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Jan 2016
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January 29, 2016

Recent Case Demonstrates the Importance of Protecting Trade Secrets


When you were a kid, did you ever tell your little brother a secret that he promised not to tell, and the moment you told him he told anyone who’d listen? And do you remember how the neighborhood bully took advantage of that secret? And do you also remember that you couldn’t get back at your little brother for breaking his promise? Of course you do. My, how times have not changed. Let’s assume that you own a business, your employees are your little brother and you have a secret. Maybe it’s a client list or a formula or maybe it’s a process. Regardless, you sure don’t want the neighborhood bully to know about it.

Fortunately, you have more options now than when you were in grade school. But, you have to take advantage of those options to make them work for you. A recent decision from the Utah Supreme Court underscores the importance of taking all reasonable steps to protect your confidential information, including your trade secrets. And by reasonable steps, we mean contracts.  

In InnoSys v. Mercer, 2015 UT 80 (August 28, 2015), an engineer (Mercer) allegedly took confidential information, including a confidential business plan, to use as evidence in an unemployment hearing. The information was forwarded to a personal Gmail account and saved onto a flash drive. Mercer claimed she deleted all of the emails and flash drive information the next day.
 
InnoSys sued Mercer, bringing claims of breach of her non-disclosure agreement, breach of fiduciary duty and misappropriation of trade secrets. After some discovery, Mercer filed for summary judgment—and won—arguing that InnoSys had no evidence of actual or threatened harm since she destroyed the confidential information. But, surely Mercer spoiled the evidence by deleting the files, right? “Wrong,” said the trial court; she did not know nor should have known that there was an anticipated litigation. As if InnoSys wasn’t having a rough day in court already, the Court then awarded Mercer attorney fees.   

Fortunately for InnoSys, the Utah Supreme Court reversed the trial court holding. InnoSys “at least arguably” established a prima facie case of misappropriation by proving the existence of a protectable trade secret (because the information had independent economic value from not being generally known) and demonstrated misappropriation. The Utah Uniform Trade Secret Act, and several other similar state acts, provides no defense to unauthorized disclosure.  Therefore, by establishing the prima facie case, InnoSys had a rebuttable presumption of irreparable harm that Mercer never attempted to rebut.

The Court applied the same principles to damages for breach of the non-disclosure and fiduciary duty claims. Additionally, the Court reversed the sanctions award.  

There are some important takeaways from this case. First, it shows the increasing level of scrutiny lower courts have for misappropriation of trade secret claims. Because of this raised level of scrutiny, employers should review and consider all available tools to protect their trade secrets and confidential information, including confidentiality clauses, non-disclosure agreements, non-solicitation agreements and non-compete agreements. In other words, don’t leave all of your eggs in one basket. Statutory trade secret protection is great, but it only protects trade secrets as they are defined by the statute. You might have confidential information that isn’t considered a trade secret under the law that you still want to protect. How do you protect that information? You protect it with an enforceable agreement.

Second, the case stresses the importance of having a separate non-disclosure agreement. Don’t rely on your employee handbook. Your employee handbook probably states clearly that the handbook is not an employment contract; if it doesn’t, it should. You don’t want your handbook to be considered a contract. But, that also means that you won’t be able to enforce certain provisions of the handbook, as if they were a contract. And chief among them are any confidentiality provisions you might have in that handbook. You will want to make sure your handbook contains these provisions; they are valuable when employees take information. Unfortunately, once the employee quits or is terminated, they lose their value. You need an enforceable agreement that survives the employee’s termination or resignation. Remember your little brother and don’t let that happen again.

Oh, and one more thing. This case demonstrates the importance of computer forensics. In many cases, employers struggle to show misappropriation after an employee leaves because they either don’t know where or how to look for evidence of the misappropriation, or the company  has a policy of wiping and repurposing computers for departed employees. Oftentimes, the best evidence exists on company-owned devices. Review your policies for departed employees, and if an employee leaves that had regular access to confidential information and/or trade secrets, consider running forensic analysis before reformatting or repurposing their devices.

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