Docstoc

Law of Trade Secrets

Document Sample
Law of Trade Secrets Powered By Docstoc
					EDWARDS & ANGELL, LLP
COUNSELLORS AT LAW                                                                   2800 FINANCIAL PLAZA
since 1894                                                                           PROVIDENCE, RI 02903-2499
                                                                                     (401) 274-9200
                                                                                     FAX (401) 276-6611




                                  THE LAW OF TRADE SECRETS:
                         A Flexible Weapon for Protecting Intellectual Property



                                  By Mark W. Freel and Darlene K. Alt*

         Even in a good economy, nothing is more important than protecting the investment of

time and resources that companies make in their intellectual property and their corporate good

will. That goal becomes even more important in less certain economic times. Companies in a

wide range of industries, from high-tech to manufacturing, often devote considerable time and

money to the development of technological advantages and creative business strategies. But,

when their employees move elsewhere in a mobile marketplace, the advantages inherent in those

innovations can all too often travel out the door to competitors.

         At such times, it is critical that companies move quickly to protect their investment in

their intellectual property and their confidential business information. At the same time,

however, in a system in which free employment mobility is favored, and restraints on trade are

disfavored, the protection of confidential information must always be weighed against the need

for strong competition and an open marketplace.

*
    Mark W. Freel is a Partner and Darlene K. Alt is a Senior Associate in the law firm of Edwards & Angell, LLP.
    Mr. Freel is admitted to practice in Massachusetts, Rhode Island and Connecticut. Ms. Alt is admitted to
    practice in Rhode Island and Illinois. Both are resident in the Firm’s office in Providence, Rhode Island.
    Mr. Freel is the Deputy Practice Group Leader for the Firm’s Litigation Department. Edwards & Angell has 300
    lawyers throughout the Northeast and Florida, with offices in Boston, Providence, Hartford, New York,
    Stamford, Short Hills, West Palm Beach and Fort Lauderdale.

    BOSTON   FT. LAUDERDALE   HARTFORD   NEW YORK   PROVIDENCE   SHORT HILLS, NJ   STAMFORD   WEST PALM BEACH   LONDON
       Amid these tensions, companies often search for the right tools to protect their business

interests and their niche in the marketplace. Among the most flexible tools in the legal universe

today is the law of trade secrets, particularly as embodied in the Uniform Trade Secrets Act (the

“Act”), which has now been adopted in 43 jurisdictions, including the District of Columbia. See

14 Uniform Laws Annotated, Uniform Trade Secrets Act (1990 & 2002 supp.). When combined

with carefully planned and well-crafted employee contracts, including non-competition

contracts, non-disclosure agreements and other intellectual property agreements, the law of trade

secrets can provide a powerful and flexible tool for the protection of a company’s investment in

its technological innovations and its business strategies.

       Unlike more objectively verifiable forms of protection such as patents and trademarks,

the law of trade secrets is often more unpredictable and subjective, lending itself to uncertain

outcomes. The definition of what constitutes a trade secret under the Act is very broad and

general, almost constitutional, in its terms and its scope. See id. § 1. This often leaves the level

of protection one can expect very unclear. Moreover, because enforcement often occurs in the

context of requests for injunctive relief, courts have considerable discretion in fashioning

appropriate remedies, and outcomes are often dependent upon the facts and circumstances of

each individual case. Thus, advising clients – either prospective plaintiffs considering litigation

or potential defendants in receipt of initial demand letters – can sometimes be difficult.

       This article outlines the unique advantages and uncertainties inherent in the law of trade

secrets as one weapon available in today’s legal arsenal for businesses protecting their

proprietary information. We will examine some of the unique questions and dilemmas inherent

in the application of the Act, and comparable common law principles, from a litigator’s




                                            -2-
perspective, both in connection with pre-litigation advice and in the prosecution and defense of

trade secrets litigation.

        Of particular interest is the doctrine of “inevitable disclosure,” under which courts can

enjoin threatened or nascent misappropriation of trade secrets, as opposed to acts of actual

misappropriation. Following a period of some notoriety associated with certain prominent

decisions several years ago, this doctrine has more recently lapsed into a period of some

uncertainty. However, it remains a valuable tool for plaintiffs and their counsel, often providing

a basis for the prosecution of claims in circumstances in which the factual basis for acts of actual

misappropriation remain unclear behind the closed doors of a competitor. Finally, we examine

certain other contractual and common law claims that may often accompany claims arising under

the laws of trade secrets, such as claims arising out of contractual covenants not to compete,

claims for tortious interference with contract, and related common law theories.



I.      What Constitutes a Trade Secret?

        The Act defines a “trade secret” in two parts. A “trade secret” is “information . . . that (i)

derives independent economic value, actual or potential, from not being generally known to, and

not being readily ascertainable by proper means by, other person who can obtain economic value

form its disclosure or use, and (ii) is the subject of efforts that are reasonable under the

circumstances to maintain its secrecy.” Id. The Act recognizes that trade secrets come in many

forms and specifically includes any “formula, pattern, compilation, program, device, method,

technique or process” in its definition. Id. In applying this very broad language, courts have

given trade secret protection to a variety of information, including a manufacturer’s research and

development data, a church’s religious documents, and a franchisee’s recipes and business plans.




                                             -3-
See EFCO Corp. v. Symons Corp., 219 F.3d 734 (8th Cir. 2000); Religious Technology Center v.

Netcom On-Line Communication Serv., Inc., 923 F. Supp. 1231 (N.D. Cal. 1995); Motor City

Bagels, L.L.C. v. American Bagel Co., 50 F.Supp.2d 460 (D.Md. 1999). While the language of

the Act naturally lends itself to technological innovations, and ideas developed in connection

with products or manufacturing processes, courts have also found that certain business and sales

strategies constitute trade secrets. See, e.g., Avery Dennison Corp. v. Kitsonas, 118 F.Supp.2d

848 (S.D.Ohio 2000) (information relating to employer’s customer lists, pricing information,

sales strategies and business philosophy constituted “trade secrets” under Ohio’s version of the

Act); Enterprise Leasing Co. of Phoenix v. Ehmke, 3 P.2d 1064 (Ariz. App. Div. 1999) (leasing

company’s financial documents and internal economic records concerning profit and loss figures,

break-even points, sales revenues and customer service worksheets were “trade secrets”);

PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

       Because the Act sets forth a two-part test, it is important to remember that a particular

piece of technology or confidential information cannot qualify as a trade secret, no matter how

worthy it may appear on the merits, unless it has also been the subject of reasonable means to

protect its secrecy. See, e.g., Amer. Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407

(11th Cir. 1998) (Florida); Buffets, Inc. v. Klinke, 73 F.3d 965 (9th Cir. 1996) (Washington);

Pioneer Hi-Bred Intern. v. Holden Foundation Seeds, Inc., 35 F.3d 1226 (8th Cir. 1994) (Iowa);

Northeast Coating Technologies, Inc. v. Vacuum Metallurgical Co., 684 A.2d 1322 (Me. 1996).

Laxity in efforts to protect the confidential or secret nature of such information can be fatal to an

unwitting plaintiff. For that reason, this section of the Act provides a common point of attack for

an aggressive defendant. Outside counsel must always make clients aware of this critical

component of the test, not only during litigation – when it is generally too late to address past




                                            -4-
practices – but in connection with ongoing advice concerning the integrity of intellectual

property. Businesses need to have a complete and thorough regimen of policies and procedures

designed to protect the secrecy of their trade secrets and proprietary information. At a minimum,

this should include non-disclosures agreements for employees, customers and vendors; controls

on ingress and egress for sensitive portions of the company’s facilities; access controls on

storage of proprietary data, whether in hard copy or electronic format; clear company policies

and frequent education on those policies; and a track record of enforcement.



II.    What Constitutes Misappropriation?

       A.      Actual Misappropriation Under the Act.

       In addition to demonstrating that something is a “trade secret” under the statutory

definition, a litigant seeking the protection of the Act must also show that “actual or threatened

misappropriation” has occurred. Act, §§ 1, 2(a). The Act defines “misappropriation” as:

            (i) acquisition of a trade secret of another by a person who knows or
                has reason to know that the trade secret was acquired by improper
                means; or

            (ii) disclosure or use of a trade secret of another without express or
                 implied consent by a person who

               (A) used improper means to acquire knowledge of the trade secret;
                   or

               (B) at the time of disclosure or use, knew or had reason to know
                   that his knowledge of the trade secret was

                   (I)     derived from or through a person who had utilized
                           improper means to acquire it;

                   (II)    acquired under circumstances giving rise to a duty to
                           maintain its secrecy or limit its use; or




                                            -5-
                   (III)   derived from or through a person who owed a duty to
                           the person seeking relief to maintain its secrecy or limit
                           its use; or

               (C) before a material change of his [or her] position, knew or had
                   reason to know that it was a trade secret and that knowledge of
                   it had been acquired by accident or mistake.

Act, § 1(2).

       Except in rare cases in which an unwitting or particularly sloppy “misappropriator”

leaves evidence of such overt acts behind for a lucky plaintiff’s counsel, evidence of actual

misappropriation will often be difficult to find. Circumstantial evidence may often arise during

discovery in litigation, through comparing information, drawings, documents or other data from

a defendant to similar, pre-existing information at the plaintiff. In building such a circumstantial

case, a plaintiff’s lawyer will often have to establish the extent to which the defendant – either a

corporate entity or individual former employees – were able to, or capable of, accomplishing

certain steps without reliance on plaintiff’s trade secrets. Timing can often be a critical

consideration. For instance, if a particular innovation did not previously exist at the defendant

company, but then appeared suddenly, in a mature and fully developed state, after it took months

or even longer to develop independently at the plaintiff, that may provide powerful and

persuasive evidence of actual misappropriation.

       More often than not, evidence of actual misappropriation simply does not exist before a

lawsuit is filed and before plaintiff’s counsel has the benefit of the compulsory disclosure

inherent in the process of discovery. Thus, in such cases, the best that a plaintiff’s counsel may

have is a series of strong inferences or telling appearances. In such cases, plaintiffs may want to,

and may need to, consider the flexible and sometimes controversial doctrine of “inevitable

disclosure.”




                                            -6-
       B.      Inevitable Disclosure – Dead or Alive?

       Because the Act authorizes injunctive relief for actual or threatened misappropriation,

courts have also extended it to include the “inevitable disclosure” of trade secrets. The inevitable

disclosure doctrine is a controversial principle based on the theory that injunctive relief may be

warranted where an employee with intimate knowledge of an employer’s trade secrets has left to

work for a competitor in a position that is substantially the same as his or her prior employment

and cannot help but rely on his or her former employer’s trade secrets.

       The landmark case marking the breakthrough of the inevitable disclosure doctrine in

trade secrets litigation is the Seventh Circuit’s decision in PepsiCo, Inc. v. Redmond. 54 F.3d

1262 (7th Cir. 1995). See also Merck & Co., Inc. v. Lyon, 941 F. Supp. 1443, 1457 (M.D.N.C.

1996); Novell, Inc. v. Timpanogos Research Group, Inc., No. 970400339, 1998 WL 177721 at *1

(Utah Dist. Ct. Jan. 30, 1998); Emery Industries, Inc. v. Cottier, 202 U.S.P.Q. 829 (S.D. Ohio

1978); Fountain v. Hudson Cush-n-Foam, 122 So.2d 232 (Fla. 1960). Under that case and its

progeny, a plaintiff seeking to establish a claim of misappropriation based on the inevitable

disclosure doctrine must prove that: (1) the employee’s former and current employers are direct

competitors providing substantially the same products or services; (2) the employee’s new

position is similar to his or her prior position to such a degree that he or she could not reasonably

be expected to fulfill his or her new job responsibilities without relying on the former employer’s

trade secrets; and (3) evidence demonstrating that misappropriation is a substantial probability

and not a mere threat. Redmond, 54 F.3d at 1269-71; see also Procter & Gamble Co. v.

Stoneham, 747 N.E.2d 268 (Ohio App. Ct. 2000) (court adopted the reasoning of the “inevitable

disclosure” doctrine in holding that there was a substantial probability that a former senior




                                            -7-
manager of the plaintiff would use its trade secrets in his new position, warranting injunctive

relief).

           Despite the appeal of the inevitable disclosure doctrine, there are compelling arguments

against it. As one court recently noted:

           [T]he inevitable disclosure doctrine … is fraught with hazards. Among these
           risks is the imperceptible shift in bargaining power that necessarily occurs upon
           the commencement of an employment relationship marked by the execution of a
           confidentiality agreement. When the relationship eventually ends, the parties’
           confidentiality agreement may be wielded as a restrictive covenant, depending on
           how the employer views the new job its former employer has accepted. This can
           be a powerful weapon in the hands of an employer; the risk of litigation alone
           may have a chilling effect on the employee. Such constraints should be the
           product of open negotiation.

           Another drawback to the doctrine is that courts are left without a frame of
           reference because there is no express non-compete agreement to test for
           reasonableness. Instead, courts must grapple with a decidedly more nebulous
           standard of “inevitability.” The absence of specific guideposts staked-out in a
           writing will only spawn such litigation . . . . Clearly, a written agreement that
           contains a non-compete clause is the best way or promoting predictability during
           the employment relationship and afterwards.

EarthWeb, Inc. v. Schlack, 71 F.Supp.2d 299, 310-11 (S.D.N.Y. 1999); see also PSC, Inc. v.

Reiss, 111 F.Supp.2d 252, 256-57 (W.D.N.Y. 2000). These “hazards” explain why a number of

courts have refused to adopt the inevitable disclosure doctrine. See, e.g., APAC Teleservices,

Inc. v. McRae, 985 F. Supp. 852, 861 (N.D. Iowa 1997); PSC Inc. v. Reiss, 111 F.Supp.2d 252,

257 (W.D.N.Y. 2000); Globespan, Inc. v. O’Neill, 151 F.Supp.2d 1229, 1236 (C.D.Cal. 2001);

Government Technology Services, Inc. v. IntelliSys Technology Corp., 1999 LEXIS 502 at *2

(Va. Cir. Ct. Oct. 20, 1999); Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 148

F.Supp.2d 1326, 1336-37 (S.D.Fla. 2001); Bayer Corp. v. Roche Molecular Sys., Inc., 72

F.Supp.2d 1111, 1120 (N.D.Cal. 1999); Bridgestone/Firestone, Inc. v. Lockhart, 5 F.Supp.2d

667 (S.D.Ind. 1998); Glaxo, Inc. v. Novopharm Ltd., 931 F. Supp. 1280, 1303 (E.D.N.C. 1996),




                                              -8-
aff’d 110 F.3d 1562 (Fed. Civ. 1997); International Paper Co. v. Suwyn, 966 F. Supp. 249

(S.D.N.Y. 1997); FMC Corp. v. Cyprus Foote Mineral Co., 899 F. Supp. 1477 (W.D.N.C. 1995).

Moreover, in certain cases, the doctrine has been limited to situations involving high-level

employees with expertise in certain technical industries. PCS, Inc., 111 F.Supp.2d at 258 (citing

International Paper Co. v. Suwyn, 966 F.Supp. 246 (S.D.N.Y. 1997)). Therefore, it is important

to determine ahead of time whether the doctrine is a viable theory in the relevant jurisdiction.

       Unless the doctrine has been affirmatively discredited in your jurisdiction, it will always

have value in drafting a new trade secrets complaint. Given the rarity of clear proof of actual

misappropriation at the time a lawsuit is filed – particularly given the speed with which it is often

important to move when injunctive relief is at issue – the inevitable disclosure doctrine may

provide a vehicle to satisfy Rule 11 obligations. As a plaintiff’s attorney, you may not be certain

if actual misappropriation has occurred, and may have to plead that upon “information and

belief,” but in a sufficiently strong case with circumstantial evidence, you will generally be able

to allege that there is a palpable and credible risk of threatened disclosure.



III.   Preparing for the Prosecution or Defense of a Trade Secret Case.

       In preparing for the prosecution of trade secrets litigation, outside counsel for a potential

plaintiff must assess several critical factors. Primarily, counsel must consider the nature of the

underlying idea or concept, and the extent to which a claim that it constitutes a “trade secret” can

credibly and legitimately be made. This would undoubtedly start with interviews of the

appropriate personnel at the client to assess the extent to which the subject methodology,

formula, process or product can arguably satisfy the statutory definition. A thorough

examination should include an assessment of the manner in which the subject technology was




                                            -9-
developed; the time frame over which it was developed; the people involved in the development;

and, most importantly, the extent to which, and the manner in which, it arguably provides the

company with “independent economic value” that is derived from its secrecy.

       Any such examination must also involve an assessment of the extent to which the

technology is arguably unique in the industry. Of course, company personnel may not be the

best, or the most objective, people to assess this consideration. However, some company

employees may be able to shed light on this critical question based on their experience

elsewhere, feedback they receive from critical customers and vendors, or their sense of the

competition. In cases in which this assessment is particularly troubling or unclear, counsel

should consider the retention of an outside expert as part of a pre-litigation assessment.

       A similar assessment must be conducted with regard to the existence of any actual or

threatened misappropriation. This should involve an assessment of the prospective defendant’s

involvement in the development of the innovation, and the extent to which the prospective

defendant can, has or could rely impermissibly on his or her experience at the former employer

in connection with new duties at a competing company. In certain situations, anecdotal

information about the former employee’s activities may be available through customers, vendors,

friends at the former employer, or other industry sources. The accuracy and credibility of any

and all such information should be thoroughly checked out. An assessment should also be made

to determine whether the former employer has taken or copied any company documents or

electronic data.

       In cases in which inevitable disclosure allegations will be made, either out of necessity or

in the alternative, the foregoing analysis should include a “worst case” assessment of the manner

in which the former employee could make use of the trade secrets at his or her new employer.




                                           - 10 -
This should be thoroughly discussed with technical and business people at the prospective

plaintiff. Any and all inherent or natural similarities between the manner in which the

proprietary or confidential information is used at the former employer, and would naturally be

used at the competitor, should be considered in the context of an argument that the former

employee will “inevitably disclose” the trade secrets at his new employer.

       The competitor’s liability under the Act should also be considered. Under the definitions

in the Act, third parties can be held liable for “misappropriation” if they received trade secret

information either in circumstances in which they knew or should have known that it was

acquired by improper means, or knew or had reason to know that it was acquired under

circumstances giving rise to a duty to maintain its secrecy. Act, § 1(2). In cases in which an

employee moving from one company to another has been less than fully forthcoming with his or

her subsequent employer, a prospective plaintiff’s lawyer can sometimes alert a competitor to

this risk of liability by directing an appropriate pre-litigation demand letter to the new employer.

Such a letter can sometimes cause the subsequent employer to conduct a more thorough

investigation, and to engage in appropriate remedial measures. It could also give the new

employer a chance to limit its liability, or to reconsider the hiring. This tactic is similar to one

that a prospective plaintiff’s counsel can take with regard to claims of tortious interference with

contract, as set forth below.

       By contrast, outside counsel advising companies hiring new employees with unique or

valuable knowledge or expertise, particularly when those new employees are coming directly

from a known competitor in an industry, can take certain steps to ameliorate their client’s risk of

liability. Companies considering the hiring of such employees should conduct due diligence

with regard to any contracts executed by the prospective new employee in connection with his or




                                            - 11 -
her former employment, and should consider the extent to which such a new employee would

necessarily or naturally employ proprietary information belonging to his or her former employer

in connection with new employment duties.

       Copies of any contracts between the prospective employee and the former employer

should be obtained and assessed. Once a decision to hire is made, in addition to any standard

contracts that the new employee may be asked to sign, the new employer may also consider the

inclusion of contractual language in which the new employee agrees not to use any trade secrets

or proprietary information belonging to his or her former employers. In certain highly sensitive

situations, specific areas of technical knowledge could be expressly carved out. Such a process

not only encourages and requires the new employee to make full disclosure, minimizing

subsequent surprise, but it may also protect the new employer from subsequent liability,

including the risk of an award of attorneys’ fees under the Act, as set forth below.

       In certain instances, companies may learn that their former employees are leaving their

employment to form new businesses in the same industry. In such cases, the former employers

should obtain as much information as possible, either through pre-litigation measures or through

early discovery, concerning steps that their former employees took to set up those new

businesses. Such steps could include the formation of any new corporations or partnerships;

consultation with counsel; preparation of new business forms, business cards or other similar

documentation; any unusual use of or access to proprietary information in the period

immediately preceding their departure; and contacts with key customers or vendors in the period

preceding their departure.

       To the extent that any such conduct has occurred while those employees were still

employed, in preparation for the start of a new business upon their departure, it could constitute




                                           - 12 -
independently wrongful acts in violation of an employee’s duty of loyalty, as set forth below, or

in violation of certain contractual provisions requiring an employee’s “exclusive efforts” or

prohibiting competition during the period of employment. At a minimum, such factual

information is often particularly damning in demonstrating a motive or planned course of action

that would necessarily involve the use of a former employer’s trade secrets or other confidential

information.

       Finally, in cases in which litigation appears inevitable or is already underway, immediate

efforts must be made to assess the prospects or risks for acts of misappropriation. A plaintiff’s

counsel should consider the extent to which a subsequent employer, or a new business, has

suddenly entered a new area of business, developed new products, sought new customers, or

expanded its pre-existing business contemporaneous with the hiring of the plaintiff’s former

employees. Such evidence often creates a strong and persuasive inference that the hiring was

motivated by a desire to obtain access to unique and economically valuable information in the

hands of that new employee. Plaintiff’s counsel must also have a thorough understanding of the

former employee’s overall career experience and general know-how. Employees are generally

entitled to use experience, knowledge or training that they have acquired over the course of a

career in an industry. See, e.g., Revere Transducers, Inc. v. Deere & Co., 595 N.W.2d 751 (Iowa

1999); SI Handling Sys., Inc. v. Heisley, 658 F.Supp. 362 (E.D.Pa. 1986). However, if their sole

exposure to an area of technical expertise, or to a particular innovation or methodology, has

come during their employment with the plaintiff, this should eliminate any argument that efforts

they are now making at a competitor is solely the function of their general career background or

experience.




                                           - 13 -
IV.     Considering Claims for Attorneys’ Fees.

        Unlike the general common law rule prohibiting prevailing parties from securing

recovery of their attorneys’ fees, the Act specifically allows a court to award reasonable

attorneys’ fees to a prevailing party in certain circumstances evidencing willfulness or bad faith.

While most states have adopted this section of the Act, some states have omitted this section

altogether, opting instead to follow the common law rule prohibiting the recovery of attorneys’

fees. See, e.g., V.A.M.S. § 417.450, et seq. (Missouri); R.R.S. § 87-501 et seq. (Nebraska); 9

V.S.A. § 4601 et seq. (Vermont).

        The Act allows a court to award attorneys’ fees in circumstances where (1) a party has

asserted a claim of misappropriation in bad faith, (2) a defendant has moved in bad faith to

terminate an injunction, or (3) a party has engaged in willful or malicious misappropriation of

trade secrets. Act, § 4. The award of attorneys’ fees is discretionary and, in some states, a court

must find subjective bad faith or egregious conduct before it will award attorneys’ fees. Russo v.

Baxter Healthcare Corp., 51 F.Supp.2d 70 (D.R.I. 1999); Optic Graphics, Inc. v. Agee, 591 A.2d

578 (Md. App. 1991), cert. denied, 598 A.2d 465 (Md. 1991). Generally, as long as a plaintiff

presents a colorable claim for misappropriation, it can avoid paying legal fees unless a contract

between the parties provides otherwise. American Sales Corp. v. Adventure Travel, 867 F. Supp.

378 (E.D. Va. 1994); Optic Graphics, Inc. v. Agee, 591 A.2d 578 (Md. App. Ct), cert. denied,

598 A.2d 465 (1991). However, the risk of a statutory award of fees should, and often does,

color and influence the conduct of all parties in a trade secrets dispute, both before and after the

initiation of litigation.




                                            - 14 -
V.     Considering the Prospects for Non-Injunctive Relief.

       For obvious reasons, injunctive relief is the most common remedy awarded by courts in

trade secrets cases. A party whose trade secrets have been misappropriated wants first and

foremost to prevent any further use or disclosure of its protected information. Damages,

however, are another remedy available under the Act. The Act allows a party to recover

damages for the actual loss caused by the misappropriation, as well as the unjust enrichment

caused by misappropriation, as long as such amounts do not result in a double recovery. Act,

supra, § 3(a).

       The Act does not specify how actual loss or unjust enrichment damages should be

calculated. Damages for unjust enrichment are traditionally measured by the defendant’s profits

on sales attributable to the use of the trade secret. See The Restatement of Unfair Competition §

45. But that is not the only measure. Damages for unjust enrichment may also be measured by

the savings the misappropriating party realizes in its business through the unauthorized use of the

trade secret. Id. When the benefit to the defendant consists primarily of cost savings, as opposed

to profits, the appropriate measure of damages is the “standard of comparison” approach, which

compares the defendant’s actual costs with the costs that it would have incurred to achieve the

same result without the use of the trade secret. Id., cmt. f.; see also Intern. Indus., Inc. v. Warren

Petroleum Corp., 248 F.2d 696 (3rd Cir. 1957), cert. dismissed, 355 U.S. 943 (1958); Telex Corp.

v. Intern. Business Machines Corp., 510 F.2d 894 (10th Cir. 1975), cert. dismissed, 423 U.S. 802

(1975); Gordon Form Lathe Co. v. Ford Motor Co., 133 F.2d 487 (6th Cir. 1943). If it would

have been possible for someone to acquire the trade secrets through reverse engineering or other

proper means, the more appropriate comparison may be the cost of properly acquiring the trade




                                            - 15 -
secret versus the cost of the misappropriated information. See Restatement of Unfair

Competition § 45, cmt. f.

        In lieu of any other available measure of damages, the Act authorizes an award of

damages equivalent to a “reasonable royalty” for the unauthorized use or disclosure of a trade

secret. Act, § 3(a). The “reasonable royalty” measure is “the actual value of what has been

appropriated,” or the amount the parties would have agreed to in licensing the trade secrets at the

time of the alleged misappropriation if both were reasonably trying to reach such an agreement.

Egry Register Co. v. Standard Register Co., 23 F.2d 438 (6th Cir. 1928); Alcatel USA, Inc. v.

Cisco Sys., Inc., 2002 WL 31950110 at *7 (E.D.Tex. Dec. 17, 2002). Courts apply this measure

of damages in situations where the defendant’s profits are too imprecise or speculative (see

Vermont Microsystems, Inc. v. AutoDesk, Inc., 138 F.3d 449 (2nd Cir. 1998), the trade secrets

have been destroyed, plaintiff is unable to prove a specific injury, or “where the defendant has

gained no actual profits by which to value the worth to the defendant of what it

misappropriated”. Alcatel USA, supra, at *6 (citing University Computing Co. v. Lykes-

Youngstown Corp., 504 F.2d 518 (5th Cir. 1974)).

       Regardless of the method ultimately used to measure damages, recovery is limited to the

period of time that the information would have remained unavailable to the defendant. See

Restatement of Unfair Competition § 45, cmt.h; see also Act, § 3, cmt. This time period is

measured by the amount of time it would have taken a defendant to obtain the information by

proper means, either through reverse engineering or independent development. Damages based

on the defendant’s use of the misappropriated information after it has lost its trade secret status is

appropriate only to the extent necessary to remedy a head start or other unfair advantage

attributable to the misappropriation. See Restatement of Unfair Competition § 45, cmt. h.




                                            - 16 -
       In addition to compensatory damages, a court may impose punitive damages if the

misappropriation is willful and malicious. Act, § 3(b); see also BBA Nonwovens Simpsonville,

Inc. v. Superior Nonwovens, LLC, 303 F.3d 1332 (Fed. Cir. 2002) (South Carolina law)

(complainant was entitled to exemplary damages upon a finding of willful misappropriation;

aggravation or malice need not be shown). A party motivated by competition rather than actual

spite or malice towards the owner of the trade secrets is not sufficient to support punitive

damages. Roton Barrier, Inc. v. Stanley Works, 79 F.3d 1112 (Fed. Cir. 1996). Any punitive

damages award is limited to no more than twice the underlying award for compensatory

damages. Act, § 3(b).



VI.    Related Legal Theories and Claims.

       A.      Non-Competition and Non-Disclosure Contracts.

       Claims for misappropriation of trade secrets are often coupled with related breach of

contract claims. In particular, this often includes claims arising out of non-competition and non-

disclosure agreements. In technical fields, non-disclosure agreements are often coupled with

agreements under which employees assign the rights inherent in any inventions or ideas

developed during the course of their employment to their employer. This is not only critical in

connection with any patent applications filed or processed after a co-inventor’s departure from

the company, but can be critical in undermining subsequent claims that an employee’s

knowledge in a particular area was developed on his or her own, and is therefore not the property

of a former employer.

       In several jurisdictions, the enforceability of covenants not to compete is governed by

statute. See, e.g., Fla. Stat. Ann. § 542.335; La. Rev. Stat. Ann. § 23:921; Tex. Bus. & Com.




                                           - 17 -
Code § 15.50, et seq. In California, there is a broad statutory prohibition, based upon public

policy considerations, on non-competition contracts, except in very limited instances involving

the sale or acquisition of a company’s stock or its assets. See Cal. Bus. & Prof. Code § 16600, et

seq. In other jurisdictions, statutes simply codify certain conditions precedent to the enforcement

of non-competition contracts, and identify other appropriate considerations and defenses.

       In most jurisdictions, however, the enforceability of non-competition contracts is

governed by common law standards. Non-competition contracts are generally disfavored as

creating impermissible restraints on trade and employment mobility, but will be enforced in

circumstances in which they are reasonably necessary and narrowly tailored to protect certain

critical and legitimate business interests. See, e.g., BDO Seidman v. Hirshberg, 712 N.E.2d 1220

(N.Y. Ct. App. 1999); Coskey’s Television & Radio Sales & Serv. v. Foti, 602 A.2d 789 (N.J.

App. Div. 1992 (citing Ingersoll-Rand Co. v. Ciavatta, 542 A.2d 879 (N.J. 1988)); Marcam

Corp. v. Orchard, 885 F.Supp. 294 (D.Mass. 1995); Iggy’s Doughboys, Inc. v. Giroux, 729 A.2d

701 (R.I. 1999). Such business interests generally include the protection of trade secrets, and the

protection of corporate good will and customer relationships. Determining the existence of such

a protectable interest is generally dependent upon the facts and circumstances of each case, and

cannot be predetermined or created in the manner in which a contract is drafted. Once again,

enforcement of non-competition covenants occurs in the context of equity, and therefore often

involves the exercise of discretion and considerations of overall fairness in assessing appropriate

remedies. As such, courts will also consider the geographical scope of covenants not to compete,

their duration in time, and the extent to which those contracts are limited to specific industries or

lines of business. In many jurisdictions, courts have the discretion to enforce aspects of a non-

competition contract even if certain portions are deemed overly broad or unenforceable. See,




                                            - 18 -
e.g., Gillespie v. Carbondale & Marion Eye Ctrs., 622 N.E. 2d 1267 (Ill. App. 1993) (citing

Total Health Physicians, S.C. v. Barrientos, 502 N.E.2d 1240 (1986)).

       In cases involving the protection of critical technical knowledge or trade secrets, non-

disclosure agreements are often enforceable through injunctive relief. This may occur in concert

with requests for injunctive relief to enjoin actual or threatened misappropriation of trade secrets

under the Act. In seeking to enjoin the disclosure of proprietary information governed by a

confidentiality agreement, a prospective plaintiff will have to show that the information or

technology at issue is in fact governed by the contract. This will often involve a question of

whether the expertise or knowledge is unique or proprietary, and whether it was obtained by the

employee during the course of his or her employment. As set forth above, employees will often

argue that certain aspects of their technical knowledge were obtained as a result of general career

experience. Assuming that a former employer can establish that certain proprietary information

does in fact belong to the company, and not to the employee personally, the company will also

have to show that any act of disclosure would cause irreparable harm.

       B.      Tortious Interference with Contract.

       If a former employee with a contractual covenant not to compete, or not to disclose, has

left a former employer to join a competitor, a lawyer representing the former employer will want

to consider the new employer’s knowledge, if any, of the contract. If the subsequent employer

had knowledge of the covenant and nonetheless hired the former employee to work under the

same or similar circumstances, or to be in contact with some of the same customers, the facts

may support a claim for tortious interference with contract.

       Generally, a party claiming tortious interference with contract must prove the following

elements by a preponderance of the evidence:




                                           - 19 -
        (1)     the existence of a contractual relationship;

        (2)    the defendant’s knowledge of the contract;

        (3)     intentional interference by the defendant; and

        (4)     damages resulting from the interference.

See Jolicoeur Furniture Co., Inc. v. Baldelli, 653 A.2d 740, 752 (R.I. 1995) (citing Smith Dev.

Corp. v. Bilow Enter., Inc., 308 A.2d 477, 482 (R.I. 1973), cert. denied, 516 U.S. 964 (1995));

Pino v. Protection Maritime Ins. Co., Ltd., 599 F.2d 10 (1st Cir. 1979) (Massachusetts law), cert.

denied, 444 U.S. 900 (1979); LinkCo, Inc. v. Fujitsu Ltd., 230 F.Supp.2d 492, 494 (S.D.N.Y.

2002) (“Under New York law, the elements of a tortious interference with contract claim are:

‘[1] that a valid contract exists, [2] that a ‘third party’ had knowledge of that contract, [3] that the

third party intentionally and improperly procured the breach of the contract, and [4] that the

breach resulted in damage to the plaintiff”)(citation omitted); Buskirk v. Apollo Metals, 307 F.3d

160 (3rd Cir. 2002) (claim for tortious interference under Pennsylvania law requires proof of a

contract, purposeful action by the defendant intended to harm existing relations, the absence of

privilege or justification on the part of the defendant, and damage to the plaintiff); ADR N. Am.,

L.L.C. v. Agway, Inc., 303 F.3d 653 (6th Cir. 2002) (elements of a claim for tortious interference

under Michigan law are: “(1) a contract, (2) a breach, and (3) instigation of the breach without

justification by the defendant”). The rationale behind this tort is that one right flowing from the

existence of a contract is the right to be free from purposeful interference with that contract. See

D. Asperlund & C. Eriksen, Employee Noncompetition Law § 5.02 (1996).

        Legal malice – intent to do harm without justification – is generally enough to impose

liability; spite or ill will is not required. Roy v. Woonsocket Inst. for Savings, 525 A.2d 915, 919

(R.I. 1987). This means that even if the subsequent employer acts with good motives and




                                             - 20 -
without express malice, interference with the contract, without justification, is still “malicious”

as a matter of law. Jolicoeur, 653 A.2d at 753. The impropriety depends upon the

circumstances, and requires consideration of the defendant’s motive; the nature of the conduct;

the interests the defendant seeks to advance; and the interests with which he or she has

interfered. See id. (citing Restatement (Second) of Torts § 767 (1979)). The subsequent

employer is not always required to have concrete knowledge of the contract. “Knowledge of

facts that would lead a reasonable person to believe that such a contractual relationship exists

may be sufficient.” DiBiasio, 525 A.2d at 493.

       If an attorney representing a former employer is uncertain of the new employer’s

knowledge of the covenant, he or she can typically address this issue by directing a demand letter

to the new employer, advising it of the existence of such a contract. In such circumstances, if the

new employer was unaware of the contract, or believes that the employee failed to make full

disclosure, a carefully drafted demand letter or inquiry could lead to a termination of the

employee’s new employment. An attorney representing the subsequent employer will also want

to consider all of these issues when advising his or her client about whether or not to retain the

new employee, or assist him or her in the defense of litigation.

       C.      Related Common Law Theories.

       Even in the absence of an express contract, an employee may be liable to a former

employer for breach of a duty of loyalty. Such a breach may occur when a former employee

discloses confidential information to a third party. Abbey Med./Abbey Rents, Inc. v. Mignacca,

471 A.2d 189, 192-93 (R.I. 1984). Any information an employee uses that would greatly abuse

his or her former employer’s trust can fall within these parameters. In certain cases, such




                                            - 21 -
information can include knowledge of an employer’s customers and particularly of those

customers’ unique needs. Id. at 193 (citing Colonial Laundries v. Henry, 138 A. 48 (R.I. 1927)).

         A subsequent employer may also be held liable under certain circumstances for using

confidential information supplied by a new employee. For instance, it may constitute common

law unfair competition for a subsequent employer to induce an employee to disclose his or her

former employer’s trade secrets, or to commit another act of disloyalty that would injure the

former employer and benefit the competitor. See, e.g., 2 R. Callmann, Unfair Competition,

Trademarks and Monopolies § 9.04 (1996). But, even short of actual inducement, the mere fact

that the subsequent employer knows that the employee will violate certain covenants or duties by

performing certain actions is enough. See id.

         When an employee, in violation of his employer’s trust, offers a competitor of his

employer information or assistance, even if he does so on his own initiate, the mere acceptance

of such information or assistance with knowledge of the facts would make the competitor a party

to a breach of trust and subject him to liability for unfair competition. See id. at § 9.05; see also

LinkCo, Inc., 230 F.Supp 2d at 501-02; Fireman’s Fund Ins. Co. v. Bradley Corp., 649 N.W.2d

685 (Wisc. Ct. App. 2002), review granted, 653 N.W.2d 888 (Wisc. 2002); Minnesota Mining &

Mfg. Co. v. Pribyl, 259 F.3d 587 (7th Cir. 2001).



   VI.      Conclusion

         The law of trade secrets provides a powerful and valuable augment to the protections

inherent in other, more common bodies of intellectual property law, and often works in concert

with the protections provided by contracts. Companies desiring to provide maximum protection

to their investment in their intellectual property and their proprietary business information should




                                            - 22 -
include careful consideration of this body of law in any series of strategies designed to enhance

their level of protection. Outside counsel must also consider the law of trade secrets when

advising companies about the various ways in which to achieve and maintain such protection,

and in considering any actual or threatened litigation necessary to seek or maintain such a level

of security.




                                           - 23 -

				
DOCUMENT INFO
Description: http://www.marcusmoon2022.org/designcontest.htm