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Recognition and Protection of Commercial Trade Secrets

April 27, 2006
by Lawrence F. Carnevale and Michele Ross
Table of Contents
Introduction
The Definition of “Trade Secrets”
Commercial Trade Secrets
            Customer Lists
            Business Operations Information
The Protection of Trade Secrets
            Non-Compete Provisions
            Confidentiality Agreements
            Claim for Misappropriation of Trade Secrets
            The Economic Espionage Act
Equitable Balancing
            Inevitable Disclosure
            Casual Memory

A.  Introduction

As successful businesses develop, their files and databases swell with information documenting their financial successes and failures, their customers’ needs and behavior, their products and services, the qualifications of their personnel and their future plans.  Properly marshaled and organized, the information can serve as the engine for and point the way to future success.  Too often, however, the inherent value and vulnerability of this information is first recognized after it finds its way into the hands of a competitor through inattention or unauthorized nefarious means.

Much attention has been devoted in literature and media to the value and protection of information of a technical or scientific nature, such as formulae or software programs.  Few would debate that such information is valuable to those who possess it, that the information must be protected, and that significant liability may result from the misuse of it.  This paper instead focuses on the value and protectibility of non-technical commercial information such as customer lists, business methodologies or marketing strategies.  Whether or not the law will come to the aid of a party who has developed such information will depend in large measure on whether the information can be said to meet the legal criteria for “trade secrets.”  As described below, certain commercial information may qualify for trade secret protection, but the owner’s right to pursue claims for its misuse will depend on its character and the way in which the owner has maintained the information.

B.  The Definition of “Trade Secrets”

A trade secret is generally defined as any information - technical or non-technical - that derives independent economic value from not being known or generally ascertainable and that is the subject of reasonable efforts to protect its secrecy.  Restatement (Third) of Unfair Competition §39 (1995).  Fueling legal debate on this subject, the Restatement of Torts observes that “[a]n exact definition of a trade secret is not possible.”  Restatement (First) of Torts, §757, comment b (1939).  Nevertheless the Restatement lists several factors to be considered in evaluating a claim of trade secrecy: 

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

(Restatement (First) of Torts, § 757, comment b.)

The New York Court of Appeals, relying on the Restatement of Torts has defined a trade secret as “any formula pattern, program, device, or compilation of information which is used . . . to obtain an advantage over competitors who do not know or use it. . . . A trade secret is a process or device for continuous use in the operation of a business.”  Ashland Mgm’t v. Janien, 82 N.Y.2d 395, 407, 604 N.Y.S.2d 912, 927 (1993) (quoting Restatement of Torts, § 757, comment b (1939)).

The majority of states, not including New York, have adopted The Uniform Trade Secret Act (“UTSA”).  The UTSA broadly defines a trade secret as “any information, including a formula pattern, compilation, program, device, method, technique, or process, that: 

(i) derives independent economic value, actual or potential, from not being generally know to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” 

The purpose of the UTSA was to codify and to eliminate inconsistencies in the common law.  While they contain slightly different language, the USTA and the Restatement convey the same broad concepts and standards and are both commonly referred to in the same legal decisions.  The UTSA was intended to broaden the early Restatement approach (embraced by the New York Court of Appeals) which accorded trade secret protection to information “continuously” used in one’s business.  No such limitation is applied by the UTSA and therefore protection may extend to information not yet implemented by a company in the operation of its business. 

C. Commercial Trade Secrets

            1.  Customer Lists 

In recent years, much of the debate regarding trade secrets has centered on customer lists and other information gathered about an employer’s customers.  An employer seeking protection for a customer list must show that it expended substantial time, money or effort in developing the list and that the list is one not known in trade or that can only be obtained through extraordinary efforts.  Today, the financial services industry as well as other service industries depend on the protectibility of information concerning a company’s customers and often take steps to enforce their rights in this regard.  In order to get this type of protection, a company must also be able to demonstrate that it made a reasonable attempt to safeguard the information.  Absolute secrecy is not required, rather, the general rule with respect to maintaining the confidentiality or secrecy of the information is that “a substantial element of secrecy must exist and this means so much that, except by use of improper means, there would be difficulty in acquiring the information.”  Ivy Mar Co. Inc. v. C.R. Seasons, Ltd., 907 F. Supp. 547, 556 (E.D.N.Y. 1995) (quoting A.H Emery Co. v. Marcan Prods. Corp., 389 F.2d 11, 16 (2d Cir. 1968)). 

This trade secret status of customer lists was addressed in the seminal case of Leo Silfen, Inc. v. Cream, 29 N.Y.2d 387, 392, 328 N.Y.S.2d 423, 427 (1972).  The court examined whether plaintiff, a seller of building maintenance supplies to industrial and commercial users, was entitled to trade secret protection for its customer list.  Plaintiff maintained that defendant, after leaving plaintiff’s employ, misappropriated its trade secrets by using plaintiff’s customer list and information to solicit new clients.  In this case, defendant had not entered into a confidentiality agreement.  In its decision, the court laid the foundation for the methods by which information should be afforded trade secret protection.  “[W]here the customers are not known in the trade or are discoverable only by extraordinary efforts, courts have not hesitated to protect customer lists and files as trade secrets . . . especially so where the customers’ patronage ha[s] been secured by years of effort and advertising effected by the expenditure of substantial time and money.” Id.  The court went on to state that in plaintiff’s case, the customer list was instead comprised of names only and the court did not feel that plaintiff actually worked to create a market for a new service or good will since the information was readily obtainable from other public sources.  Id.  Accordingly, the court held that plaintiff’s customer list did not warrant trade secret protection. 

Where customer lists are developed with continuing sales and regular follow-up services and the customer information is not available from other sources, courts will award trade secret protection.  For example, in Repair Tech Inc. v. Zakarin, 2005 WL 1845659 * 5 (N.Y. Sup. Ct. Kings County 2005) plaintiff was engaged in the business of offering extended warranties to retail purchasers of cameras and consumer electronic equipment who purchase such products from retail merchants.  Plaintiff sued its former employee who left and began soliciting plaintiff’s customers using plaintiff’s customer list.  Although the plaintiff did not have defendant sign a confidentiality agreement, the court nevertheless granted a preliminary injunction in favor of plaintiff because the facts established that plaintiff took years to develop its customer list and the list contained confidential pricing information tailored and adjusted specifically for each individual client.  In its ruling, the court examined the value of the list to plaintiff and whether or not plaintiff exercised considerable time and effort in securing that value.  In ruling that plaintiff made a sufficient showing of trade secrets, the court noted that, if allowed to use the information, “defendants may unfairly undercut plaintiff’s price and exploit his access and familiarity with the client.”  Id.  

In Nutmeg Tech., Inc. v. Mahshie, 1989 WL 60285 * 5 (N.D.N.Y. 1989) plaintiff, a manufacturer and vendor of industrial chemicals and equipment used in water and fuel treatment sued defendant for trade secret misappropriation.  Here, defendant had entered into an employment agreement that contained a non-disclosure provision.  In ruling that plaintiff would undoubtedly suffer irreparable harm by defendant’s continued use of its customer list, the court showed the elaborate process that plaintiff undertook to generate its customer list:  

“On average, a six to seven month direct and personal contact sales effort per customer is required before initial orders are secured . . .  Sales engineer . . . performs a detailed survey of a customer’s manufacturing system.  This takes . . . time and requires the study of plant plans and process and in-depth discussions with . . . plant personnel . . . staff prepares a written report for the customer which includes recommendations as to . . . treatments . . .  Once a prospective customer places an . . . order… a responsible . . . engineer . . . monitors performance…”

Id. at * 5; see also Unisource Worldwide, Inc. v. Valenti, 196 F. Supp. 2d 269, 279 (E.D.N.Y. 2002) (where plaintiff had defendant sign a confidentiality agreement and it was further determined that plaintiff spent considerable time and effort in establishing customer names, items sold to customer and pricing information, court found customer list to be protectible trade secret); Eastern Bus. Sys., Inc. v. Specialty Bus. Solutions, LLC., 292 A.D.2d 336, 338, 739 N.Y.S.2d 177, 179 (2d Dep’t 2002) (upholding preliminary injunction where plaintiff was able to present evidence that its confidential information was not available to the public, was highly valuable to competitors, was available to inside personnel and cost considerable sum to develop). 

In contrast, in Kadant, Inc. v. Seeley Machine, Inc., 244 F. Supp. 2d 19 (N.D.N.Y. 2003) plaintiff argued that its customer databases containing contact information for companies in the paper-making industry, along with purchasing history and the names of those individuals key to purchasing, were protectible trade secrets.  The court rejected plaintiff’s argument, even though defendant had signed a confidentiality agreement, on the basis that plaintiff failed to show that the purchasing histories were cultivated through great effort, time and expense.  Moreover, plaintiff was unable to establish that the specific contact information that it acquired was expensive to maintain.

Similarly, in Ivy Mar Co. Inc. v. C.R. Seasons, Ltd., 907 F. Supp. 547 (E.D.N.Y. 1995), where plaintiff engaged in the retail business failed to establish that its customer list was confidential, that it conferred a business advantage or that substantial time, money or effort was expended to generate it, the court concluded that no trade secret protection was warranted.  

Where customer lists are readily obtainable through publicly available sources, courts routinely deny trade secret protection.  In Hair Say, Ltd. v. Salon Opus, Inc., 2005 WL 697538 *4 (N.Y. Sup. Ct. Nassau County 2005) the plaintiff, owner of a beauty salon, sued its former stylists who left to form a competing business.  Plaintiff claimed that defendants’ misappropriated plaintiff’s customer list to solicit new business. The customer list included client names, addresses, telephone numbers, the stylist used, last appointment, next appointment, birthday and the formula for the customer’s hair color or permanent wave.  In evaluating whether plaintiff’s customer list could be protected as a trade secret, the court focused primarily on three factors:  (1) the access that other employees had to the list; (2) the value and competitive advantage that the list afforded plaintiff; and (3) the expenses incurred by plaintiff in compiling, maintaining or updating the customer list and the advertising, networking or marketing involved in compiling the list.  Id. at *5 The court concluded that plaintiff failed to show how the list was confidential since several employees had access to all or part of the list.  The court further stated that plaintiff failed to adduce any evidence “regarding the value of the customer list to either [plaintiff] or [defendant].”  Id.  This was further substantiated because none of the defendants were forced to sign confidentiality agreements.  Finally, plaintiff failed to establish that it had expended time and money in developing the customer list.  Id.   

Similarly, where the plaintiff seeks protection for information that can be obtained from available sources like the internet and trade publications, trade secret protection will not be afforded.  Inflight Newspapers, Inc. v. Magazines In-Flight, LLC., 990 F. Supp. 119, 129  (E.D.N.Y. 1997) (“It was sufficiently established that the identity of magazine publishers and airline in-flight personnel could be easily ascertained through the use of trade directories, telephone books, the internet, trade shows, and the magazines themselves.  If these sources did not directly reveal the proper contacts, further inquiry therein would”); see also ENV Serv. Inc. v. Alesia, 2005 WL 3240478 *5 (N.Y. Sup. Ct. Nassau County 2005) (finding no trade secret protection for customer lists even though defendants had signed confidentiality agreements where customers’ names were readily available from sources like internet and trade publications); Samuel-Rozenbaum U.S.A, Inc. v. Felcher, 292 A.D.2d 214, 215, 741 N.Y.S.2d 1 (1st Dep’t 2002) (holding no trade secret protection warranted where list of customers was easily identifiable from reference to trade magazines and telephone directories and could be readily solicited with respect to purchasing wholesale diamonds) Starlight Limousine Serv., Inc. v. Cucinella, 275 A.D.2d 704, 705, 713 N.Y.S.2d 195, 196 (2d Dep’t 2000) (holding that regardless of time and money expended by plaintiff in compiling customer list, information used to compile customer list could be acquired with no extra effort from non-confidential sources and is therefore not entitled to trade secret protection).

To summarize, courts will examine the following factors in analyzing whether customer information is protectible: 
  • The amount of time, money and effort expended by a company in procuring the customer list or business information.  This generally must be of considerable duration and significant cost in not only procuring the information, but maintaining it as well.
  • The availability of the information.  Whether the employer went to great lengths to gather and compile the information, or whether the information  was readily obtainable from available public sources.
  • The value of the customer list to the employer’s business and any competitive advantage the customer list and information might give if misappropriated by a competitor.
  • The measures taken by the employer to keep the information confidential.
Any party seeking legal relief with respect to the loss of customer information must be prepared to offer specific evidence of the development of the list and its value in the marketplace.

Even a cursory review of the cases discussed above reveals that courts are not entirely consistent in their conclusions concerning whether customer-related information should be considered a trade secret.  The trade secret determination is a fact-intensive process and provides enormous latitude for a court in examining the circumstances.  One thing is clear however; a party must offer relatively detailed proof if it hopes to succeed in obtaining legal or equitable relief for the loss of non-technical trade secrets.  Courts will not imply the existence of trade secrets.

2.  Business Operations Information

Trade secret protection can also be awarded for other particularized information about a business’ operations and strategies, including but not limited to, pricing information, marketing strategies, product development, and business objectives.  As with trade secret protection for customer lists, trade secret protection for operational information must be shown to give an employer considerable competitive and economic value in order for it to be considered a trade secret.  The information must also be maintained as confidential.

The following decisions express the range of items that may be considered a trade secret after considering all of the above-mentioned factors.  This list is representative, not exhaustive:

  • Pricing and Cost Information - (pricing and cost information used in bid proposal was entitled to trade secret protection) Support Systems Assoc., Inc. v. Tavolacci, 135 A.D.2d 704 (2d Dep’t 1987).

  • Customer Preferences and Needs - (information detailing the characteristics and nature of customer specifications for tennis rackets entitled to trade secret protection) see Jay’s Custom Stringing, Inc. v. Yu, 2001 WL 761067 (S.D.N.Y. 2001).

  • Strategic Business Plans - (strategic planning and product development related to exercise equipment considered protectible trade secret) Lumex v. Highsmith, 919 F. Supp. 624 (E.D.N.Y. 1996).

  • Methods of Manufacture - (method for manufacture of polymethyl methacrylate used in the manufacture of intraocular lenses was  considered trade secret) see Surgidev Corp. v. Eye Technology, Inc., 648 F. Supp. 661 (D. Minn. 1986).

  • Drawings and Blueprints - (detailed drawings and blueprints of hydraulic load cell machine used in connection with weighing devices can be trade secrets) see A.H. Emery Co. v. Marcan Products Corp., 268 F. Supp. 289 (S.D.N.Y. 1967).

  • Quality Control Data - (quality control data used in connection with bids to procure jobs for the manufacture of automatic testing equipment was considered protectible trade secret) see Support Systems Assoc., Inc. v. Tavolacci, 135 A.D.2d 704, 706, 522 N.Y.S.2d 604 (2d Dep’t 1987).

  • Designs - (specifications and drawings related to how to best design silicone gloves were not known outside a select few and thus considered protectible trade secret) see Sylmark Holdings Ltd. v. Silicone Zone Int’l Ltd., 5 Misc.3d 285, 783 N.Y.S.2d 758 (N.Y. Sup Ct. N.Y. County 2004).

  • Recipes - (unique recipe for pretzel flour considered trade secret) see Pretzel Time, Inc. v. Pretzel Int’l, Inc., 1998 WL 474075 (S.D.N.Y. 1998).

  • Source Codes - (source codes of computer program constitute trade secret) see Dynamic Microprocessor Assoc. v. EKD Computer Sales, 919 F. Supp. 101 (E.D.N.Y. 1996). 

Certain compilations of business information, even if components are not secret, may qualify for trade secret protection.  This was the case in Integrated Cash Mgmt Serv. Inc. v. Digital Transactions, Inc., 920 F.2d. 171, 174 (2d Cir. 1990), where plaintiff software developer sued the defendants for misappropriation after its former employee went to work for a competitor and the competitor created a software program substantially similar to plaintiff’s.  To refute plaintiff’s claim, defendants argued that certain utility programs which were used to create plaintiff’s software were in the public domain.  The court rejected this argument and stated, “[a] trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectible secret.”  Id. (quoting Imperial Chem. Indus. Ltd. v. Nat’l Distillers and Chem Corp., 342 F.2d 737, 742 (2d Cir. 1965)). 

In Integrated Cash Mgmt Serv., the court went on to explain that plaintiff’s package as a whole, along with the specifications used by plaintiff to make the package work, were not in the public domain and therefore created a trade secret.  Defendants were simply unable to show how the limited information available in plaintiff’s promotional literature contained sufficient detail to constitute disclosure of the software’s actual architecture.  Moreover, in determining that plaintiff’s information should be awarded trade secret protection, the court noted that plaintiff took measures to protect the secrecy of its product architecture, namely, by locking the premises and requiring employees, including defendants, to sign non-disclosure agreements.  These factors further supported the confidential nature of the information.  From this case, it appears that trade secret protection stems not necessarily from the individual information, but the methods used by an employer to utilize the material in a fashion that creates some kind of competitive advantage for the employer.  Once this occurs and the combination or compilation of the material becomes commercially advantageous, trade secret protection can be substantiated if the employer takes the appropriate steps to protect and guard the secrecy of the information.  See also Elm City Cheese Co., Inc. v. Federico, 251 Conn. 59, 74, 752 A.2d 1037, 1048 (Conn. 1999) (where the court recognized a compilation of information revealing a unique relationship between plaintiff, its suppliers and three primary customers was a trade secret stating, “in light of the unique combination of the components at issue, that the aforementioned individual components, viewed in conjunction with each other, can be considered a trade secret.” Id. at 76)

In contrast, courts often hold that generic knowledge of the nature and operation of an employer’s business alone will not be considered a trade secret.  For example, in Catalogue Serv. of Westchester, Inc. v. Henry, 107 A.D.2d 783, 784, 484 N.Y.S.2d 615, 616 (2d Dep’t 1985) the court reversed a lower court ruling granting plaintiff a preliminary injunction against its former employee who solicited and procured sales from plaintiff’s customers after resigning.  Here, there was no confidentiality agreement in place and the court ultimately held that “remembered information as to specific needs and business habits of particular customers is not confidential” and went on to further state that absent a wrongdoing, “[k]nowledge of the intricacies of a business operation” does not constitute a trade secret. Id.;  see also Anchor Alloys v. Non-Ferrous Processing Corp., 39 A.D.2d 504, 507, 336 N.Y.S.2d 944, 946 (2d Dep’t 1972) (employee could not be enjoined from using his knowledge of the metal field industry).

It has also been held that “salary information, information about employee morale, and information about employee qualifications may not fall within the definition of a ‘trade secret’.”   ENV Serv. Inc. v. Alesia, 2005 WL 3240478 at *5 (N.Y. Sup. Ct. Nassau County 2005) (quoting Ashland Mgt. Inc. v. Janien, 82 N.Y.2d at 397).

Absent proof an employer took appropriate measures to maintain the confidentiality of the business information, trade secret protection will not be given to general operational information.  In Carpetmaster of Latham, Ltd. v. Dupont Flooring Sys., Inc, 12 F. Supp. 2d 257, 261-262 (N.D.N.Y. 1998), the court held that plaintiff failed to take measures to protect and maintain the secrecy of its general business information and ruled that information related to costs, pricing and estimating, used by defendant to solicit new customers, should be considered nothing more than a matter of experience, knowledge of the business and judgment.  The court refused to grant plaintiff trade secret protection for its business information, maintaining “there is nothing secret in the decision of how much of a mark-up percentage is necessary for good profit.”; but compare H. Meer Dental Supply Co. v. Commisso, 269 A.D.2d 662, 664, 702 N.Y.S.2d 463, 465 (3d Dep’t 2000) (vacating lower court’s grant of a preliminary injunction preventing defendants from using information, including customer lists, inventory lists, price lists, ordering frequency information and other proprietary information, on the basis that plaintiff was unable to show that its customer lists were confidential since they were available to the public).

D.  The Protection of Trade Secrets

               1.  Non-Compete Provisions

A common means by which non-technical commercial trade secrets are protected is the inclusion in employment agreements of covenants restricting an employee’s ability to compete or to solicit the company’s clients after termination of employment.  The concept is to limit an employee’s ability to provide services to a successor employer, and thereby limit the risk that trade secrets will be deliberately or inadvertently disclosed to and used by a competitor.  Courts have historically viewed non-compete covenants with skepticism and will only enforce them to the extent that they are reasonable in scope (i.e. duration and geography) and are necessary to protect “legitimate interests” of the employer.  BDO Seidman v. Hirschberg, 93 N.Y.2d 382, 389; Leo Silfen, Inc.v. Cream, 29 N.Y.2d at 393.  To determine whether the employer has a “legitimate interest” at stake, the courts typically consider whether the covenant protects “trade secrets” or whether the employee’s services are of a unique or extraordinary nature.  Reed Roberts Assoc., Inc. v. Stauman, 40 N.Y. 2d 303, 308, 386 N.Y.S. 2d 677, 682 (1976).  Thus, a symmetry has developed between trade secret law and non-compete law.  Courts expect that any enforcing party will specifically establish that trade secrets or other unique interests are at stake if equitable relief is to be granted to enforce a non-compete agreement.*

              2.  Confidentiality Agreements

 Confidentiality agreements are also commonly used in employment agreements and employment manuals as a device to protect non-technical commercial trade secrets.  Such agreements are not a prerequisite of trade secret protection.  For example, in Suncoast Tours, Inc. v. Lambert Group, Inc., 1999 WL 1034683 * 8 (D.N.J. 1999) the court granted a preliminary injunction despite defendant’s argument that as employees of plaintiff, they were not instructed by plaintiff to keep the customer lists confidential, and therefore, the lists should not be entitled to trade secret protection.  The court stated, “even if the employees were not instructed to keep the list confidential, the list may still constitute a trade secret” because plaintiff could reasonably rely on the “discretion and common sense of his employees without a specific policy of confidentiality.” Id.  Though not a prerequisite of trade secret protection, confidentiality agreements can serve the useful purpose of alerting employees of the existence of and the need to protect trade secrets and they serve as contemporaneous indicia that the employer has taken steps to protect the confidentiality of the trade secrets, a prerequisite to enforcement of trade secret claims.

Importantly, designation in a confidentiality agreement of certain information as confidential may not automatically entitle a party to legal or equitable remedies to protect the information.  Notwithstanding a confidentiality agreement courts routinely examine the inherent nature of the information with respect to which relief is sought and to determine if it is worthy of trade secret protection.  See Kadant, Inc. v. Seeley Machine, Inc., 244 F. Supp. 2d 19, 36 (N.D.N.Y. 2003) (holding that in spite of defendant’s confidentiality agreement in which he agreed not to disclose or use to his benefit any confidential information about plaintiff’s customers, court nevertheless held that customer lists and customer databases were not entitled to trade secret protection since the information was readily ascertainable through other sources like the internet or telephone book); ENV Serv., Inc. v. Alesia, 2005 WL 3240478 at * 1 (restrictive covenants precluding “disclosure of [plaintiff’s] confidential information” for three years from termination” were not enough to warrant trade secret protection for customer lists since lists were published on website and readily ascertainable through other sources); Tactica Int’l, Inc. v. Atlantic Horizon Int’l, 154 F. Supp. 2d 586, 608 (S.D.N.Y. 2001) (finding that plaintiff failed to prove that customer lists warranted trade secret protection despite existence of confidentiality agreements signed by defendants); Cf. Lumex v. Highsmith, 919 F. Supp. at 630 (where the court, notwithstanding confidentiality agreement signed by defendant, still examined the record to determine the nature of and existence of plaintiff’s trade secrets).  Therefore, confidentiality agreements are more likely to serve as indicia of the trade secret status of certain information identified in them than as a guarantee of or contractual right to trade secret protection.  Nevertheless, where there is a confidentiality agreement in place, a court may be reluctant to imply protection for information not specifically referred to in the agreement.  Nilssen v. Motorola, Inc., 963 F. Supp. 664, 680 (N.D. Ill. 1997) (court concluded that where plaintiff failed to designate certain material as confidential, by either reducing designated material to written form or by stamping the material confidential, prior to and after the executed confidentiality agreement, defendant was under no obligation to maintain confidentiality of plaintiff’s disclosures).

3. Claim for Misappropriation of Trade Secrets

Employees often commence litigation alleging misappropriation of trade secrets when an employee goes to a competitor.  The New York Court of Appeals has concluded that to succeed on a misappropriation of trade secrets claim, the moving party must show (1) that it was in possession of a trade secret and (2) that the defendants used that trade secret in breach of an agreement, confidential relationship, or duty, or that it was used as a result of discovery by improper means.  See North Atlantic Instruments, Inc. v. Haber, 188 F.3d 38, 44 (2d Cir. 1999). 

Significantly, where trade secrets are demonstrated, the court will presume the risk of “irreparable harm” necessary in order to obtain preliminary injunctive relief.  FMC Corp. v. Taiwan Tainan Giant Indus. Co., 730 F.2d 61, 63 (2d Cir. 1985) (the loss of a trade secret is not measurable in terms of money damages because “[a] trade secret once lost is, of course, lost forever.”).

E.  Equitable Balancing

1.  Inevitable Disclosure

In their continuing effort to strike an appropriate balance between the protection of trade secrets and an employee’s freedom to move between employers, courts have developed some innovative doctrines.  One controversial doctrine is known as “inevitable disclosure.”  This doctrine is premised on the concern that once an employee gains knowledge of a competitor’s confidential information, it is almost impossible for that employee, when joining a new employer, to compartmentalize that knowledge and avoid using it when they go to work in a similar position in the same industry.  The doctrine of inevitable disclosure has been used to support equitable relief to protect trade secrets in the absence of non-compete provisions or actual proof of misappropriation.  However, to rely on the doctrine, an employer will have to show more than mere knowledge of business intricacies.  There must be an actual showing or an actual threat of misappropriation. 

The seminal case on inevitable disclosure is PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).  In PepsiCo, the district court granted a preliminary injunction barring a former employee from working for a competitor upon plaintiff’s showing that defendant’s new employment would inevitably lead him to rely on plaintiff’s trade secrets.  PepsiCo maintained that defendant Redmond, a senior management executive, had detailed knowledge of its pricing, costs, margins, distribution systems, products, packaging and marketing with respect to sports drinks and related products and could not oversee marketing of a competitor without inevitably relying on his knowledge of plaintiff’s trade secrets.  Redmond was subject to a confidentiality agreement but not a non-compete agreement.  The court found that PepsiCo would be irreparably harmed without an injunction because “[plaintiff] finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team before the big game.”  Id. at 1270. 

In finding a likelihood of inevitable disclosure, courts have considered the following factors: 

  • the degree of competition between the former and new employer

  •  the new employer’s efforts to safeguard the former employer’s trade secrets

  • the former employee’s lack of forthrightness both in his activities before accepting the job and in his testimony

  •  the degree of similarity between the employee’s former and current position. 

Since PepsiCo, there has been an increase in inevitable disclosure cases.  New York first recognized the inevitable disclosure doctrine in Doubleclick, Inc. v. Henderson, 1997 WL 731413 *6 (N.Y. Sup. Ct. N.Y. County 1997).  In Doubleclick, defendants were senior managers of an internet advertising company and sought to strike out on their own to compete with Doubleclick.  Both defendants had entered into confidentiality agreements and one defendant had a non-compete agreement.  Plaintiff argued that defendants would inevitably rely on plaintiff’s trade secrets.  The court agreed, holding that the centrality of their roles at Doubleclick together with their obvious plan to replicate the company’s business plan for the benefit of a competitor was enough to show actual misappropriation and justified enjoining them from competition for six months.  See also Lumex, Inc. v. Highsmith, 919 F. Supp. at 624 (granting preliminary injunction against former employee who was privy to design of plaintiff’s current and future equipment, pricing, income and objectives and holding that it would be unlikely that defendants could eradicate secrets from their minds). 

Most recently, in Wenner Media LLC v. Northern & Shell North America Ltd., 2005 WL 323727 * 4 (S.D.N.Y. 2005), the court granted a temporary restraining order preventing a former executive editor, who signed an employment contract with non-compete and confidentiality provisions, from working for a competing celebrity magazine publication.  Defendant left her position with Wenner before her contract period was over to develop a competing magazine.  Plaintiff feared imminent exploitation of its confidential information.  In rendering its decision, the court noted that the defendant employee breached the non-compete agreement which prevented her from accepting employment with a competing publication during her employment period since she was privy to “publishing methodologies which were characterized as confidential trade secrets” in the signed employment contract.  Id.  The court concluded that plaintiff met its burden of showing likely irreparable harm without equitable relief and acknowledged that “certain circumstances may exist which overcome disfavored status to justify enforcement.”  Id.   

While some New York courts have embraced the doctrine of inevitable disclosure, the doctrine has not been universally accepted in New York.  In EarthWeb, Inc. v. Schlack, 71 F. Supp. 2d 299, 310 (S.D.N.Y. 1999) the court concluded that “in its purest form, the inevitable disclosure doctrine treads an exceedingly narrow path through judicially disfavored territory.”  The court refused to apply the inevitable disclosure doctrine, stating that “its application is fraught with hazards and reasoning that defendant had entered into an employment contract and confidentiality agreement and there was no evidence of actual misappropriation.  Id.

More recently, in Marietta Corp. v. Fairhurst, 301 A.D.2d 734, 737, 754 N.Y.S.2d 62, 65-66 (3d Dep’t 2003) the court rejected plaintiff’s inevitable disclosure argument stating that an employer should not be permitted to make an “end run around the [confidentiality] agreement by asserting the doctrine of inevitable disclosure as an independent basis for relief.”  Id. at 66, 737; see also Colonize.com, Inc. v. Perlow, 2003 WL 24256576 * 6 (N.D.N.Y. 2003) (denying preliminary injunction where plaintiff was unable to rely on inevitable disclosure of trade secrets because defendant had not actually used or threatened to use plaintiff’s trade secrets and therefore plaintiff was unable to establish that it would suffer irreparable harm); Tactica Int’l, Inc. v. Atlantic Horizon Int’l, Inc., 154 F. Supp. 2d 586, 608 (S.D.N.Y. 2001) (denying preliminary injunction based on doctrine of inevitable disclosure where neither defendant held senior executive position and plaintiff failed to establish evidence of overt theft or actual misappropriation of either trade secrets or confidential information).

The inevitable disclosure doctrine has met considerable resistance.  Some jurisdictions, most notably Florida and California, have rejected use of the inevitable disclosure doctrine because it “creates a de facto covenant not to compete and runs counter to strong public policy favoring . . . employee mobility”  GlobeSpan, Inc. v. O’Neill, 151 F. Supp. 2d 1229, 1235 (C.D. Cal. 2001) (stating that “[t]he Central District of California has considered and rejected the inevitable disclosure doctrine”); see also Del Monte Fresh Produce Co. v. Dole Food Co., Inc., 148 F. Supp. 2d 1326 (S.D. Fla. 2001) (noting that Florida has yet to adopt the inevitable disclosure doctrine); Gov’t Tech. Serv., Inc. v. IntelliSys Tech. Corp.,  51 Va. Cir. 55, (Va. Cir. Ct. 1999) (“Virginia does not recognize the inevitable disclosure doctrine.”); Bayer Corp. v. Roche Molecular Sys., Inc. 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999) (holding that “California trade secrets law does not recognize the theory of inevitable disclosure; indeed, such a rule would run counter to the strong public policy in California favoring employee mobility”); Bradbury Co., Inc. v. Teissier-Ducros, 413 F. Supp. 2d 1203, 1209 (D. Kans.  2006) (holding that Kansas has yet to address the inevitable disclosure doctrine).

Although Pennsylvania has not explicitly adopted the doctrine of inevitable disclosure, the Third Circuit in Doebler’s Pennsylvania Hybrids, Inc. v. Doebler Seeds, LLC, 88 Fed. Appx. 520, 523 (CA. 3 (Pa.)) predicted that under the circumstances of that case, the Pennsylvania Supreme Court would apply it or some variation.  In Doebler’s the court granted plaintiff, a family owned company in the business of marketing seeds, a preliminary injunction against its former board member who left and started a competing business.  In the course of forming the competing business, defendant hired many of the employees who formerly worked for plaintiff and the court found that this posed a legitimate threat of irreparable harm to the plaintiff since defendant now “employ[s] many of [plaintiff’s] former employees in positions that will result in inevitable disclosure of trade secrets.”  Id. at 522.  Accordingly, the Third Circuit affirmed the district court’s decision to grant the preliminary injunction and protect plaintiff from unfair competition.

2.  Casual Memory

On the opposite side of the scale, courts have recognized that employees should not be unnecessarily restricted in obtaining new employment based on work done for a prior employer.  In some instances, courts have found that where an employee is able to remember business information from his or her casual memory (as distinct from studied memorization or actual physical taking), that information should not be deemed a trade secret and is therefore not entitled to protection.  See Falco v. Parry, 6 A.D.3d 1138, 775 N.Y.S.2d 675 (4th Dep’t 2004) (fitness club and its managing member could not maintain action based on misappropriation of client list, where plaintiff could not show defendants engaged in “wrongful conduct such as physically taking or copying plaintiffs’ files and use of information concerning plaintiffs’ clients that is ‘based on casual memory . . . is not actionable”); Johnson Controls, Inc. v. A.P.T. Critical Sys., Inc., 323 F. Supp. 2d 525, 537 (S.D.N.Y. 2004) (“[T]rade secret protection will not attach to customer information that can easily be recalled or obtained from the customers themselves. . . . Thus, absent the physical removal of actual contracts or client lists, it is difficult to show the misappropriation of these types of trade secrets or confidential information.”); Abraham Zion Corp. v. Lebow Clothes, Inc., 593 F. Supp. 551, 564 (S.D.N.Y. 1984) (employee who contacted ex-employer’s retail customers and suppliers from memory based on previous personal associations with them did not misappropriate confidential customer information), aff’d, 761 F.2d 93 (2d Cir. 1985); Arnold K. Davis & Co. v. Ludemann, 160 A.D.2d 614, 615, 559 N.Y.S.2d 240, 241 (1st Dep’t 1990) (the use of information about an employer’s customers based on casual memory is not actionable); Catalogue Serv. of Westchester, Inc. v. Henry, 107 A.D.2d at 784 (knowledge of the intricacies of a business operation does not necessarily constitute a trade secret). 

A rationale behind the casual memory exception is that an employee should not be obligated to have professional amnesia in order to work for a competitor.  However, common sense dictates that valuable, confidential information should not necessarily lose its confidential status when carried away from an employer in a former employee’s head as opposed to in tangible documents.  The result may still be exploitation of confidential information by a competitor resulting in an unfair competitive advantage regardless of how the information was transported from the former employer.  While modern cases often assume casual memory is not actionable, a closer inspection of the early casual memory cases on which these cases are based reveals, that the courts also relied on the supplemental rationale that the information was either publicly available and therefore not a trade secret or that there was simply no harm in the employee’s conduct.  See e.g., Peerless Pattern Co. v. Pictorial Review Co., 147 A.D. 715, 718, 132 N.Y.S. 37, 39 (1st Dep’t 1911); Falco v. Parry, 6 A.D.3d 1138; Bus. Networks of N.Y. Inc. v. Complete Network Solutions, Inc., 1999 WL 126088 * 9 (N.Y. Sup. Ct. N.Y. County 1999).  Thus, the seminal cases leave ambiguous precisely the reason why the information was deemed not to be protectible.

Other cases have held that the use of remembered confidential information is improper.  See Hecht Foods, Inc. v. Sherman, 43 A.D.2d 850, 851, 351 N.Y.S.2d 711, 714 (2d Dep’t 1974) (after defendant resigned and began soliciting former customers, court enjoined him from using plaintiff’s customer list (which was deemed a trade secret) absent proof either way that defendant memorized the customer list or recalled it from casual memory); Goldstein v. Freeman, 1/4/2000 N.Y.L.7 27, (Col. 3) (N.Y. Sup. Ct. Rockland County 2000) (where plaintiff’s customer list found to be trade secret, court enjoined defendant from using trade secret to solicit customers holding that protection is not less applicable because defendant might have committed customer list to memory).   

The casual memory doctrine appears to turn less on the inherent nature of the information in question and more on the inevitable portability of the information and practical considerations of not unreasonably limiting an employee’s freedom to move between employers and exploit their expertise.  Apparently sensing the logical dilemma presented by the doctrine, courts relying on the doctrine have provided supplemental bases to deny trade secret status and have further stated that other “wrongful conduct” could avoid the casual memory exception.  Given the ambiguity in the rationale for the casual memory doctrine, confidentiality agreements arguably should operate to preclude misuse of certain casually remembered information.  While a confidentiality agreement may not operate to convert information that is not inherently a trade secret into a trade secret, if the information is valuable and confidential, though easily remembered, breach of an express agreement might provide the “wrongful conduct” necessary to plug the casual memory gap. 

Acknowledgement/Contact Information

Invaluable contribution to this paper was provided by Carter Ledyard & Milburn LLP litigation associate, Michele L. Abraham.

For further information on these and related subjects contact:

Lawrence F. Carnevale
Michele L. Ross
Carter Ledyard & Milburn LLP
Two Wall Street
New York, NY  10005
212-238-8617

Note

* For a more detailed examination of the enforceability of non-compete agreements see Common Law and Contractual Restraints on Employee Conduct, by Lawrence F. Carnevale, November 1, 2005.


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