When Is a Trade Secret Not a Trade Secret? When You Don’t Protect It Like One

Non-compete, confidentiality clauses, nondisclosure, employment agreements, Illinois

In Abrasic 90 Inc. v. Weldcote Metals, Inc., 364 F. Supp.3d 888 (N.D. Ill., 2019), U.S. District Court Judge Tharp of the Northern District of Illinois provides a virtual checklist of the steps a company should consider if it wants its important information to be treated as a trade secret. Alternatively, the decision serves as a valuable reminder of what happens if an employer fails to implement appropriate protective measures.

As a starting point, trade secret analysis involves two components: 1) is the information a trade secret (i.e. is the information sufficiently secret to impart economic value because of its relative secrecy) and 2) did the employer treat the information like a trade secret by taking reasonable steps to protect the information from disclosures. In his very detailed decision, Judge Tharp concluded some of the information at issue was protectable as a trade secret, but denied the plaintiff company’s request for a preliminary injunction because the company failed to adequately protect the information. Accordingly, the information did not warrant trade secret protection.

What the Former Employees Did

The two individual defendants had worked as the company’s President and its former IT Manager when they resigned to join a competing business. In connection with their move to their new employer, the individual defendants took a number of flash drives containing information regarding the company’s vendors and suppliers, sales data, pricing and cost information, and profit margins. At least some of the information was used by their new employer.

The Court’s Analysis

Judge Tharp had little trouble concluding that at least some of the information taken by the former employees was 1) “secret” (i.e. not generally known in the industry), 2) misappropriated (i.e. stolen as opposed to independently developed or obtained from a third source), and 3) used by the former employees’ new company. Moreover, the court observed that even where the information consisted of a compilation of data where parts were in the public domain, it might still qualify as a trade secret if it would require substantial time, effort and expense to recreate the compilation.

Where the company failed in its efforts to enjoin its former employees was with its efforts to keep the information secret. With this prong of the trade secret analysis, the court held that the company’s “almost total failure to adopt even fundamental and routine safeguards for the information at issue belies its claim that the information has economic value to its competitors….” Essentially, the company treated its claimed trade secret information the same as it treated non-trade secret information.

What the Former Employer Failed to Do

Use Confidentiality Agreements

  • “Among the most fundamental omissions by the company” was its failure to enter into non-disclosure and confidentiality agreements. While the former President had an employment agreement that contained non-compete and confidentiality provisions, the company allowed the employment agreement to expire more than 5 years before the President resigned and a new employment agreement was never executed.
  • While its independent sales representatives signed agreements regarding information considered to be confidential and requiring that the information be returned when the representatives relationship with the company ended, it did not have its employees with similar access to the same information enter into comparable agreements.
  • Suppliers and distributors were not required to sign nondisclosure agreements with respect to pricing and sales information that the company contended was confidential.

Identify Confidential Information and Train Employees

  • The company did nothing to train or instruct employees regarding their obligations to keep certain types of information confidential.
  • The company did not specify what information was considered confidential. For example, the employee handbook’s confidentiality language was too broad and vague to confer meaningful protection “as not every shred” of the company’s information was a confidential trade secret. Indeed, at least some of the information was distributed publicly.

Restrict Access to Confidential Information

  • Office personnel were routinely granted access to a shared drive of company information without limiting what information the employee would have access to and without limiting what the employee could download from the shared drive (as opposed to restricting access on a “need-to-know” basis).
  • Files on the shared drive were not encrypted or password protected.
  • For a number of years all employees used the same password for accessing the computer system.
  • Much of the information on the shared drive was not identified as proprietary or confidential.
  • The recommendation by a new IT Manager to limit access to certain files on the shared drive and to have employees remove company data from the employees’ personal devices when employment terminated was never implemented.

Address Confidential Information Concerns When Employees Terminate Employment

  • When employees resigned, the company did not demand the return of confidential information or even ask the employee if the employee had confidential information in his or her possession.

Judge Tharp’s discussion of the steps that the company could, but failed, to take is a must read for any company seeking to make sure its trade secrets are sufficiently protected.

 

Michael Braun concentrates his practice in labor & employment, civil litigation, and financial services. He litigates in both courts and arbitral forums, and counsels in the areas of employment, restrictive covenants, trade secrets, and business disputes.

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