Articles Posted in Uniform Trade Secrets Act

All businesses have customers. Many maintain an electronic database of their customers that includes such things as contact information, pricing and purchasing information, and other data that has been collected through time and expense. This database can be an important asset to the business and provide it with a competitive advantage in the marketplace. As such, a majority view this information as “confidential” and believe it constitutes a “trade secret” and thus is protected from unauthorized disclosure under the law.

Not all customer information, however, may qualify as a trade secret under Delaware law. In addition, many businesses fail to take steps to protect confidential information such as requiring employees to enter into non-disclosure agreements. Unfortunately, businesses frequently learn this when it is too late to do anything about it. The time to address these issues is before such information is removed by a departing employee or other third party.

All employers should require employees who have access to confidential information and trade secrets to sign confidentiality or non-disclosure agreements. In Delaware, a company may legally require employees who have access to such information to sign such an agreement in order to keep their job. If drafted properly, the agreement can provide the business with contractual remedies against the former employee, including emergency injunctive relief from a court and a potential award of damages. Importantly, in appropriate circumstances, Delaware courts will enforce a provision in a confidentiality agreement providing that an individual who violates its terms is subject to paying the company’s attorneys’ fees and costs in bringing enforcement action.

In the absence of a binding confidentiality agreement, a company usually must look to applicable state law to try to protect its customer information. Delaware, like most states, has enacted the Uniform Trade Secrets Act which provides businesses with legal protection for trade secret information even in the absence of contractual agreements with employees. The statutory definition for a trade secret is “information” that “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.” 6 Del. C. § 2001(4).

Customer lists and compilations may qualify as protected secrets trade secrets if they derived independent economic value by virtue of not being generally known to and not being readily ascertainable by proper means by others. For instance, if a business were to collect and store information about its customers’ purchasing trends and habits which gives it an advantage in the marketplace, then this information could qualify as a trade secret.

The Court of Chancery in Delaware has granted trade secret status to customer lists in various situations. Nucar Consulting, Inc. v. Doyle, (Del. Ch. Apr. 5, 2005) (observing that “[c]ustomer lists are ‘precisely the type of business information which is regularly accorded trade secret status.’”); Great Am. Opportunities, Inc. v. Cherrydale Fundraising, LLC, (Del. Ch. Jan. 29, 2010) (finding certain customer lists “held independent economic value” and constituted protected trade secrets, observing that the “customer lists . . . contain[ed] important, nonpublic information, including the names, addresses, and phone numbers of contacts at each organization as well as the types and volume of product purchased by each customer. In the fundraising industry, such information could take months or years–and significant expense–to accumulate.”).

It is important to remember that in order to be considered a trade secret the information must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Although this does not necessarily require signed confidentiality agreements, a company must show that it took “reasonable efforts” to maintain the secrecy of this information, such as adopting specific policies to prevent disclosure of information to outsiders. Wayman Fire Prot. v. Premium Fire & Sec., (Del. Ch. Mar. 5, 2014). Other reasonable methods to maintain the secrecy of such information include:

· Periodic communications to employees explaining the company’s confidentiality policies

· Labeling the information as “confidential” and keeping it in a secured location

· Limiting employee access to confidential information on a need to know basis

· Restricting access to electronic data by requiring a user name and password

· Shredding or destroying outdated confidential information

· Requiring a confidentiality agreement before disclosing information to a third party

· Reminding departing employees (in writing) of their ongoing confidentiality obligations

Taking the above steps does not guaranty that a customer list will be classified as a trade secret under Delaware law. These steps will, however, show that the company has taken reasonable efforts to maintain the secrecy of the information, thereby increasing the protections available under the law. It goes without saying that these measures must be implemented before – not after – a dispute arises.

Employers frequently confront the problem of theft or misappropriation of trade secrets and confidential, proprietary information by departing employees. While employers have an arsenal of legal weapons at their disposal to protect their most valuable business assets, it is critical that they take proactive steps to protect against the disclosure of important business information and prevent unfair competition. From a practical standpoint, failure to implement basic security measures makes it easier for an unethical employee or competitor to misappropriate confidential business information. From a legal perspective, absent efforts to preserve the secrecy of such information and avoid unfair competition, a court is unlikely to respond favorably to an employer request for relief.youngconaway

Trade Secret Protection

Delaware, like most states, has enacted the “Uniform Trade Secrets Act” providing employers with legal protection for trade secret information even in the absence of contractual agreements with employees. While many people may believe that “trade secret” status is only afforded to scientific data such as the formula for Coke, in reality, trade secret protection is available for a much broader array of information. The statutory definition for a trade secret is “information” that “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.” To be protected by the statute, the information must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Trade secret protection is available to business information other than scientific data such as formulas and chemical compounds. The Uniform Trade Secrets Act specifically extends protection to a “compilation,” “program,” “method,” “technique,” or “process” that has independent economic value to a company arising from its secrecy.

Customer lists may be subject to trade secret protection if the employer expended substantial resources and time in developing information that is not generally known to the public or competitors. Further, even if the customer list itself is not trade secret, information the employer compiled as part of its marketing efforts may be protected. For example, the courts have found that a “rankings report” kept by company sales representatives concerning the amount of sales to clients and ranking the company’s customers by sales volume is sensitive financial information that may be subject to trade secret protection. Likewise, while an idea such as linking a savings program to an affinity group may not be a trade secret, the means by which such a program is implemented may be.

Even if business information does not meet the definition of a “trade secret,” it still may be confidential, proprietary information subject to other legal protections.

Computer Fraud Act

Employers have a potentially powerful weapon to combat improper access and misappropriation of electronic data and information stored on a computer. We are all familiar with cases in which an unethical employee downloads company electronic information to a thumb drive for later use and/or sends such information via email to his or her personal computer in preparation for leaving employment and competing with their employer. The federal Computer Fraud and Abuse Act (“CFAA”) may be used to hold employees liable both civilly and criminally for such misconduct. Although the CFAA was originally passed to target computer “hackers”, not disloyal employees, some courts have applied the statute to employee misconduct. The CFAA also has criminal provisions. For example, former news anchor, Larry Mendete, plead guilty under the CFAA to intentionally accessing the private email account of his former co-anchor, Alycia Lane.

Delaware has a state counterpart to the CFAA.  The Misuse of Computer System Information Statute, 11 Del. C. § 935 et seq., makes it a crime to knowingly access a computer system without authorization. The statute prohibits not only the unauthorized copy and disclosure of electronic data, but the knowing deletion of data from a computer system.  The statute also has a civil component to this law which allows an aggrieved party to bring an action in the Delaware Court of Chancery for injunctive relief, restitution, treble damages, and attorneys’ fees.  For more information see our earlier blog post on this statute.

Common Law Claims

There are many other legal claims that the company may assert to protect its business assets if an employee improperly uses or discloses its confidential, proprietary, or trade secret information. Employees who are given access to such information may be treated as fiduciaries with a duty of loyalty to protect it from disclosure during their employment. A competitor who knowingly participates in improper disclosure may be charged with “aiding or abetting” a breach of fiduciary duty or illegally participating in a civil conspiracy. In addition, a competitor who unfairly competes through the acquisition and intended use of such information may be sued for tortious inference with contract or business relations.

Contractual Protections

Aside from statutory and common law protections, there are contractual safeguards available to help employers stop the inappropriate disclosure of the business information and prevent unfair competition. At a minimum, all employers should consider requiring key employees who have access to confidential, proprietary, and trade secret information to sign Confidentiality and Non-Disclosure Agreements. A company may legally require employees who have access to confidential, proprietary information to sign such an agreement. If drafted properly, such agreements have “teeth” when enforcement action is necessary. Confidentiality agreements may provide not only for emergency injunctive relief, but also for an award of damages from the improper disclosure of company information. Importantly, in appropriate circumstances, Delaware courts will enforce a provision in a confidentiality agreement providing that an individual who violates its terms is subject to paying the company’s attorneys’ fees and costs in bringing enforcement action.

For certain classes of employees, employers should consider broader contractual protections beyond a simple confidentiality agreement. Employees in sales and marketing or high-level management positions may be in a position to seriously damage the company’s business if they leave to work for a competitor. A non-competition agreement or restrictive covenant is valid and enforceable in Delaware so long as the agreement is not overly broad and is necessary to protect the company’s legitimate economic interests.

Delaware courts will generally enforce a non-competition agreement that is reasonable in geographic and temporal scope. The non-competition agreement must contain a geographic restriction tied to the areas where the company does business and where the employee works to establish that the Company has a legitimate business interest in restricting competition in those locations. Delaware courts, like most courts throughout the United States, also require that the restriction against competition have a reasonable time limit. Typically, a Delaware court will find a two-year restriction to be reasonable.

Since enforcement of a non-competition agreement prohibits an employee from working in a specified field in competition with his or her former employer, courts are careful to balance the equities. The court will consider the employer’s reasonable business needs versus the impact of the enforcement of such agreements on an individual’s ability to earn a livelihood. Upon a showing of a need for such relief, however, courts will enforce non-competition agreements and may even issue an order prohibiting a former employee from working for a competitor.

An alternative to a non-competition agreement is a “non-solicitation” agreement. Non-solicitation agreements are narrower than non-competition agreements. A non-solicitation agreement restricts a former employee from soliciting a company’s clients or customers. Like a non-competition agreement, a non-solicitation agreement must include a reasonable time limit. Instead of a geographic limitation, however, a non-solicitation agreement may restrict an employee from solicitation or business dealings with certain customers such as those with whom the employee had direct contact or about whom the employee received confidential information. Non-solicitation clauses may also include potential customers or prospects. Of course, as with other contractual provisions, careful drafting is necessary to ensure the enforceability of such contractual restraints.

In appropriate cases, employers may include confidentiality, non-competition, and non-solicitation clauses in the same agreement. As a rule of thumb, the need for such protections and the likelihood of successful enforcement increases with the amount of access an employee has to valuable business information and his or her level in the organization. In addition, employee misconduct, such as misappropriation of a customer list or other sensitive information, increases the likelihood that a court will award relief to the employer.

Posted by Barry M. Willoughby

Injunctive relief is normally awarded when the court finds there is no adequate remedy at law. In enforcement actions involving noncompetes, injunctions are usually sought since damages are often difficult, if not impossible, to caculate.

Damages for misappropriation of trade secrets, on the other hand, are often based on lost profits and in many cases can be sufficiently quantified to be awarded. A recent case illustrates that the Court of Chancery may look to novel damage theories to forego the necessity of an injunction.

Agilent Technologies brought suit against three former employees alleging the group had misappropriated its trade secrets. The parties competed in the business of producing high performance liquid chromatography columns used to separate and analyze complex mixtures of gasses, liquids and dissolved substances.

After finding the defendants had wrongfully used Agilent’s trade secrets, the Court of Chancery bypassed certain requested injunctive relief and found damages were sufficient to remedy the harm. The Court calculated these damages using the “head start rule.” The rule allows a monetary recovery for trade secret misappropriation for the period in which information is entitled to protection as a trade secret, plus the additional period, if any, in which a misappropriator retains an advantage over competitors because of the misappropriation.

In this case, the Court found that the defendants were given a three year head start by using Agilent’s trade secrets and awarded damages for unjust enrichment. The Court did not stop there, however, awarding additional damages to cover the customers and profits that the defendants will continue to accrue for the unlawful use of Agilent’s trade secrets. The total damages awarded were $ 4,530,017.75, including unjust enrichment and amounts attributable to Agilent’s lost profits.

By awarding past and prospective damages, the Court found it was unnecessary to issue an injunction prohibiting defendants from marketing their products, noting that such relief would essentially drive the defendants’ company out of business. In the Court’s view, the monetary award, including damages for unjust enrichment under the head start rule, more than adequately compensated Agilent.

Agilent Techs. v. Kirkland, 2010 Del. Ch. LEXIS 34 (Feb. 18, 2010)

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