. If the new employer or former employee has publicized the secret, then an injunction is inadequate and damages likely will be awarded. The computation of damages may be based on the owner’s actual losses because of the secret’s disclosure, the defendant’s resulting profits or other benefits, or a reasonable amount for the secret’s value.

Conclusions and Strategies

Trade secrets permeate the oil and gas industry, requiring employers and sensitively placed employees to address these issues early in their relationship, including whether to introduce confidentiality and noncompetition agreements. An employer should get a very broad agreement from the employee because courts tend to reduce the scope of these contracts when employers try to enforce them. A clause should be added that the agreement can be modified or waived only by a specific writing signed by a designated corporate official. Both parties ought to evaluate whether subsequent employment agreements affect an existing noncompetition or confidentiality contract. The employee needs to consider how these agreements, or the mere exposure to confidential information, will limit his ability to change jobs.

Once the employer learns that the employee is quitting or being terminated, the employer should

Interview the departing employee (and have the employee sign the interview).
Remind the employee of his duty not to disclose or use secrets, regardless of any written agreement.
Notify the new employer that disclosure or use of trade secrets is prohibited.
Describe to relevant parties the types of information that the former employer considers a trade secret.
Make an inventory of materials kept and left by the employee.
Have the employee acknowledge that all confidential information has been returned.
Promptly respond to a trade secret’s disclosure/use (otherwise, a court may conclude that the information is not valuable).
Consider that a preliminary injunction could cause the new employer to cancel the hiring without the former employer ever having to prove his case.

Trade secrets are perhaps the most valuable company asset. Useful not only in themselves, they are the seeds of patents and copyrights. They are also perhaps the most vulnerable asset, existing in company procedures, techniques, and data that are easily disclosed to the public or carried off by departing employees. Though more fragile than patents and copyrights, trade secrets can, unlike those forms of intellectual property, remain intact indefinitely, but only with the type of vigilance discussed in this article.

References

Anenson, Leigh T. 2005. The Role of Equity in Employment Noncompetition Cases. American Business Law J. 42, 1–63.

Bejesky, Robert. 2004. Investing in the Dragon. Tulsa J. of Comparative and Intl. Law. 11, 437–461.

Campbell, D. 1999. World Intellectual Property Rights and Remedies. Dobbs Ferry, NY.

E.I. du Pont de Nemours & Co. v. Christopher. 1970. 431 F.2d 1012 (5th Circuit Court of Appeals).

Essex, David. 1993. Employee Turnover, the Costs Are Staggering. www.itworld.com.

Harris, H. Stephen Jr. 2002. Comparative Law and Patent Protection in Japan. Columbia J. of Asian Law. 16, 71–90.

Harvey, D. Peter. 1998. Inevitable Trade Secret Misappropriation after PepsiCo, Inc. v. Redmond. Practicing Law Inst./Patents. 537, 226–227.

Jager, Melvin F. 1994. Trade Secrets Throughout the World. Thomson/West.

Koh, Jay. 1998. From Hoops to Hard Drives: An Accession Law Approach to the Inevitable Misappropriation of Trade Secrets. American U. Law Review. 48, 271–358.

Lipton, Jacqueline. Mixed Metaphors in Cyberspace: Property in Information and Information Systems. Loyola U. Chicago Law J. 35, 235–269.

Long, Brandon S. 2005. Protecting Employer Investment in Training: Noncompete vs. Repayment Agreements. Duke Law J. 54, 1295–1320.

PepsiCo Inc. v. Redmond. 1995. 54 F.3d 1262, 1262-72 (7th Circuit Court of Appeals).

Pugh, Rachal C. 2002. Trade Secret: Employment Relationships. Berkeley Technical Law J. 231–250.

Rowe, Elizabeth. 2005. When Trade Secrets Become Shackles: Fairness and the Inevitable Disclosure Doctrine. Tulsa J. of Technical and Intellectual Property. 7, 167–226.

Van Arnam, Robert C. 2001. Business War: Economic Espionage in the United States and the European Union. North Carolina J. of Intl. Law and Commerce Regulations. 27, 95–139.

Whaley, Susan Street. 1999. The Inevitable Disaster of the Inevitable Disclosure Doctrine. U. of Cincinnati Law Review. 67, 809–857.

David E. Warden is a partner with the Houston law firm of Yetter & Warden, L.L.P. (www.yetterwarden.com). Before becoming an attorney, Warden was an engineer for Exxon Corp. on assignments in Alaska, California, and Texas. Warden specializes in intellectual property and has written several articles and conducted seminars on this topic. During his nearly quarter century legal career, he has represented international business clients in numerous issues, including cases involving oil and gas drilling rights in Yemen. His peers honored him in 2004 as one of Texas’ best lawyers. He is admitted to practice in various courts including the U.S. Patent and Trademark Office. Warden earned an MS degree in engineering from Purdue U. and a law degree from the U. of Virginia. Joe Phillips is a professor of international relations at Dongseo U. in Busan, Korea and an attorney. His 20-year legal practice includes numerous cases involving trade secrets and commercial torts and he has published extensively on legal topics, including co-authoring three legal books. Phillips earned an MA degree from the U. of Chicago and a law degree from the U. of California, Berkeley.