Tag: Trade Secret

  • Trade Secret Protections for Small Businesses

    Trade Secret Protections for Small Businesses

    Business owners seeking to protect their proprietary information or invention have many different options. The most common method that people think of is patent protection. Depending on the complexity of the subject matter, patents can be expensive to draft, prosecute, and defend. Additionally, not all information that a business may find valuable will fall under the umbrella of patentable subject matter. Where can a business turn to protect their valuable information that is not protected by a patent?

    The simple answer is to turn to trade secret for protection. The same protections that have protected the iconic taste of Coca-Cola, Google’s proprietary search algorithm, McDonald’s Big Mac special sauce recipe, as well as WD-40’s secret formula can be put to use by your business to efficiently and effectively protect your business’ information.

    What is a Trade Secret?

    A trade secret can take several forms. For instance, a trade secret could be a formula, pattern, compilation of data, computer program, or device. Practically, with trade secret protections you can protect any information that is valuable to your business that you keep secret. In order to receive common law legal protections for a trade secret, the information must meet a few requirements.

    Trade Secret Requirements

    First, the information must actually be economically valuable. That is, what you are seeking to protect must convey some kind of economic benefit to the holder. For example, a curated client list satisfies this requirement because the list is valuable to a competitor in the field. Think of this as the secret sauce.

    Second, the information must be secret. This requirement is a bit confusing because secret here means not widely known by the public. You do not need to keep the information you wish to protect as a trade secret absolutely secret. Your business’ managers and employees are free to possess and use the secret knowledge for the benefit of the business. The secrecy requirement is closely tied to the economically valuable requirement. If your competitors and the public are generally unaware of the information then it is likely valuable to your business.

    Third, the holder of the information must have taken some kind of precautions to keep the information secret. You can satisfy this requirement, for example, through non-disclosure or confidentiality agreements that prevent employees from sharing your valuable, secret information.

    What is Trade Secret Misappropriation?

    Trade secret misappropriation is legalese that simply means that some bad actor stole your business’ valuable information and either used it or disclosed it in a way that harmed your business. There are a few requirements to meet in order to assert a claim of trade secret misappropriation in state court.

    Information is a Trade Secret

    First, the holder of the trade secret must prove that the information met the requirements for a trade secret. Business-owners often overlook this initial step. You or your business’ conduct prior to the trade secret theft could potentially be detrimental to your ability to recover for the trade secret theft. For example, if your business does not have a confidentiality agreement in place with your employees, vendors, or potential business partners then the courts may find that your business did not do enough to protect your trade secret.

    Trade Secret Acquired Through Confidential Relationship

    Second, trade secret misappropriation requires that the bad actor acquired the trade secret information as a result of a confidential relationship with the holder of the trade secret. For example, if you hired an employee who signed a non-disclosure agreement and then upon leaving your business that employee spread confidential information protected by the non-disclosure agreement, you or your business could potentially pursue that employee for trade secret misappropriation. However, if you disclose the information outside of that confidential relationship, it is likely not actionable (think of an inventor or entrepreneur’s elevator pitch).

    Here, it is important to note what trade secret misappropriation does not cover reverse engineering. Reverse engineering of a trade secret is not trade secret misappropriation. This is the big trade-off associated with trade secret protection. Unlike patent protection, trade secret protection does not prevent use of the secret information. Instead, trade secret protection only prevents a bad actor bound by some kind of agreement from violating that agreement. Trade secret provides another cause of action to help to protect the internal workings of your business that set you apart from your competitors.

    Unauthorized Use or Disclosure

    Third, trade secret misappropriation requires that the bad actor has either made unauthorized use of the trade secret information or has disclosed the secret information. For example, this requirement would be satisfied if a disgruntled ex-employee of Coca-Cola who signed a non-disclosure agreement shared Coca-Cola’s secret formula on the internet.

    Potential Remedies for Trade Secret Misappropriation?

    Remedies for trade secret misappropriation fall generally into the two buckets. First, pursuing trade secret misappropriation as a cause of action allows the court to enter injunctive relief. If a disgruntled ex-employee is sharing your company’s secrets online on social media, a court can order that ex-employee to stop spreading your business’ trade secrets. A judge can enter this order early in litigation before any arguments on the merits of the case have begun. This is a time and cost-effective way to protect your business’ trade secrets.

    Second, juries have been extremely sympathetic to businesses harmed by trade secret misappropriation. Juries have awarded huge awards in the past. For example, in a case recently heard in a Texas state court involving a Quicken Loans company allegedly stealing the trade secrets of a Silicon Valley real estate start-up, a jury awarded the start-up over $706 million dollars to compensate the start-up for the theft of its trade secrets.

    Trade secret protection is a valuable option for businesses seeking to protect the inner workings of their businesses.

    For more information, or to speak with an attorney about protecting your business, please contact our office for a free consultation.

    Disclaimer: This blog is made available by Kloss, Stenger & LoTempio for educational purposes only. It is not intended to provide legal advice nor form any attorney client relationship between the reader and Kloss, Stenger & LoTempio. You should always seek professional advice from a licensed attorney for any legal questions you may have.

     

  • What is a Non Compete Agreement?

    What is a Non Compete Agreement?

    Non Compete or Non Competition Agreements are contracts that contain a restrictive covenant whereby an employee promises to refrain from competing against their employer for some period of time. Such agreements can be beneficial to both the employer and employee. Employers are likely to invest more in the training and development of the employee without fear of the employee leaving to work for a competitor. Employees are also likely to be paid more and receive greater professional skill development.

    However, employees should be very cautious before signing such agreements. Employers often draft the language of the restriction broadly for their own protection. Employers should also tread carefully as Courts will not enforce non compete covenants if they are unconscionable, offend public policy, or otherwise operate as a restraint of trade for the employee.

    A Non Compete Agreement is generally enforceable if it is:

    • Necessary to Protect a Legitimate Business Interest

      Will the employee have access to the employer’s trade secrets, customer lists, or some other form of proprietary information? Would that information be damaging to the employer if used by a rival? The employee must have the ability to harm the business of the employer with the information once the employment ends for it to be necessary.

      • Consider the uniqueness of the employee’s services. The more unique the services, the more likely it is that the covenant will be enforced. If the services are not unique, there is less need for a non compete covenant.
        • Are janitors, gardeners, or day laborers unique in their services? No. They are unlikely to possess company trade secrets through the normal scope of their employment.
        • Are executives, engineers, or software developers unique? Yes. They are likely to have access to company trade secrets and other proprietary information that would be damaging if used by a rival.

    • Reasonable in Scope

      The reasonableness inquiry is where the Court will evaluate the actual terms of the restrictions. They must be no greater than is justifiable to protect the employer. They also cannot impose an undue burden on the employee’s livelihood.

      • Reasonable in time: Does the agreement seek to prohibit the employee from competing forever? If so, the restriction is likely unreasonable absent unique circumstances, and thus unenforceable. So long as the length of time is reasonably related to the length of time that the secret remains valuable, it will likely be enforceable. In most cases, a restriction period of 6 months to 2 years will be upheld as reasonable.
      • Reasonable in distance: Does the employer seek to prohibit the employee from competing within 10, 20, or 30 miles of the employer’s business? Generally, the larger the geographic restriction, the less likely it is to be enforceable.
      • Reasonable in extent of restriction: Does the agreement prohibit the employee from working in his or her trade completely? If so, it is likely an unenforceable restraint of trade. Nonetheless, a temporary restriction from directly competing in a specialized area of the employer’s industry is more likely to be upheld.

    • Supported by Consideration.

      The employee must receive something of value at the time of execution. This is typically money, but may also be equity in the company. The employer should not seek to intimidate or attempt to put undue pressure on the employee to sign. This may lead to the subsequent invalidation of the restrictions, and nullification of the agreement. It is important to note that if the agreement is signed after the employee has been hired, simply continuing the employment does not constitute consideration and another item of value must be provided.

    Before signing a non compete agreement, you should have it reviewed by a knowledgeable contract attorney. For more information, or to have your non compete agreement drafted or reviewed, please contact our office for a free consultation.

    Disclaimer: This blog is made available by Kloss, Stenger & LoTempio for educational purposes only. It is not intended to provide legal advice nor form any attorney client relationship between reader and Kloss, Stenger & LoTempio. You should always seek professional advice from a licensed attorney for any legal questions you may have.