Protecting Trade Secrets in the Restaurant Industry

It seems like more and more restaurants are built around “celebrity” chefs. Not just household names like Emeril Lagasse or Wolfgang Puck, but other lesser known, yet acclaimed chefs who through marketing efforts become as visible as the restaurants themselves. Chefs’ increased name recognition can drive traffic, but  this comes with a risk: When such a chef departs the restaurant, it can be a challenge to convince patrons that the dining experience will remain the same. While not immediately obvious, restaurant owners can proactively use trade-secrets concepts and laws to address problems surrounding a celebrity chef’s departure.

A very recent example here in Miami shows how. A restaurant group called 50 Eggs Inc. has developed several popular and critically acclaimed restaurants in the Miami area. Relatively recently, 50 Eggs opened Khong River House, which serves authentic Thai cuisine. Leading up to the restaurant’s opening, much of the press coverage focused on the head chef, affectionately known as “Chef Bee. ” Khong River House experienced both commercial and critical success very quickly, including being named as a semifinalist for Best New Restaurant in 2013 by the James Beard Foundation.

This weekend, 50 Eggs and Chef Bee parted ways, as explained in this article. In response to some local media coverage, 50 Eggs’ founder and CEO, John Kunkel, issued a statement that included the following sentence:

While Chef Bee handled interviews about the culinary program on behalf of Khong, our recipes are proprietary and belong to the restaurant and our family of chefs at Khong.

Essentially, Kunkel is saying that even though Chef Bee is gone, the food will remain the same, since the restaurant will still be using the identical recipes. It sounds like 50 Eggs’ contracts vest the ownership of all Khong River House’s recipes with the company, not with the chef. All restaurants should be doing the same thing.

While recipes can be trade secrets, restaurants are not always focused on taking steps to keep them secret, as required by the Uniform Trade Secrets Act. Instead, restaurant owners should have the chefs who created the recipes sign agreements making clear that any IP rights associated with the recipes belong to the restaurant, not the chef. And employees with access to the recipes should sign nondisclosure agreements. With these contracts in place, restaurant owners do not need to rely on the Trade Secrets Act, but can instead simply enforce the contracts.

Then, when a celebrity chef departs, the owner can issue a statement similar to the one used by John Kunkel, which hopefully reassures diners that their favorite meals will remain the same.

S.C. Supreme Court Addresses Trade Secrets in Discovery

A previous post talked about how trade-secrets issues can come up in lawsuits having nothing to do with trade-secrets claims. Recently, the South Carolina Supreme Court examined when a party is entitled to discovery of its opponent’s trade secrets.

In Meadwestvaco Corp. v. Rayonier Performance Fibers, LLC, 2013 WL 3761622 (S.C. July 15, 2013), the plaintiff and defendant sued each other for breaching a contract. Under this contract, the defendant was to provide the plaintiff with certain materials to use in connection with the plaintiff’s cellulose fiber manufacturing business.

At several depositions of the defendant’s employees, the plaintiff asked for specific details about the defendant’s manufacturing process, including “the ‘recipe’ information for its mill processes.” The defendant’s counsel instructed the deponents not to answer and filed a motion for a protective order, arguing that these details were trade secrets.

The court applied S.C. Rule of Civil Procedure 26(c), which is identical to Federal Rule of Civil Procedure 26(c), and the South Carolina Trade Secrets Act. This analysis required a three-part inquiry: (1) the party opposing discovery must show that the information sought is a trade secret, after which (2) the requesting party must show that the information is relevant and necessary to bring the matter to trial, after which (3) the court must weight the potential harm of disclosure against the need for the information.

Here, the plaintiff did not dispute that the information sought was a trade secret. Thus, the court focused on whether disclosure was necessary, and concluded that it was not. Most importantly, the contract’s terms did not address the recipe behind the defendant’s mill processes, and the plaintiff did not offer any evidence showing that the recipe was necessary for, or even relevant to, its claims. On this latter point, the court took issue with the plaintiff’s failure to offer any expert testimony connecting the defendant’s trade secrets to its claims.

There are takeaways in this case for attorneys seeking and defending the disclosure of trade secrets. When trying to get an opposing party to produce trade-secret information, be sure to clearly explain the connection between the information sought and the claims/defenses in the case. If the information at issue is complicated or technical, consider using expert testimony. On the flip side, attorneys need to be aware of their clients’ trade secrets so that they can properly object to discovery and move for a protective order.

S.D.N.Y.: Marketing Concepts Are Not Trade Secrets

protecting trade secrets Recently, the Southern District of New York addressed whether marketing concepts can be trade secrets in Sarkissian Mason, Inc. v. Enterprise Holdings, Inc., 2013 WL 3585313 (S.D.N.Y. July 15, 2013).

Here, the plaintiff sued Enterprise (the rental car company) for breaching a nondisclosure agreement and misappropriating trade secrets. It alleged that it brought a proprietary business proposal to Enterprise that Enterprise then adopted for its own use.

After someone’s car is totaled, they often need a rental car for a while. A study showed that these people are more likely to buy the rental car, since they are effectively getting an extended test drive. Based on this study, Enterprise asked the plaintiff to develop a plan that makes it easy for renters to purchase their rental cars. They entered into a nondiscosure agreement and engaged in extended negotiations regarding the plaintiff’s plan.

In a nutshell, the plaintiff’s proposal involved placing a code on the rental car’s key fob. If the renter entered the code on the plaintiff’s website, the renter would get information about the car. The plaintiff would then forward the renter’s information to a car dealer, who could try to sell the car to the renter.

The plaintiff and Enterprise could not agree on the precise details for rolling out this program. The plaintiff wanted the renter to be directed solely to the plaintiff’s website, while Enterprise wanted to give auto manufacutrers the choice of using the plaintiff’s website or having the renters directed to the manufacturer’s website. This disagreement proved insurmountable, and Enterprise did not implement the plaintiff’s proposal.

Instead, Enterprise launched its own service, which allowed the renter to go directly to the manufacturer’s website. This case followed.

The court granted summary judgment in favor of Enterprise. Essentially, the court concluded that the plaintiff’s “proposal never progressed beyond a marketing concept, which was easily replicated.” The court focused on the public availability of the ideas behind the plaintiff’s proposal. And it cited to cases that differed between marketing concepts and the technical means for implementing those concepts. Here, the plaintiff solely came up with a concept based on publicly available information. It never developed any unique technology or processes to implement this concept. Thus, it could not establish the existence of a trade secret.

Since the marketing plan was not a trade secret, the plaintiff could only prevail if Enterprise breached the parties’ contract. But even though the plaintiff and Enterprise entered into a nondisclosure agreement, that agreement exempted publicly available information. Thus, the court rejected the breach of contract claim, again relying on the public availability of the information behind the plaintiff’s proposal.

This case shows that plaintiffs will have difficulty proving that marketing plans or concepts are trade secrets. A company offering such services needs to have its business partners execute nondisclosure agreements that specifically prohibit disclosure or use of the plan.

Are WWE Wrestling Results Trade Secrets?

protecting trade secrets

Just about everyone reading this blog knows that pro-wrestling matches are scripted. And I’m sure many wrestling viewers know as well. But that hasn’t stopped WWE—the largest pro-wrestling company—from being hugely successful. Having scripted results, however, is very different from allowing the public to know who is going to win.

According to this Deadspin post, someone has been leaking WWE wrestling results before the matches start by posting the winners on Reddit (for the uninitiated, Reddit is essentially a sophisticated message board site — www.reddit.com).

This causes a number of issues for WWE. But for our purposes, let’s examine whether WWE wrestling match results are trade secrets under the Uniform Trade Secrets Act (UTSA).

To be a trade secret under the UTSA, information must be (1) independently valuable because it is not known by others who could obtain value from knowing it, and (2) subject to reasonable efforts to maintain its secrecy.

I can envision ways that wrestling results could be valuable to WWE’s competitors. WWE generates a large portion of its revenue from pay-per-view events. A competitor could distribute these results in advance of the event, which may result in fewer pay-per-view purchases, thus reducing WWE’s revenue. But while there’s an argument that wrestling results satisfy the first prong, I tend to think that this type of information falls outside what the UTSA is seeking to protect. It’s not like a competitor could replicate the matches. And I’m having a tough time thinking of ways a competitor could use this information to steal viewers.

(Regardless of whether the first prong is satisfied, we don’t have enough information about how WWE keeps this information secret to determine whether it acted reasonably.)

To me, the match results are confidential information that does not rise to the level of a trade secret. For information like this, it’s critical to have employees sign confidentiality/nondisclosure agreements, since protection under the UTSA is a longshot.

For its part, WWE is making light of the situation, having issued the following statement:

“We may have a modern day Nostradamus on our hands. We might have to monitor these posts in advance of our next pay-per-view to see how good he or she really is.”

Email Signature Disclaimers Are Useless

In my last post, I discussed one of the most effective tools to protect trade secrets: confidentiality/nondisclosure agreements. Today, I’d like to talk about one of the least effective: email signature disclaimers.

We’ve all seen them, and most of us use them. Boilerplate-type language at the bottom of emails warning that “This email may contain proprietary or confidential information that is intended only for the designated recipient,” or something along those lines.

I hate these disclaimers. There’s nothing worse than opening an email chain on an iPhone and having to scroll through pages of disclaimer language. Or printing out a five-page email chain that has two pages of useful text and three pages of disclaimers. I can only imagine how many trees have been sacrificed in the name of email disclaimers.

There’s no question these ubiquitous disclaimers are an annoyance. But do they have value? Does robo-stamping a disclaimer on all emails increase the likelihood that a company’s proprietary information is a trade secret under the Uniform Trade Secret Act?

In my opinion, no. Both the senders and recipients of emails routinely ignore these disclaimers. Disclaimers do nothing to reduce the risk that an employee will inadvertently send proprietary information to the wrong recipient. And they essentially do nothing to stop the recipient from misappropriating the information.

So I do not think that email disclaimers should have any effect on a UTSA reasonable-protection analysis. In an ideal world, they would disappear. But I’m not holding my breath.

Is A Confidentiality Agreement A Prerequisite to a Trade Secrets Act Claim?

Last week, I published a post that asked whether confidential information that is not a trade secret can be misappropriated. In response, several people commented on LinkedIn and on the blog that if a plaintiff did not have its employees sign a confidentiality agreement, the company would not succeed on a Uniform Trade Secrets Act claim. Essentially, these commentators argue that if a company does not have those with access to its proprietary information sign a confidentiality agreement, it has not reasonably protected this information as required by the UTSA.

I disagree, at least to a point. If a UTSA claim could only be brought where the company and the defendant had a written contract, there would essentially be no need for the UTSA; the plaintiff could just sue for breach of contract or specific performance. Also, a company could still take a number of other steps to protect its proprietary information, which could rise to the level of reasonable protections. For example, if a company implemented password protections, clearly informed its employees of their obligation to keep certain info confidential, and limited sharing of confidential information to those employees who need access, a court could find that the company acted reasonably. Absent these types of protections, however, the lack of a confidentiality agreement would likely be fatal to a UTSA claim.

Of course, having a confidentiality agreement makes bringing a UTSA claim much easier. And I highly recommend that all companies have their employees and vendors execute such an agreement. But all hope is not lost without one.

Any other opinions? Feel free to share below.

Can Confidential Info That’s Not a Trade Secret Be Misappropriated?

In a previous post, I discussed the Uniform Trade Secret Act’s (UTSA) preemption provision. Essentially, the UTSA and the parties’ contracts are the only mechanisms for remedying trade-secret misappropriation, as all other claims are preempted.

A recent District of Arizona case—Food Services of America, Inc. v. Carrington, 2013 WL 3199691 (D. Ariz. June 24, 2013)—discussed a related issue: Is there a common-law claim for misappropriating confidential information that does not rise to the level of a trade secret?

Here, a food-services company sued its former employees, who allegedly misappropriated confidential information “and now work in positions where they could use that information to their new employers’ competitive advantage.” The plaintiff brought claims for violating the UTSA, the Computer Fraud and Abuse Act, and Arizona’s Anti-Racketeering Statute, along with claims for breach of fiduciary duty, conversion, and unjust enrichment.

The court dismissed the racketeering, fiduciary duty, conversion, and unjust enrichment claims as preempted by the UTSA. While the primary issue in this case involved whether the UTSA violates the Arizona Constitution’s anti-abrogation clause*, the plaintiff also raised a novel argument: The UTSA does not preempt common-law claims for misappropriating confidential information that does not qualify as a trade secret, and thus its common-law claims should survive.

The court rejected this argument. It looked to Arizona law and that of other states and concluded that the common law only protected information that qualified as a trade secret. Essentially, if the information is not a trade secret under the UTSA, there is no action for misappropriation.

Certainly, companies have confidential information that may not qualify as a trade secret. For example, a company may have highly confidential information about its customers, such as their social security numbers. If this information is improperly disclosed or used, the results could be devastating. But companies likely cannot rely on either the UTSA or other common-law causes of action to seek relief. Instead, they should require that employees with access to this information sign a nondisclosure agreement. That way, any misappropriation can be the subject of a breach-of-contract action.

*The anti-abrogation clause provides that “the right of action to recover damages for injuries shall never be abrogated, and the amount recovered shall not be subject to any statutory limitation.”

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