Safeguarding Trade Secrets

By Budden, Michael Craig | Security Management, March 1997 | Go to article overview
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Safeguarding Trade Secrets


Budden, Michael Craig, Security Management


Gordon Employment, Inc., a temporary employment agency in Minnesota, had always considered its client list a valuable asset. When a former manager started her own employment agency by using the company's customer lists, Gordon did not hesitate to sue for theft of this information, which it considered to be trade secrets. But to the company's surprise, the courts did not agree.

In that case (Gordon Employment, Inc., v. Jewell et al, 1984), the Minnesota Appeals Court found that the disputed customer lists could not be considered trade secrets because Gordon had not taken reasonable efforts to protect them. Specifically, the court noted that the lists were kept in unlocked file cabinets in public reception areas and that Gordon had no written policy regarding the information's confidentiality or its continued security. The lists were not even marked confidential.

Misappropriation of trade secrets appears to be on the rise as evidenced by the increasing number of firms seeking legal protection of secrets under trade secret law. IBM, Borland International, General Motors, Procter & Gamble, General Electric, and Kendall-Jackson Winery are among the businesses that have pursued their proprietary trade secret rights in recent years.

The value of the secrets in contention varies, but General Electric's formula for making synthetic diamonds, which had been misappropriated, was said to be worth millions of dollars - one indication of the serious nature of trade secret theft. Business owners and the security professionals on whom they rely to protect their assets need to be aware of trade secret law and respond accordingly.

The law. Information such as customer lists, marketing research results, secret formulas, recipes, and other types of valuable information sometimes qualify as trade secrets and, as such, can be protected by law. In the United States, each state governs how information can be protected through trade secrets laws and laws governing contracts.

In the past, such state acts varied considerably, but since 1980, most states have adopted the Uniform Trade Secrets Act (UTSA), which offers consistent protection for intellectual properties classified as trade secrets. To date, forty states and the District of Columbia have adopted the UTSA.

The UTSA defines trade secrets as information of value that is not generally known or legally knowable by others and that has been reasonably protected to maintain the secrecy of the information. If a company's legally protectable trade secrets have been misappropriated, the UTSA allows the firm to obtain an injunction prohibiting further use of the secret by the misappropriator. The act also allows for the recovery of damages in the amount of actual losses related to the misuse, plus any unjust profit made by unauthorized users. Additionally, in situations where the willful and malicious misappropriation of trade secrets has occurred, the act allows the victim to recover punitive damages and attorney fees.

Another tool in the arsenal against information thieves is The Economic Espionage Act of 1996. The act, passed by Congress in the last session, imposes heavy fines on individuals and companies and can result in imprisonment for those found guilty of stealing proprietary information.

Like the UTSA, the new federal law requires that companies take reasonable measures to protect vital information. In addition to being protected, information must have a demonstrable value to be considered a protectable trade secret.

Reasonable measures. A company must take reasonable measures to maintain the secrecy of proprietary information. For example, in one Iowa case, the 205 Corporation, doing business as the Tavern Restaurant, sued a former manager and his new employer alleging, among other charges, that the former employee had stolen its trade secrets (205 Corporation v. Brandow et al., Supreme Court of Iowa, 1994). The secrets in dispute were recipes for the restaurant's pizza and specialty sandwiches.

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