Do Companies Sue Competitors to Learn the Competitors' Trade Secrets?

Keith J. Broady and Timothy C. Matson

Corporate Counsel

01-02-2013

In the new millennium, employee mobility is the norm. Gone are the halcyon days when employees worked for one company for their entire career. One consequence of greater employee mobility is the proliferation of trade secret claims. When an employee leaves one company to work for a competitor, it is not unusual for the former employer to sue the new employer for misappropriation of trade secrets. After getting over your initial negative reaction, one of the most important responses, apart from analyzing the legitimacy of the trade secrets claim, is to protect your own trade secrets from a possible fishing expedition by a competitor.

Steps to Take to Protect Your Trade Secrets if You are Sued by a Competitor

Whether they are fishing expeditions or valid claims, lawsuits by competitors claiming violations of the Uniform Trade Secrets Act are common. If your company is involved in a trade secret lawsuit, you should identify and maintain all records relating to the process of independent development of your trade secrets—i.e., inventors’ notebooks and business records that document the time and costs involved in developing the trade secret information. Do not allow any evidence in your possession or control to be destroyed or altered, including by automatic deletion of electronic information. Court sanctions for destroying evidence can be severe. Consider demanding that the competitor disclose trade secrets it claims were misappropriated with specificity very early in litigation.

Federal and state courts have looked very closely at the allegations made in these suits and have dismissed complaints on trade secret claims where there is not sufficient identification with specificity of the trade secret. If the litigation continues, consider protecting your trade secrets in the discovery process through protective orders restricting who can look at the trade secret information and allowing only inspections of some information without copies being taken.

What is a Trade Secret?

All companies—not just science- or technology-based companies—develop and own trade secrets. Therefore, it is vital that you understand what can be considered a trade secret within your company. As a general matter, trade secrets can be any information used in one’s business and which gives the business owner an advantage over competitors who do not know how to use it.

For example, a trade secret can be a formula for a chemical compound, a process of manufacturing, a pattern or device for a machine, a customer list, pricing information, sales forecasts, or any other item of confidential or proprietary information that makes up the core business assets of a company. Other examples include formulas for cosmetics and household products, recipes, business methods, computer source code, and pending (unpublished) patent applications.

To qualify for trade secret protection, the information comprising the formula, pattern, compilation, program, device, method, technique, or process must satisfy three requirements:

1. The information must not be generally known or readily ascertainable by others through proper means.
2. The information must derive independent economic value from its secrecy.
3. The owner of trade secrets must make reasonable efforts to maintain the information’s secrecy.

Thus, courts and juries consider a number of factors when analyzing whether specific information qualifies as a trade secret, including:

• The novelty of the information—in other words, the degree and extent to which the information is known outside the owner’s business.
• The degree and extent to which the information is known to those involved in the owner’s business.
• The measures taken by the owner to safeguard the secrecy of the information, and the economic value of the information to the owner and, if misappropriated, to competitors.
• The effort and money spent to develop the information.
• The ease or difficulty of acquiring or duplicating the same information by proper means.

Products that have been manufactured or distributed without modifications for many years will not likely qualify for trade secret protection. Could Chevrolet claim its Chevy Impala, which has been sold for many years, includes trade secrets misappropriated by another car manufacturer that recently started selling a new model of a four-door family sedan? Probably not, since most of the features of the Impala have been widely known and readily ascertainable for some time. On the other hand, information that is not widely known or readily ascertainable may qualify as a trade secret. A classic example of a trade secret is the secret formula for Coca-Cola.

What Steps Must a Company Take to Protect its Trade Secrets?

Over the years, courts have identified a number of steps a company can and should take to protect its trade secrets. For example, as an owner of trade secrets you should require employees to sign employment agreements, which define the scope of work to cover trade secrets developed by the employee and include confidentiality/nondisclosure provisions to maintain secrecy. Train employees in the protection of confidential company information. This should include identifying specific company trade secrets, marking all documents containing trade secret information as “Confidential,” and advising employees who work with or have access to trade secret information about the trade secret status of such information.

For trade secret information and data stored on a hard drive or accessible via a computer network, ensure that such computerized data is secure, and restrict access to key employees who work with such information. Also, consider employing computer network-security specialists to assess the vulnerabilities of the computer network and threats to security breaches.

If trade secrets are the subject of agreements with other businesses, you should require these businesses to sign confidentiality/nondisclosure agreements prior to entering into new business relationships. Finally, employ physical security measures such as locked doors, guarded entrances, and secure rooms for trade secret information, and constantly review all publicly disclosed information in advertising, websites, press releases, seminars, and articles to ensure that any intended trade secret information remains secret.

Reverse Engineering of Products

Litigation is not the only method to fish for trade secrets. A competitor may use reverse engineering to properly learn trade secret information about the product, such as dimensions, types of materials used, and other physical characteristics. Publicly available products, which are not subject to patent protection, may be reverse engineered by competitors. It is more difficult to learn manufacturing processes used when a competitor does reverse engineering. The manufacturing process itself could be a trade secret that remains protected.

If a competitor undertakes to reverse engineer a product, the competitor should maintain business records of the time, materials, and costs incurred during the process. A simple product may be easily reverse engineered. The more complex a product, the more likely that a court will find that the trade secret information in the product is not readily ascertainable, and thus is subject to trade secret protection.

Good Business Practices are Your Best Protection

Ultimately, following good business practices with respect to identifying and protecting your trade secrets—and not using a competitor’s trade secrets—is the preventive medicine that should take you a long way toward avoiding litigation. However, if you become embroiled in litigation, those same practices will be put under a microscope and can become your best defense.

Keith J. Broady and Timothy C. Matson are shareholders with Minneapolis-based Lommen, Abdo, Cole, King and Stageberg. Mr. Broady represents individuals and businesses in litigation and transactional matters. His litigation practice includes real estate disputes involving title and boundary claims, construction disputes, title insurance, insurance coverage, real estate agents, and professional liability. Mr. Matson is an experienced and skilled transactional lawyer, litigator, and intellectual property attorney with over 18 years of experience representing creators of artistic works in all aspects of their entertainment careers.