Safeguarding trade secrets.

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. The Supreme Court of Iowa upheld the district court's ruling that the recipes were trade secrets and that reasonable steps had been undertaken to maintain their secrecy. The restaurant was able to obtain an injunction barring the further use of its recipes, as well as damages for their misappropriation.

According to the evidence, the pizza sauce and sandwich recipes were closely guarded and kept in a safe deposit box when not in use. The few persons privy to the recipes were instructed to keep the information secret.

The pizza crust recipe had to be made more widely available to employees, as pizza crusts were necessarily prepared daily by several cooks. Though several employees knew the crust recipe, the court found that because those employees were told not to divulge the information, reasonable steps had been taken by the restaurant.

Demonstrable value. The courts have ruled that the term "value" in the definition of trade secrets implies that the information will have significant value. Names acquired by culling phone books, public directories, magazines, and other easily acquired, inexpensive sources will not be shown to be secret, nor will the information be shown to be of significant value, negating the possibility of trade secret protection.

For example, in a Florida case, Creative Loafing Tampa, Inc., a company that publishes specialty magazines, filed suit against a former employee who it claimed had misappropriated company trade secrets (Templeton v. Creative Loafing Tampa, Inc., The Court of Appeals of Florida for the Second District, 1989). The secrets in dispute were the names and addresses of magazine advertisers and local merchants to whom the magazines were distributed free of charge. The former employee had created a competitive magazine and, claimed Creative Loafing, had sold advertising space to many of its customers. In addition, copies of the competing magazine were being distributed to many of the same locations as Creative Loafing's magazines. A trial court found in favor of Creative Loafing, but a higher court overturned the ruling in favor of the former employee. In overturning the ruling, the appeals court noted that the names and addresses in contention were not trade secrets. It pointed out that anyone who read a copy of the magazine could easily note the names of the magazine's advertising customers. In addition, the names and addresses of stores willing to allow the distribution of free magazines could easily and inexpensively be obtained. The lists were found not to be a product of great expense, nor did they include information unavailable from public sources. In short, they were found to be neither secret nor valuable. As a consequence, the court ruled they were not trade secrets.

In another case, a list of customer names was found to be a legally protectable trade secret (Surgidev Corporation v. Eye Technology, Inc., U.S. Court of Appeals for the Eighth Circuit, 1987). In that instance, the courts found that reasonable steps had been taken to protect a list that included the names of doctors who performed a specific type of surgery. The list was secured in a locked cabinet in a restricted area, released to employees only on a need-to-know basis, and resecured once the employee had finished with the list. In addition, employees were required to sign nondisclosure, noncompete covenants prohibiting the use of the list in unauthorized endeavors.

Protection procedures. To ensure that a company is protected, the security manager should identify information the firm possesses that it considers to be a secret. Working closely with senior management, security professionals should determine whether so-called proprietary information is widely known or easily obtained. If it is, the courts may not consider it a secret.

Next, security should assess whether the secret is valuable and, if so, how valuable. The security manager should, in consultation with senior management and other appropriate personnel, assign a dollar value to corporate data such as marketing strategies, product evaluations, and customer credit information. For example, a computerized database of customer names and financial information has intrinsic and competitive value because its loss could give another business easy access to those clients.

After evaluating what information should be secret and determining its value, security can begin designing a reasonable protection strategy. Security professionals should ensure that documents containing secrets are labeled "confidential" and are kept in a secure location when not in use.

Ensuring that surplus documents containing the secrets are destroyed is another critical step. In one case, a company's failure to destroy surplus copies of its secrets worked against the firm's claim that reasonable steps had been taken to protect them (Electro-Craft Corporation v. Controlled Motion, Incorporated et al., Minnesota Supreme Court, 1983). In another case, the court noted that despite requiring employees to sign-out copies of documents containing the firm's secrets, the plaintiff failed to monitor employees to assure that copies were shredded when no longer needed (Rockwell Graphic System, Inc., v. Dev Industries et al., Illinois Court of Appeals, Northern District, 1990).

After decisions are made regarding the protection of proprietary information, security should develop written policies specifying which information is covered and prohibiting its unauthorized use. The company may also want to incorporate into its personnel hiring process an employment agreement that includes a legal nondisclosure, noncompete covenant. Such covenants should make employees aware of information the firm considers a trade secret and their responsibility not to disclose it to others or use it without authorization.

When drafting such covenants, companies must remember that these agreements need to be reasonable. For example, reasonable parameters must be set regarding the length of time any restrictions apply to the activities of employees once they leave the organization. Similarly, the geographic area to which the agreement applies must be reasonable. Therefore, an attorney should review all such covenants.

Counsel should also be involved in all trade secret protection planning. Differences in states' laws concerning trade secrets do exist, and even within a particular state, the law may change over time.

These recommendations should not be considered legal advice, but should form the basis of discussions with senior management about how best to protect company secrets. A good trade secret protection program will not just position the company to win in court, it will make former employees and competitors think twice before attempting to infringe on the company's ownership of proprietary information.

Michael Craig Budden, Ph.D., is professor of marketing at Auburn University-Montgomery. He is the author of Protecting Trade Secrets Under the Uniform Trade Secrets Act: Practical Advice for Executives, available from Quorum Books.