Are You Keeping Your Trade Secrets Secret?

Editor’s Note: E. Bradley Evans is a member of the Intellectual Property Practice Group of Ward and Smith, P.A.

RALEIGH – If you own or operate a business, chances are you have trade secrets. Generally speaking, your trade secrets are all of those bits of knowledge and information you have developed over time by your efforts and at your expense and that you do not want your competitors to get their hands on and use against you to get or keep business that otherwise might come to you.

North Carolina has enacted tough laws to protect trade secrets, but business owners and operators must take the appropriate steps to take advantage of them.

The North Carolina Trade Secrets Protection Act

What are trade secrets? North Carolina has adopted the Uniform Trade Secrets Protection Act ("TSPA"), which defines a "trade secret" as "business or technical information, including but not limited to a formula, pattern, program, device, compilation of information, method, technique, or process that: (a) derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by 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."

The first portion of the definition makes it clear that trade secrets can take a wide variety of forms. The most typical example would be the secret formula for Coca Cola^® or a secret method or device for accomplishing some result (i.e., how to "build a better mousetrap"). The TSPA definition of a trade secret, however, makes it clear that trade secrets can be any kind of business or technical information, and decisions from North Carolina’s courts have held that information such as customer and supplier lists and pricing materials can constitute trade secrets.

In fact, customer lists and pricing information tend to be the most frequently misappropriated and litigated forms of trade secrets.

The definition of trade secrets is limited in two important ways. First, the information, in whatever form it takes, must have "independent actual or potential commercial value" to competitors in the business by virtue of the fact that they cannot obtain it through some other source. In other words, trade secrets cannot be stale or outdated information that has no commercial value. It also cannot be information that may be readily obtained by the public upon request, such as the final bid on a particular public job.

On the other hand, a trade secret can be a combination of publicly available information used in a way that is not known to the public.

The second limitation is that in order to acquire the protections of the TSPA, a business must take reasonable steps to maintain the secrecy of its information. Information is not a trade secret unless its owner treats it as a secret. For example, if you freely discuss your customer list with third parties not subject to any confidentiality, the list is not a trade secret.

Protecting Trade Secrets

In order to ensure that your most important business information is protected by the TSPA, business owners and operators should consider the following:

• Managers should limit access of lower-level employees to critical business information. Sensitive business information should be made available to employees on a "need-to-know" basis only. First-year sales associates should not have the same access to sensitive financial or technical information as senior management and executive officers.
• Sensitive business information stored electronically should be maintained behind a firewall, should be password protected and should be otherwise inaccessible to unauthorized individuals. Hard copies and other tangible materials should be stored under lock and key.
• Employment agreements should contain provisions in which employees acknowledge that they may, as part of their employment, have access to confidential, proprietary, and trade secret information. The employee should specifically acknowledge and promise in the employment agreement not to disclose such information to outside parties, at the risk of facing substantial damages for breach.
• Employment agreements also should contain covenants by employees not to misappropriate trade secret information from third parties – especially former employers.

Trade Secret Litigation

The TSPA authorizes a civil cause of action for misappropriation of trade secrets. In North Carolina, these lawsuits arise most often in the context of a former employee leaving one business and starting a new business, or beginning work with an existing business that engages in substantially the same type of work. If the departing employee uses the trade secrets of a former employer to start the new business or to benefit the new employer’s business, the former employer may choose to initiate a lawsuit against the former employee and/or, under certain circumstances, the new employer.

The remedies available to the former employer under the TSPA are as strong as any remedy available under North Carolina law. The former employee may be enjoined from using the misappropriated information for as long as the information has commercial value. The former employer also may recover any damages incurred as a result of the misappropriation, as measured by either (a) the harm caused or business lost as a result of the misappropriation, or (b) the degree to which the former employee was enriched by taking the trade secret information without authorization.

The TSPA provides a right to recover attorneys’ fees for intentional misappropriation, a type of recovery rarely available in North Carolina. In combination with other statutes, the victim of trade secret misappropriation also may receive punitive or treble damages as a way of discouraging such unlawful conduct in the marketplace.

Conclusion

Virtually every business has information that it would not like for its competitors to have. North Carolina law provides significant protection for such trade secret information, as long as business owners and operators take the necessary steps to avail themselves of the protection of the law.

© 2007, Ward and Smith, P.A.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.