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What Should You Do to Protect your Company’s Confidential Information and Technology?

What is your company worth?

The answer to this question often hinges on what confidential and proprietary information your company possesses that gives you a competitive advantage in the market. Therefore, the protection of such information is critical to the long term success of your enterprise.

The law will protect confidential and proprietary company information - but you must take certain definite steps in order to preserve and maintain that protection. Most states, including Kentucky, have adopted the Uniform Trade Secrets Act (UTSA) that sets forth the steps that you must take in order to protect your confidential and proprietary information, and provides the remedies in the event someone misappropriates that information from you.

It is noteworthy that some technological developments may be entitled to patent protection. But, a down side to the patent process is that certain confidential and sensitive information may be disclosed to the public. In addition, patents expire, whereas trade secrets do not expire by operation of law. Therefore, many inventors and companies choose not to seek patents. Rather, they utilize the legal protections afforded by the trade secrets law in order to maintain their competitive advantage in the marketplace.

What is a trade secret?

“Trade secret” means information, including a formula, pattern, compilation, program, data, device, method, technique or process 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; andis the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Pursuant to the UTSA, confidential company information is protected in a wide variety of formats, including:

  • proprietary compilations such as customer lists, price lists and marketing strategies;
  • certain computer data;
  • internal company methods and techniques; and
  • internal engineering drawings and data.

To meet the definition of a trade secret, such items must have “independent economic value from not being generally known and not readily ascertainable by proper means from other sources.” Hence, the information contained in the trade secret may be in some regards public information, but the proprietary way that it is compiled may be a protected trade secret. For example, a customer name may be ascertainable from a phone book, but the internal market information regarding that customer possessed by your company may be proprietary and protected by law from disclosure to a competitor. Or, for example, the components of one of your machine designs may be public information, but the manner in which the components are synchronized and fitted may be a protected trade secret.

What steps are necessary to maintain legal protection of your trade secret?

To satisfy the definition of a trade secret, your company must take “reasonable efforts under the circumstances” to maintain its secrecy. It is noteworthy that the law does not require you to maintain absolute secrecy. Rather, you must take “reasonable” steps under the circumstances of your company.

In the litigation arena, the success of a trade secret claim largely depends upon a showing of what efforts the company took to protect the information from disclosure to a competitor or to the public.

There is no bright line rule as to what steps a company must take. Rather, it is a piece-by-piece analysis on a case-by-case basis. Some of the recommended steps to take, depending on the circumstances of your company, may include:

  • having your employees sign well crafted non-disclosure agreements;
  • properly designating and marking as confidential your proprietary information;
  • limiting employee access to such information to the degree necessary;
  • training your employees regarding their duties of confidentiality;
  • surveying exactly what information needs protection, and monitoring its dissemination;
  • having security measures such as passwords, keys and document check out procedures;
  • restricting the amount of detail given to customers and sales representatives;
  • reviewing advertisements and publications prior to publication for the proprietary information contained therein; and
  • inventorying the return of proprietary information held by departing employees.

All such steps should be taken in advance of a disclosure of proprietary information. Obviously, if reasonable steps are not taken in advance, the law generally does not provide protection to the company.

What is considered to be an unlawful misappropriation of a trade secret?

A trade secret is misappropriated by a person when he or she:

  • acquired the trade secret knowing, or having reason to know, that the trade secret was obtained by improper means;
  • disclosed it without expressed or implied consent and used improper means to acquire knowledge of the trade secret or, at the time of the disclosure or use of the trade secret, knew, or had reason to know, that his or her knowledge of the trade secret was derived through a person who had utilized improper means to obtain it, or acquired it under circumstances giving rise to a duty to maintain its secrecy or limit its use, or derived it from or through a person who owed a duty to the person seeking relief to maintain its secrecy or to limit its use, or knew, or had reason to know, it was a trade secret and that his or her knowledge of it had been acquired by an accident or mistake.

The statute defines improper means as including:

  • theft,
  • bribery,
  • misrepresentation,
  • breach of a duty to maintain secrecy,
  • inducement of a breach of a duty to maintain secrecy, and
  • espionage through electronic or other means.

When do you need to bring a court action?

It is important to note that you need not wait until there has been an actual misappropriation in order to seek protection from a court of law. Rather, the UTSA expressly allows you to seek court relief when there is an actual or threatened misappropriation.

If you have reason to believe that a misappropriation has taken place, and you demand return of the information to no avail, your company has a legal duty to institute a timely court proceeding. Failure to do so has been viewed as not taking “reasonable” measures to maintain the trade secret. Therefore, if one competitor unlawfully obtains your trade secret, and you do not seek judicial relief, you may waive the right to bring an action against any competitors who obtain the information in the future from lawful sources.

In Kentucky, the statute of limitations for bringing an action for misappropriation must be brought within three years after the misappropriation is discovered, or by the exercise of reasonable diligence should have been discovered. In Tennessee and Ohio, the statute of limitations is three years and four years, respectively. A continuing misappropriation constitutes a single claim for purposes of statute of limitations.

Can a competitor can be enjoined from using your trade secret?

Courts have the statutory authority to issue an injunction for the time period that the trade secret continues to exist and the injunction may be continued for an additional reasonable period of time in order to eliminate commercial advantage that otherwise would be derived from the misappropriation.

In exceptional circumstances, the court may issue an injunction that allows the competitor to use the trade secret information upon payment of a reasonable royalty for no longer than the period of time of which the use could have been prohibited. Such “exceptional circumstances” include, but are not limited to, material and prejudicial change of position prior to acquiring the knowledge, or where circumstances exist that would render a prohibitive injunction inequitable.

The court also has the statutory authority to enter an order requiring a party to take affirmative action to protect your trade secret.

Can the court award your company damages, punitive damages and attorneys’ fees?

Damages for recovery in a trade secret case include:

  • a monetary award for the actual loss caused by the misappropriation,
  • a monetary award for the unjust enrichment caused by the misappropriation that is not taken into account in computing the actual loss.

In lieu of damages measured by any other method, the damages caused by misappropriation may also be measured by the imposition of a reasonable royalty for the misappropriator’s unauthorized disclosure or use of a trade secret.

If a willful and malicious misappropriation exists, the court may award punitive damages in an amount not to exceed twice any award made under compensatory damages.

Attorneys’ fees are available to the prevailing party if a claim for misappropriation is made in bad faith, or a motion to terminate an injunction is made or resisted in bad faith, or there is a willful and malicious misappropriation.

  • Partner

    Mark is the Co-Chair of the Litigation Department, and he concentrates his practice in business litigation and dispute resolution. He has broad experience in contract, commercial, estate, real estate, trade secret, employee ...

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