Changes in business culture and technology over the past 30 years have increased the risk that businesses will suffer theft of their trade secrets. Litigation to enforce a trade secret claim can be both difficult and expensive; better to identify and protect such secrets in advance.
Trade secrets, patents, protecting business information. In the age of paper, pencils, and contracts-by-handshake you likely could have left such matters to an intellectual property lawyer and concentrated on other aspects of the business. But in the 21st century, far from being an area only for specialists, trade secrets have become vulnerable matters of widespread concern. Attorneys who work with business clients need to be conversant with trade secrets law because their clients need, if they are not already seeking, advice in this area.
Minnesota was the first state to adopt the Uniform Trade Secrets Act when it did so in August 1980. The new law was effective January 1, 1981. So what has happened in the last 30 years? The truth is, the law has not changed much, but the world has.
What Is a Trade Secret?
First, a general primer. The Uniform Trade Secrets Act in Minnesota is found at Minn. Stat. §§325C.01-325C.08. To constitute a trade secret, the information must not be generally known or readily ascertainable, the information must derive independent economic value from its not being known or readily ascertainable, and reasonable efforts must be made to maintain the secrecy of the information.1
A trade secret can be whatever gives a business a competitive edge, such as a process, a strategy, or a customer list which is not generally known. “Not generally known” means it must be more than a variation on a process: “[M]ere variations in general processes known in the field which embody no superior advances are not protected.”2
To be a trade secret, the information must also derive independent economic value from its secrecy. In other words, the business must derive competitive advantage from the information being unknown to others. One way to analyze this factor is to consider: if an outsider obtained the information, would the outsider be able to gain market share without having to invest substantially in development?
In most cases, the factor determining whether there is a trade secret is the effort the business made to keep its information secret, which must be both reasonable and extensive. The business must treat the information as secret; simply intending to keep it secret is not adequate.3 Rather, it is the actions that are determinative.
So what are reasonable efforts? As we lawyers always say: it depends. It depends on many things, including the industry and the type of information to be protected. Among the efforts considered are: Were the premises of the business kept physically secure? Were the pertinent documents labeled as confidential? Where were the documents kept and who had access to the information? What were employees told about confidentiality and how were they told? What policies were in place? Were employees required to sign confidentiality agreements? As the court explained in Electro-Craft Corp. v. Controlled Motion. Inc.:
It is this aspect of trade secret law which truly sets it apart from the other two means through which employers can protect information—patents, and employment contracts containing a non-competition clause. The latter two remedies depend on only a single act by the employer. Trade secret protection, on the other hand, depends upon a continuing course of conduct by the employer, a course of conduct which creates a confidential relationship.4
The reasonable efforts must be continuing and ever-present.
A customer list can be a trade secret if it cannot be easily duplicated from public sources.5 If the list can easily be identified it is not a trade secret. “[T]he solicitation of former customers might seem unfair and unjust, but the employer has no exclusive right to the continued patronage of customers, and employees have the right to better themselves in new businesses.”6 If a business wishes to protect itself from such solicitation by a former employee, it must have a noncompete agreement in place. Otherwise, former employees are free to solicit the customers of their former employer. While an employee is not allowed to solicit customers while still employed, an employee can prepare to enter into competition. The analysis is whether there was permissible preparation versus prohibited solicitation. As stated by the Minnesota Court of Appeals,
Employees who wish to change jobs or start their own businesses … should not be unduly hindered from doing so. An employee has the right, therefore, while still employed, to prepare to enter into competition with her employer.7
Patents v Trade Secrets
So why would a business prefer a trade secret over some other form of intellectual property? Trade secrets have some benefits that patents do not. A trade secret can last forever, while a patent generally lasts for 20 years before an application for renewal is required. A customer list can be a trade secret, but it cannot be granted a patent. Trade secrets can be effective immediately and do not require registration, while patents can take quite a long time and expense to create. Some trade secrets do not meet the standard required for a patent.
On the other hand, in some situations it may be preferable first to apply for a patent. If a patent is not granted, reverse engineering may be used to discover a trade secret. That discovery can then be patented. A trade secret can be difficult and expensive to enforce.
Protecting Trade Secrets
As in many situations, the best means to enforce a claim to a trade secret is to protect it from being challenged. There are many steps that should be followed to this end. Among these are:
- Identify what is truly a trade secret in need of protection.
- Clearly label all documents “CONFIDENTIAL” that are to be treated as confidential.
- Restrict access to confidential information: Protect computer information with passwords; limit physical access to the business; use locked cabinets, security cards, and security cameras.
- Require employees to sign a confidentiality agreement. (The employer still needs to treat the information as secret.)
- Include a confidentiality policy in the employee handbook.
- Hold internal meetings for employees regarding the importance of maintaining the confidentiality of information.
- Require vendors, customers, and consultants—as well as other “outsiders”—to sign a confidentiality agreement.
- If confidentiality is breached, take action to punish the violator and prevent further loss.
New Risk Environment
Much has changed in the nearly 30 years since the Uniform Trade Secrets Act became effective in Minnesota. While the law has not changed much, the circumstances in which it is applied are very different. Thirty years ago, people did not own personal computers. Few businesses utilized computers for data storage. Now the world stores information and communicates via computers and the internet. Information is exceedingly portable. So trade secrets are far more portable.
People change jobs more frequently than they did 30 years ago. The “traditional” generation (generally those born between 1922 and 1945) and the “baby boomers” (generally those born between 1945 and 1965) have been characterized as loyal to their employers. Gen Xers (those born between 1965 and 1979) generally have not been found to have the same loyalty to their employers. Witnessing job losses among traditional or baby boomer parents who were loyal to their employers and played by the rules, Xers presumably learned that loyalty to an employer did not guarantee job security.8 In any event, Xers were more likely than boomers to report that remaining loyal to an employer was “outdated” and were significantly less likely to report being loyal to their employer.9 The “Millenials,” otherwise known as “Generation Y,” are in the group born anywhere from 1978 to 2002, depending on whose study you read. Millenials are characterized as “shaped by parental excesses, computers, and dramatic technological advances.”10
So what does this have to do with trade secrets? Plenty! The traditional generation makes up a very small share of the current workforce. The baby boomers are notably loyal but have suffered historic job losses in the past two years. The Gen Xers and Millenials have exhibited less loyalty to their employers and are highly conversant with the technology that makes all manner of information portable. These factors together make it very easy if not likely that an employee today may think nothing of using trade secrets when moving to a new employer or beginning a new business. Indeed, there has been a substantial increase in trade secret theft. Business owners must, therefore, be even more concerned about and more protective of trade secrets.
Remedies for Theft
If a business has been the victim of trade secret theft, there are remedies. Informal resolution can be attempted. If that is not effective, the best alternative is to commence a lawsuit for misappropriation and move for an injunction to enjoin the use of the trade secret. Either “[a]ctual or threatened misappropriation may be enjoined”11 The damages awarded can be significant and may include exemplary damages if the misappropriation is willful and malicious.12 However, trade secret litigation is expensive and should not be untaken without a thorough investigation. If a claim of misappropriation is made in bad faith, the defending party may be awarded reasonable attorney fees.13
Thirty years ago, instances of trade secret theft were perhaps rare enough that the practice could be left to intellectual property attorneys who concentrated their practice in the area. In the 21st century, changes in business culture and in technology have created an environment where businesses that fail to identify and protect their trade secrets may soon find their intellectual property at risk. Prudent companies and their counsel will do well to become familiar with this area and take the steps necessary to protect themselves.
1 Minn. Stat. §325C.01.
2 Jostens, Inc. v. National Computer Systems, Inc., 318 N.W.2d 691, 699 (Minn. 1982).
3 See Gordon Employment, Inc. v. Jewell, 356 N.W.2d 738 (Minn. App. 1984).
4 Electro-Craft Corp. v. Controlled Motion. Inc, 332 N.W.2d 890, 901 (Minn.1983)
5 Blackburn, Nickels & Smith, Inc. v. Erickson, 266 N.W.2d 640, 645 (Minn. App. 1985)
6 Blackburn, 266 N.W.2d at 645 (citing Boone v. Krieg, 156 Minn. 83, 194 N.W. 92 (1923)).
7 Rehabilitation Specialists v. Koering, 404 N.W.2d 301, 304-305 (Minn. App. 1987) (citations omitted).
8 Karp, H., Fuller, C., & Sirias, D. Bridging the Boomer Xer Gap. Palo Alto: Davies-Black, 2002.
9 Tolbize, Anick. Generational Differences in the Workplace. Minneapolis: Research and Training Center on Community Living, University of Minnesota, 08/16/08. Online at http://rtc.umn.edu/docs/2_18_Gen_diff_workplace.pdf
10 Id. (citations omitted).
11 Minn. Stat. §325C.02(a).
12 Minn. Stat. §325C.03(b).
13 Minn. Stat. §325C.04.