Court Ruling Helps Define Factors Used in Trade Secret Classification

What is an allograph? And why doesn’t a company’s sterilization process violate the trade secrets of another company that allegedly invented and protected the sterilization protocol?  And why, you might ask, do these questions appear on our blog?

First, an allograph is a transplant of tissue from one person to a genetically dissimilar person. To successfully complete this transplant, you must sterilize the human tissue. In April 2012, Florida’s Fifth Circuit of Appeal ruled on a case involving allographs: Duane Duchame, Tai T. Huynh, et al. v. Tissuenet Distribution Services, LLC, et al., 37 Fla. L. Weekly D875a.

This case established several factors that Florida courts now use in determining whether to uphold injunctions enforcing trade secrets. These factors are important when recognizing the undeniable link between success with a trade secret claim and the existence of a valid non-compete agreement.

The court ultimately decided in a reversal of the lower court’s temporary injunction in this sterilization case, based on several things.

  • The chemicals used in the case were well-known in the industry and therefore use of them did not constitute qualities of a trade secret.
  • The former employee who created the sterilization protocol did not use a direct replica of the system for a new employer. Rather, he “used his education, knowledge, skill, and experience” to formulate a protocol for his new employer, indicating it was a new creation instead of a stolen trade secret.
  • And most importantly, if the plaintiff wanted to prevent the departed employee from working for a competitor, then the plaintiff should have issued a non-compete agreement to the former employee—which they did not do.

This case stands demonstrates two propositions that all employers seeking to protect trade secrets should remember.  First, if a trade secret exists, it should be kept secret.  Additionally, verify that it does qualify as a trade secret. If you use industry-known materials and use them in a special or untraditional manner (i.e. the sterilization protocol in this case), make sure you can prove in court that your methods are significantly different enough to classify them as trade secrets, and not merely a variation of a widely-accepted process.

Second, if you have a key employee capable of taking their talents to a competitor which could adversely impact your business, then you should always consider executing a valid non-compete agreement to protect your company.  In the Tissuenet case discussed above, it is impossible to say whether or not a valid non-compete agreement would have justified the plaintiff’s claims, but it is likely that the lack of a valid non-compete agreement caused the fatal blow.  Are trade secret claims and non-compete claims different?  Of course! However, as this example has demonstrated, they are often compatible tools working with sensitive information and skilled employees.

For more information, if you have any questions about trade secrets or non-compete agreements, or if you have an unfair competition issue, please contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

 

Other articles you may be interested in:

What is a Trade Secret?

Key Ingredients for an Effective Non-Compete Agreement

Key Ingredients for an Effective Non-Compete Agreement

In increasingly competitive business environments consisting of mobile and tech-savvy workforces, employers need to take full advantage of the most important protection available against unfair competition by former employees: a comprehensive and effective non-compete agreement. Employers should have non-compete agreements reviewed and/or drafted by an attorney familiar with the laws of any state that the agreement will be active in (usually the states in which employees reside). This is especially important because the laws governing non-compete agreements vary from state to state.

However, regardless of state, the key ingredients to a successful and protective agreement include the following types of provisions:

  • Non-Competes — While a “Non-Compete Agreement” usually refers to an employment contract that includes many of the provisions in this list, an actual non-compete provision is the one that actually prohibits an employee from working for a competitor.  To be enforceable, this type of provision typically must be reasonable in terms of the duration, the territory, and the scope of prohibited activities.  What is deemed reasonable varies from state-to-state and is often fact-specific based on the circumstances of each particular employee.
  • Non-Solicitation of Customers — In a world where anyone on the globe is potentially accessible by email or cellphone, an employer’s vulnerability to competition is often defined not by geography but by customers.  Accordingly, a provision for the non-solicitation of customers is essential for most modern businesses.  A non-solicitation covenant does not by itself prevent an employee for working for a competitor, but rather it prohibits an employee from affirmatively soliciting the customers of the former employer.  A non-solicitation provision often works in tandem with a non-compete clause, but a non-solicitation term is a must where employees are reluctant to agree to an absolute prohibition from competing in a certain area.
  • Confidentiality/Non-Disclosure — These provisions limit an employee’s ability to use or disclose non-public information relating to the employer’s business and customers.  Even in the absence of a non-compete or non-solicitation provision, confidentiality agreements can be used to hinder unfair competition and solicitation of customers by a former employee if it can be shown that the employee is using the confidential business information from the former employer.  Additionally, confidentiality agreements are usually necessary, at minimum, to prove the key element of a claim for a trade secret violation: efforts to maintain the “secrecy” of a purported trade secret.
  • Non-Recruitment — A non-recruitment provision seeks to limit a former employee’s ability to recruit other employees away from the employer.  There are few common law and statutory restrictions on the recruitment of a company’s employees, so these types of covenants are an important tool for staving off mass defections.
  • Return of Property — Many post-employment problems can be avoided, or grounds for a remedy improved upon if there is a problem, by a contract requiring that an employee return all company-related property, information, or documents obtained or created by the employee upon termination of the employment relationship.

BURR POINTWhile there are multiple other terms that are a part of a well-drafted non-compete agreement, the list above provides the backbone terms that will serve as protection for the employer.

What is a Trade Secret?

Most businesses are familiar with the concept of a trade secret, but few can accurately define the legal meaning of the term.  Those seeking protection will claim that basically all of their business information qualifies as a trade secret, while defendants fighting a claim will argue that the requirements for something to be a trade secret are extremely restrictive. The answer, of course, is somewhere in the middle.  So, what exactly constitutes a trade secret?

The Uniform Trade Secrets Act has been adopted by 46 states (all except New York, Massachusetts, North Carolina and Texas).  Georgia’s version of the Act defines a trade secret as follows:

“Trade secret” means information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers which is not commonly known by or available to the public and which information:

(A) Derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(B) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Whether or not a supposed trade secret satisfies the definition of a trade secret often decides the winners and losers in trade secret disputes.  Here are some examples of decisions by state and Federal courts in Georgia regarding the determination of a trade secret:

Items Ruled as Trade Secrets

  • Written, or electronically-stored, customer lists, if not readily available to the public
  • Computer software
  • Packaging idea
  • Logistics system
  • Healthcare provider’s referral log and workbook containing doctor referral statistics

Not a Trade Secret

  • Intangible customer information existing in the mind of the former employee
  • Recollection of cities that franchisor considered to be good location for future franchises (deemed to be similar to intangible customer information, and thus not protectable)
  • Accumulated technical information in employee’s mind
  • A particular bearing in a cleaning system  (since bearing was stamped with the name of a third party, anyone could call the bearing manufacturer to find out the specifications of the bearing)
  • Name for future newspaper planned by publisher
  • Matters generally known in the industry
  • Process of evaluating amount to bid on tax deeds   (the information was available to the public, and the process was not a unique combination affording possessor a competitive advantage)
  • A customer list that does not provide a competitive advantage (even though it was not publicly available)
  • Investor lists

BURR POINT:  The Uniform Trade Secret Act can be a powerful tool for protecting a confidential business and customer information, but claiming a trade secret and meeting the legal definition of same are two different matters.  Businesses of all types would be well-served to have an attorney review their processes, employment agreements and policies to ensure they are set up to take full advantage of the protection that trade secrets laws provide.

 

Welcome to Burr & Forman’s Non-Compete and Trade Secrets Law Blog!

Welcome to Burr & Forman’s Non-Compete and Trade Secret Law Blog!

In an increasingly competitive and mobile workplace, non-compete agreements and trade secret laws have become necessary tools for employers to protect their valuable customer relationships and confidential information and to avoid unfair competition from former employees and competitors. Continual changes in non-compete and trade secrets law, as well as technological advances providing increasing avenues for unfair competition, make it imperative that businesses in all fields stay abreast of the latest developments in this area.

For these reasons, the attorneys of Burr & Forman’s Non-Compete and Trade Secrets Group have launched this blog to help employers, executives and attorneys keep up with news, statutory changes, legal opinions and practical tips involving all areas of unfair competition law:  non-competes, trade secrets, customer non-solicitation, non-recruitment, non-disclosure, confidentiality agreements, tortious interference with business relations, employee piracy, computer theft, breach of fiduciary duties, employee loyalty, and intellectual property rights.

Because the law relating to most of these areas is state-specific, we will focus on developments in Burr & Forman’s Southeastern focus of Georgia, Alabama, Tennessee, Mississippi and Florida. However, we will also cover any particularly impactful or interesting events in other parts of the country relating to unfair competition. If you need help in a state outside of Georgia, Alabama, Tennessee, Mississippi or Florida, let us know. We’ve aligned our firm with trusted practices across the country and around the world and we will get your questions answered at the right law firm.

We hope that our clients, as well as other employers, executives and their attorneys, will find this blog informative and entertaining and will make it a regular part of their business reading. If you ever have a question about something on the blog or have an unfair competition issue, feel free to contact any of the Burr & Forman’s Non-Compete & Trade Secrets team members and we will be happy to assist you.

Thanks for reading!