Five Trade Secrets Businesses Don’t Know They Have

When a business owner or executive asks what kind of law I practice, and I tell them about my trade-secrets work, I often get a response along the lines of “Interesting stuff, but we don’t have any trade secrets.” Most of the time, they are wrong. Almost all businesses have some kind of proprietary information that can qualify as a trade secret, as long as the business reasonably protects that information.

Here are five categories of common information that can qualify as trade secrets, under the right circumstances:

  1. Customer Information. Many companies spend significant time and money gathering information about their customers. Some maintain simple address and demographic information, while others compile detailed customer databases with order history and precise customer preferences. The more detailed the information, and the more time spent compiling it, the more likely it could be a trade secret.
  2. Pricing Information. In many industries, pricing information is not publicly known. Such pricing information can qualify as a trade secret, as long as the company reasonably protects it. At a minimum, customer contracts should include a confidentiality provision.
  3. Profit-Margin Information. Like pricing information, profit-margin information can also be a trade secret.
  4. Contracts. I’ve had clients who spend years developing proprietary contracts that help them better serve their customers. In these cases, the contract can become a trade secret. Again, a confidentiality provision would likely be required, along with other protections, before a court will recognize a contract as a trade secret.
  5. Business Plans. Business plans inevitably include some kind of proprietary information, whether it be pricing-related, or market forecasting. If this information is not outdated, and is properly protected, it can be a trade secret.

If your company has one or more of these types of information, it may have trade secrets. But to enjoy protection under the trade secrets act, you must take reasonable measures to protect your information.  Consult with an attorney to make sure you’re in the best possible position to protect your proprietary information.

I Forgot About My Noncompete!

Recently, I was retained by a client with an all-too-common story: one of its former employees, who signed a noncompete agreement, was working for a competitor and soliciting the client’s customers. I sent the former employee and his new employer a cease-and-desist letter, attaching the signed noncompete.

The next day, I got a call from the former employee. He said that he had forgotten that he had signed the noncompete years before. And he told me that he had quit his job with the competitor (which I had him and the competitor confirm in writing), and that he would no longer do work in my client’s field.

I have no idea whether the former employee really forgot about the noncompete, though I doubt it. More likely, he knew he had signed a noncompete, but he just hoped that my client wouldn’t enforce it. Regardless, this situation shows how important it is to address a departing employee’s noncompete obligations before he leaves the company.

The most efficient, effective way to handle this is through an exit interview. During the interview, the departing employee should be given a copy of his noncompete agreement and asked to sign an acknowledgement of his noncompete obligations. This sends the message that the company is serious about enforcing the agreement, hopefully deterring the departing employee from otherwise disregarding his obligations.

The exit interview also gives a company an opportunity to gather intelligence about whether there is a risk that the departing employee may violate his noncompete. If a departing employee refuses to sign the acknowledgement, or is evasive when asked about his next job, it may be worth consulting with an attorney to figure out how to proceed.

In my client’s case, there’s a good chance that had they conducted an exit interview, the former employee never would have accepted a job with their competitor.

Dealing With Bankruptcy After a Trade-Secrets Judgment

What happens if you obtain a judgment for misappropriation of trade secrets, and the defendant files for bankruptcy? A recent case from the E.D. Va. bankruptcy court could offer some assistance, as it held that judgments for willful and malicious misappropriation are not dischargeable in bankruptcy.

In re: Erika Brooke Harton, 2013 WL 5461832 (Bankr. E.D. Va. Oct. 1. 2013) (linked below) has a particularly egregious story of trade-secret misappropriation. While still working at the plaintiff’s med-spa/salon, the defendant/debtor opened her own competing salon. After the plaintiff’s salon had closed for the day, the debtor entered the salon, accessed the plaintiff’s computer, and printed out the plaintiff’s client’s appointment schedule for the next three months. The debtor also looked up and copied all of the plaintiff’s clients’ contact information.

The debtor then mailed over 2,000 postcards to the plaintiff’s clients that said “We’ve moved—same faces—new location,” and directed them to the debtor’s business. Many of the clients changed their appointments to the debtor’s salon.

Not surprisingly, the plaintiff sued in Virginia state court and obtained a judgment for misappropriation of trade secrets under the Virginia Trade Secrets Act. The court concluded that the defendant’s misappropriation was willful and malicious. After that, the debtor filed for Chapter 13 bankruptcy relief.

In the bankruptcy court, the plaintiff filed an adversary proceeding claiming that the judgment was nondischargeable under 11 U.S.C. 523(a)(4). This statute provides that debts based on, among other things, embezzlement or larceny are not dischargeable.

The bankruptcy court first determined that the debtor was collaterally estopped from relitigating the state court’s finding that her misappropriation was willful and malicious. The bankruptcy court then found that willful and malicious misappropriation falls under Section 523(a)(4), noting that it involves taking another’s property for one’s benefit.

Takeaway: There is always a risk that a judgment debtor will file for bankruptcy protection. In a trade-secrets action seeking damages, try to argue and establish (when possible) that the defendant’s misappropriation was willful and malicious. Armed with such a finding, a judgment creditor can argue that its judgment cannot be discharged in bankruptcy.

In re Erika Brooke Harton, Memorandum Opinion

N.D. Ohio Discusses Damages in Trade-Secrets Lawsuits

The Northern District of Ohio recently discussed the various types of damages that can be obtained in Trade Secret Act (TSA) cases. It concluded that a plaintiff can recover for the money it spent acquiring the trade secret, but cannot recover for lost investment due to the ongoing trade-secret litigation.

In Mar Oil Co. v. Korpan, 2013 WL 5406078 (N.D. Oh. Sept 4, 2013) (link below), the plaintiff, MAR Oil Co., and defendant Korpan entered into an agreement under which Korpan would assist in MAR’s exploration for oil and gas reserves. During the agreement’s term, MAR Oil invested millions of dollars in exploration, including producing seismic readings. These readings are apparently very valuable, as they help in locating oil and gas reserves. Korpan had access to this information.

After the agreement expired, Korpan began working with the other defendants to locate oil and gas reserves in the same area, including on property where MAR Oil previously had a lease. MAR Oil sued, alleging that Korpan and the other defendants used its trade secrets, including the seismic readings.

MAR had three damages theories: (1) lost profits, (2) its acquisition costs for the readings, and (3) lost investment. There was no dispute that lost profits can be a measure of trade-secret-misappropriation damages. But the defendants argued that MAR could not recover for acquisition costs and lost investments.

The court started by discussing the damages available in misappropriation cases (citations and quotations omitted):

Ohio law [and the Uniform Trade Secrets Act] treats actual loss and unjust enrichment caused by misappropriation as two distinct theories of recovery. Each requires plaintiff to prove with reasonable certainty that it suffered a loss because of the defendant’s misappropriation. . . . [D]amages in trade secrets cases are difficult to calculate because the offending company has mixed the profits and savings from increased quality and quantity of products, as well as savings from reduced research costs, with its own natural profits.

The court then ruled that MAR can recover the money it spent acquiring the seismic data, since “if [the defendant] used MAR’s seismic data improperly, what MAR spent and [the defendant] thereby saved would appear to be a proper yardstick for a damage award.” Essentially, the defendant was unjustly enriched by the amount it would have cost to acquire the data.

As for lost investment, MAR argued that a potential investor withdrew an investment due to the ongoing litigation. The court would not allow MAR to seek damages for this lost investment, since “there must be a demonstrable link between misappropriation of the trade secret and MAR’s loss.”

As the court noted, calculating damages in misappropriation cases can be tricky. Plaintiffs need to start thinking about their damage models—and working with a damages expert—early in the case.

MAR Oil Co. v. Korpan — Order

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