When Key Employees Depart
What are you losing:An
employee's expertise or company trade secrets
Patrick M.
Pilachowski
The following was published in the Daily Records,Baltimore's
legal and business daily newspaper, June 29,2002
Recently, I have seen in my employment law
practice a substantial growth in disputes over employees
competing with their
former employers, often accompanied by charges of misuse
of confidential
business information and trade secrets.
Is it legal for employees to consider their employers'
business information and customers as "portable"?
As is often the case in legal matters, the answer is: "It
depends." On what? On several things, such as:
- Whether
the employer's information is a trade secret.
- The
existence of a contract restricting the employee's
post-employment
competition, contact with customers,
and/or use of the employer's business information
- When
the activity occurs.
- The
nature of customers and efforts to cultivate them.
- Whether
the employee engages in what courts have characterized
as a breach
of the duty of loyalty, unfair competition, "raiding" of
the workforce, conversion (i.e., taking of property), or interference
with contractual rights.
This
column and the one follows will look at trade secrets.Items 2,3 and 4 all
encompass various forms of post-employment restrictive covenants. Item
5 encompasses
business torts. The latter items are beyond the scope of this article and
will
be covered in a future column. Terms
of art
"
Trade secret" is a legal term of art. It has a generally-accepted
meaning developed over the years via court decisions (the so-called "common
law").
Currently, these principles have been codified into statutes since most
states have adopted variations of the Uniform Trade Secrets Act. [Maryland
has adopted
the UTSA, contained at ßß 11-1201 through 11-1209 of the
Commercial Law Article, Annotated Code of Maryland.]
Whether
something is a trade secret requires an analysis of the
nature
of the information and efforts at secrecy. Without going into its essential
elements
include information: (1) with economic value; (2) not generally known
or easily ascertainable; and (3) that is the subject of efforts to
maintain secrecy.
A
trade secret is one of several species of business goodwill
which enjoys legal protection from
competitors. Other species include patented
devices
or processes,
trademarks and trade names, and copyrighted material. All of these
are rendered untouchable from competitors by virtue of statutory
protection.
However
there is a fundamental difference between trade secrets
and the above-listed items. That
is, patents, trademarks and copyrights
contain
publicly-disclosed
information. Trade secrets contain privately-held information.
For example, a copyrighted literary work or a movie is obviously
known to any competitor, and indeed to the general public. The
components and operation
of patented items -ñ be they complex like intricate chemical
formulae, gears and tolerances of machinery, etc., or simple like
the "Post-It" notes
-ñ are available to the public and competitors at the U.S.
Patent Office. Trademarks or trade names like Big Macô are
protected from having their names, or confusingly similar ones,
misappropriated. For example, it is unlikely
that a restaurant owner could call his business "The Big Mack",
even if Mack is his given name.
The
U.S. Supreme Court has acknowledged the niche for protection
of trade secrets as well, and explained the rationale for legal
protections afforded
to them.
In the case of Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470,
493
(1974),
the Court stated:
Trade
secret law encourages the development and exploitation
of those items of lesser or different invention than might
be accorded protection under the patent laws, but which
items still have an important part to play in the technological
and scientific advancement of the Nation. Trade secret
law promotes the sharing of knowledge, the efficient operation
of industry; it permits the individual inventor to reap
the rewards of his labor by contracting with a company
large enough to develop and exploit it. Congress, by its
silence over these many years, has seen the wisdom of allowing
the States to enforce trade secret protection.
Thus,
the "wisdom" underlying
this public policy is to encourage, stimulate and develop
R&D so as to
improve products or methods. Without legal protection,
improvements generated by R&D could be pirated and
the creator's investment in his asset ñ or, more
typically, his employer's investment -- would immediately
evaporate. Obviously, that scenario would greatly chill
R&D endeavors.
The
doctrine of trade secrets developed in state law in recognition
of the fact that public policy
should encourage
the evolution of increased knowledge, more efficient
methods, and better products.
Essential
components
As
stated above, essential components of trade secret status
include, obviously, secrecy, as well as
information
that
is inherently valuable and not generally known in
the industry, or not easily ascertainable. Stated
most generally, the types of information/data that are
potentially valuable
after have included:
- Secrets
- Devices
not patented or patentable;
- Manufacturing
or preparation processes;
- Chemical or other formulae; technical or scientific processes,
and the like;
- Nature and extent of components or ingredients;
- In appropriate cases, information such as customer lists,
buying habits, pricing, and costs.
Litigation may ensue when an employee, typically a key
one, leaves and is suspected of transferring assets such
as those described above to his new employer.
Employment
law disputes often arise in this area because of
the struggle between competing legal interests: on the
one hand an employee's freedom of mobility and the right
to earn a livelihood in the profession of one's choosing;
the other hand an employer's right to protect business
assets such as trade secrets/confidential business information/long-standing
customer relationships.
The
general presumption is that an employee is free to use
his experience, skills and
abilities when transferring
to a different employer. A conflict arises if the employment
experience included the acquisition of trade secrets
from the former employer.
A substantial body of law has been created as courts
attempting to draw lines between the portability of
an employee's
experience, skills and abilities and the employer's
legally protectable employer's trade secrets.
Next
week, this column will explain how to establish and preserve
trade secret status. Employers may wish
to consider
whether they possess any of the listed legal protections
for their potential trade secrets. The third and
final
part will discuss how employers can attempt to protect
good will even if information does not rise to the
level of trade secret status.
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