Do You Have A Trade Secret?

Do You Have A Trade Secret?



Thadford A. Felton Arnstein & Lehr LLP Chicago

Thadford A. Felton

120 S. Riverside Plaza Suite 1200 Chicago, Illinois 60606 (312) 876-6934 [email protected]

Thad Felton is a Partner in Arnstein & Lehr’s Complex Litigation Group. As a lawyer and counselor, he has extensive experience representing clients in a broad range of complex commercial and business tort matters. Mr. Felton has experience advising public and privately-held businesses, and individuals, in managing and identifying a broad range of legal issues, negotiating and documenting transactional matters and advising on day-today operations issues. He has litigated in the areas of fraud, misrepresentation, fraudulent transfer and consumer fraud act claims; breach of contract claims, including issues related to interference with contract and prospective economic advantage; misappropriation of trade secrets; injunctive and equitable remedies, with a focus on the enforceability of restrictive covenants; breach of fiduciary duty matters; products liability; declaratory judgments; section 1983 civil rights matters; creditor’s rights; and complex insurance coverage disputes, including the availability of coverage for environmental claims.

Copyright 2008, Thadford A. Felton All Rights Reserved

Thadford A. Felton . Do You Have A Trade Secret?

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ost business people believe that their businesses have important confidential information which must be protected from competitors. Obvious examples are secret formulas such as how to make certain cola drinks or mix fragrances. But what about customer lists, customer ordering patterns or preferences, pricing formulas, product designs, sales or merchandising strategies, and the like? Most business people would not dream of discussing these things with a competitor. But when an employee resigns or is fired, these things may be disclosed to competitors or the employee may become the competitor. So what is a business person to do? After all, most business people believe that everything about their business is a trade secret. They may be in for unpleasant surprises. Just because a business labels something a trade secret, does not mean that a court will recognize it as a trade secret. The goal of this article is to give you a better understanding of what factors courts look at to determine whether one has a trade secret and what you and your business can do to increase the chance of the court finding that you have a trade secret. Definition Of A Trade Secret? In Illinois the definition of is very broad. Illinois, like 43 other states, adopted the Uniform Trade Secret Act ("Act"). The Illinois version of the Act defines a trade secret: information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that: (a) is sufficiently secret to derive economic value, actual or potential, from not being generally known to other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality. While not determinative, the courts in Illinois look to the following factors to assist them in determining the existence of a trade secret: (1) (2) (3) (4) (5) (6)

The extent to which information is known outside of the business; The extent to which the information is known by employees and others involved in the business; The extent of measures taken to guard the secrecy of the information; The value of the information to the business and competitors; The amount of effort or money expended by the business in developing the information; and The ease or difficulty with which the information could be properly acquired or duplicated by others.

In sum, whether the information sought to be protected qualifies as a trade secret depends fundamentally on the secrecy of such information. You Need To Be Able To Specifically Define Your Trade Secret. While it may be stating the obvious, before one can determine whether one has a trade secret, one has to be able to specifically identify the thing that is claimed to be a trade secret. Defining the trade secret in generalities such as business and strategic planning information, manufacturing information, capacity information, marketing information, customer information and costs, without more, is insufficient. Whether you are preparing an employment agreement with a clause regarding trade secrets and/or confidential information or suing to stop an employee or third party from taking your trade secret, you must be able to specifically identify the trade secret. The more specifically you define the trade secret, the better off you will be. What Is Not A Trade Secret. Because trade secret protection depends on both the nature of the information and its secrecy, it is impor3

Thadford A. Felton . Do You Have A Trade Secret?

tant to discuss what is not a trade secret. As a trade secret has to be secret, generalized confidential business information and information that is generally known within or understood within an industry is not a trade secret, even if that same information is not known to the public at large. Being the first one to use certain information does not, in and of itself, transform otherwise general knowledge into a trade secret. Otherwise, the first person to use information, no matter how ordinary or well known, would be able to appropriate it to his or her own use under the guise of a trade secret. Mere legwork in acquiring information on the basics of a business cannot be the basis of a trade secret claim as a party who learns the basics of an industry from an employer would be precluded from entering the business at all in a competitive relationship. Price information disclosed by a business to its customers is usually not a trade secret as those customers are free to disclose that information to anyone, including a competitor. A design or process that can easily be ascertained from an examination of the product itself cannot be a trade secret. The protection afforded trade secrets reflects a balancing of conflicting social and economic interests. Where an employer has invested substantial time, money, and effort to obtain a secret advantage, the secret should be protected from an employee or third party who obtains the trade secret through improper means. On the other hand, that which is generally known or easily reproducible by competitors is not protected. Pricing formulas can be a trade secret if one can establish that the value in the pricing formula lies in the fact that it is not generally known to others who could benefit by using it, or could not be acquired through general skills and knowledge. However, mere knowledge of the price desired by a business or a formula that permits one to charge a certain amount to allow that business to make a good profit is not a trade secret. Likewise, price information disclosed by a business to its customers is not a trade secret as the customer is free to disclose that information. Factors That Are Considered. A factor that the courts look to is how easily information can be duplicated without involving substantial time, effort or expense. Information that was developed over a long period of time at great expense is more likely to be afforded trade secret protection than information that was developed inexpensively over a short period of time. For example, courts have found that under certain circumstances customer lists can constitute trade secrets where that information has been developed by the employer over the years at great expense, kept under tight security and cannot be duplicated merely by looking at the industry or reading the yellow pages or industry publications. Another factor that the courts look to is whether a business took reasonable steps to maintain the secrecy of the information. Where a business has failed to take reasonable steps to protect the secrecy of the information, a business will not be afforded protection for its trade secret. While not a prerequisite to the protection of a trade secret, one manner in which a business can protect a trade secret is through restrictive covenants in agreements with its employees and third parties who are involved with the trade secret. A "textbook" example of reasonable steps taken to maintain the secrecy of a formula were as follows: employees who had access to the formula were required to sign confidentiality agreements which advised the employees that the formula was secret; only those employees who signed the confidentiality agreements had access to the formula; labels on ingredients of the formulas were coded; and the formula ingredients were referred to in company documents by their code names. 4

Thadford A. Felton . Do You Have A Trade Secret?

Many businesses in the service sector keep extensive files with information on their customers. This information may include customer contact information, service history, customer preferences and materials pricing to customers. Where a customer list was created over several years and could not be duplicated without referring to multiple sources and calling potential customers to determine if they were in the market to purchase the product, one may be able to establish that the customer list was not readily ascertainable and could only be produced with considerable time, effort and expense. However, a business must also show that it took reasonable measures to protect the secrecy of the customer list. Trade secret protection of the same customer list can be lost where copies of the list were not kept under lock and key, not marked confidential, or given to third parties who are not instructed or required to maintain the secrecy of the list. One court found a customer list of mobile tool jobbers to be a trade secret. A list of mobile tool jobbers could only be developed using considerable time, effort and money as such a list could not be discerned from the telephone book, library, special directories, or any other publicly available sources. In addition, the office in which the list was kept was locked, special computer access codes were used, customer information was limited on a need to know basis, hard copies of the list were kept in one place, salesman's call books could not be removed from the office, security cameras were used, employee confidentiality agreements were utilized, and employees were constantly reminded of the confidentiality of the list. While the steps taken by the business above to maintain the secrecy of the customer list were reasonable, "reasonableness" varies depending on whether the business is large or small. What would be reasonable for a Fortune 500 company might by unreasonable, due to expense and nature of the business, for a small company. The owner of a custom tailor shop maintained a customer list that had the customer's name, information unique to each customer, and information known only to the salesmen who dealt with the customer. The list was kept in a closed file drawer at the store, employees with access to the list were repeatedly informed that the list was confidential, and only those salesmen that contacted the customer had access to the information. Based on this, the court found that the customer list was a protectable trade secret. In contrast, a customer list of a multi-million dollar company was found not to be a trade secret because the company did not establish that it undertook reasonable efforts to protect the secrecy of the information. The company maintained the customer list on a computer that was only accessible by three employees and each of those employees had received a company manual which provided that the company information was confidential. However, there was no evidence of internal security, the employees who had access to the customer list had not entered into confidentiality agreements, the customer list was not stamped "confidential," hard copies of the customer list were not kept under lock and key, and upon departure employees were not reminded of the confidential nature of the customer lists. Conclusion. In summary, every business wants to protect information in order to maintain its competitive edge. Whether that information is entitled to trade secret protection depends on a variety of factors. While this article cannot tell you if your information will be entitled to trade secret protection, it is hoped that the article has given you an idea of some steps you or your business can take to increase the chance that information will be afforded trade secret protection. There are multiple avenues to protect business information and consultation with legal counsel is important before there is a problem. 5