Protecting Your Company’s Trade Secrets

It is a nightmare scenario.  After spending years building a successful business, you receive by email the resignation of your star salesperson.  Although he claims to want to spend more time with family, you soon discover that he has, in fact, started working for a competing business.  He solicits the customers he served for your business to follow him to his new employer, and many do so.  He also takes with him confidential trade secrets, including your customer lists and the secret plans for a product your business expects to begin selling next year.  Overnight, your business may lose millions of dollars in current and future sales.

A company’s trade secrets are valuable assets which give the company a competitive advantage and may be essential to its very survival.  While secret formulas immediately come to mind, many other types of information may qualify as trade secrets, including detailed quotes for work performed, information about sources of and special rates paid for raw materials, special methods of doing business or information about the history of particular customers’ accounts, among others.  Clearly, no company wants its trade secrets to fall into the hands of a competitor.  Massachusetts law offers protection to trade secrets, but only when the company owning those secrets takes reasonable steps to safeguard them.  Has your company protected itself?

The elements of a trade secrets claim.

To succeed on a claim for misappropriation of trade secrets or confidential business information, in violation of G.L. c. 93, § 42, and common law, a plaintiff must prove that:

(1) the information in question is a trade secret, (2) [plaintiff] took reasonable steps to preserve the secrecy of that information, and (3) [defendants] used improper means, in breach of a confidential relationship, to acquire and use that trade secret.[1]

Where a defendant knowingly benefits from a trade secret that a third party has obtained from its owner via breach of a confidential relationship, the defendant is liable for misappropriation of trade secrets.[2]  Thus, where an employee leaves his or her employer, goes to work for a competing business, and uses the former employer’s trade secrets to the new employer’s advantage, the new employer is liable if it was aware of the misappropriation.  

When is information a trade secret?

The first step in proving a claim for misappropriation of trade secrets is to establish that the information taken qualified as a trade secret.  General business information and routine data of a particular company normally is not protectable as confidential.  Massachusetts courts consider six factors in determining whether information constitutes a trade secret:

(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and to his competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[3]

Where the evidence as to these factors conflicts, the existence of a trade secret is a question of fact for the jury.[4] 

It is particularly important that a company take reasonable measures to protect information which it regards as a trade secret.  If the company fails to safeguard the information, it will be difficult to prove that the information is both secret and deserving of legal protection.  The reasonableness of measures taken to protect a trade secret depends on the facts of each case.[5]  Heroic measures need not be taken. A court will consider:

(1) the existence or absence of an express agreement restricting disclosure; (2) the nature and extent of security precautions taken by the possessor to prevent acquisition of the information by unauthorized third parties; (3) the circumstance under which the information was disclosed … to the extent they give rise to a reasonable inference that further disclosure, without the consent of the possessor, is prohibited; and (4) the degree to which the information has been placed in the public domain or rendered “readily ascertainable”.[6] 

Did the defendant obtain access to the trade secret through improper means in breach of a confidential relationship?

A company suing for misappropriation of trade secrets must also prove that the defendant obtained the trade secrets improperly through a breach of the defendant’s confidential relationship with, and his fiduciary duty to, the company.  An employee who ha signed a confidentiality agreement obviously acts improperly by misappropriating secret information covered by that agreement.  However, even an at-will employee who has not signed a confidentiality agreement owes his or her employer a duty not to steal the employer’s trade secrets.[7] 

Did the defendant use the misappropriated trade secrets and did the plaintiff company sustain harm as a result?

To prove a claim for misappropriation of trade secrets, the plaintiff must show that the defendant used the information and that the plaintiff was harmed as a result.  The required use and harm can be inferred based on the circumstances.  In Network Systems Architects Corp. v. Dimitruk, 2007 WL 4442349 (Mass. Super. 12/6/07), an employee had taken trade secrets, including information about customer accounts and proposals, from his employer, NSA.  After beginning work for his new employer, Accunet, the employee contacted customers he had serviced for NSA and convinced them to follow him to Accunet.  The court held that a jury could reasonably infer that the employee had made use of the trade secrets on behalf of Accunet and that such use had played some role in NSA’s loss of the customer to Accunet.  The court explained:

The evidence offered, including Lundberg’s findings, would support findings that Dimitruk sold to Bain on behalf of NSA; that shortly before his departure he communicated with Bain regarding his plans; that documents relating to Bain were on both laptop computers, and were among those deleted from the computers …, and that after Dimitruk’s departure Bain told [NSA] that it was transferring its business to Accunet.  From these facts, a factfinder could reasonably infer that Dimitruk made use of the NSA documents in his possession for purposes related to sales to Bain on behalf of Accunet, and that his use of such documents played some causative role in Accunet’s success in accomplishing those sales.  That is enough to prevent summary judgment.

2007 WL 4442349, *8.  (Emphasis added.)

What should you do?

Protecting trade secrets is primarily a matter of using common sense.  If your company wants certain sensitive information to remain secret, take steps to protect it.  A company hoping to protect its trade secrets should obtain confidentiality agreements from its employees, should expressly inform employees that the information is secret and confidential, and should ensure that access to the secret information is restricted to those employees who “need to know.”  If the information is in the form of computer files, they should be password protected.  Access to paper documents should be similarly limited, perhaps by placing them in a locked room.  

Your company’s trade secrets are valuable assets and perhaps critical to its future survival.  While Massachusetts law protects trade secrets, you must do your part by taking reasonable precautions to preserve their secrecy.