By Michael Kelsheimer
Who, What, Why . . .
What qualifies as a trade secret: Among other things, customer information and lists, business methods (pricing, etc), chemical formulas, recipes, computer programs and source code, business know-how (think special way of modifying a car engine), manufacturing processes, marketing information, product designs, suppliers and vendors, and technical drawings.
What does not qualify as trade secret:Abstract ideas that have not been formed into a business practice or strategy, general skills taught to an employee, and, importantly, what an employer might otherwise call a secret that is out in the public domain.
What obligations do my employees owe to keep my secrets while employed: Employees owe their employer what is known as a “fiduciary” duty while employed. A fiduciary relationship is known in the law as a relationship of the highest trust. They must keep all of your trade secrets and confidences without even requiring a policy to hold against them and they may not compete with your business.
What obligations do my employees owe to keep my secrets after they leave: The fiduciary duty goes away after termination for most employees, leaving employers with somewhat less protection, unless the employer uses a covenant not to compete. Employees can take the general business knowledge they learned from the employer and solicit those customers they can remember from the employer. They can even open up shop right next door to compete.
How can I use a covenant not to compete: Covenants not to compete will be discussed in a separate EH piece, but can help an employer to restrict former employees from opening up right next door and competing with their former employers.
Secret to the whitest teeth: Don Dentist would like to increase his business for teeth whitening. There is a huge market for it, but customers don’t come to him for that service. In fact, he has lost a lot of business to Happy Teeth dental across town that seems to bring in all the whitening customers. Wondering what the secret is, he lures one of Happy Teeth’s employees to come work for him so he can learn the secret. Can Happy Teeth prevent the former employee and Don from using his secret method for bringing in all the customers? In this instance, no. Happy Teeth’s “secret” method turns out to be a special machine that is new in the marketplace that can instantly whiten teeth. Don could have saved himself the new hire and gone in as a patient of Happy Teeth’s to learn the secret. Information which is discoverable by inspection, is not a trade secret so the hiring of an employee from Happy Teeth doesn’t even matter.
Special car modifications: Mike at Mike’s Hot Rods has really figured out how to modify the engine and suspension of the new Dodge Charger. He has so much work that he has to hire some new workers and teach them his system. After a year, Mike’s business is still going strong. So strong, that the year old workers have decided to open up shop right across the street with their own business making the same modifications. Can Mike stop them? In this case, the answer is probably yes. Mike has specially fabricated parts, experimented with various parts and come up with an undeniably special combination. It took him years to do so and the information would be hard for his customers to discern by taking one of his cars apart. While he cannot stop the former employees from competing, he can stop them from making the same special modifications to the Charger that he uses.
But I came up with the formula: Dr. Chemie has worked for Star Adhesives for 25 years. Over that time, he personally developed almost all of Star’s chemical formulas for its adhesive products. His new girlfriend has convinced him that Star Adhesives is not treating him fairly after all of those years and that he should go into business for himself. They will be rich, she tells him. Dr. Chemie takes the advice and begins selling the adhesive formulas that he developed while working for Star. Can Star Adhesives stop Dr. Chemie? After all, the formulas are his. Absolutely, Dr. Chemie developed those formulas during work hours and those ideas belong to Star Adhesives. He created them, but was paid to do so.
Patent-shmatent: Brice Architecture developed a methodology for building suspension bridges that takes less time. Twenty years ago, they patented the procedure and have enjoyed its protections since that time. Five years ago, Brice hired an enterprising architect who became dissatisfied with the company and went into business for himself this year. The young architect is using Brice’s patented method. Can Brice stop the architect from using its patented design? No. The patent has expired. Even though Brice claims it is still a secret, any architect who looked at one of their bridges can easily discern the idea. That was the reason for patenting it. Brice cannot put its former employee in any worse situation than any other person off the street who wants to copy its formerly patented formula.
That’s MY customer list: Stone Investments provides investment advice for businesses looking to expand. The company is very secretive about its customer relationships and its customers insist Stone have non-disclosure agreements for all of their dealings. One of Stone’s employees decides to strike out on his own. The employee was very careful not to take any secret customer lists or other information from the company at the time he left, but is about to blast an email to many of Stone’s customers. Can he get away with that? It is likely he will have no liability if the folks he is sending the offer to are just those people he is connected to on Linkedin and Facebook. Any of the former employee’s friends and many strangers can look at his contacts so they are no secret for Stone.
What should I do:
Good: You don’t really have to do anything to enjoy the basic protections preventing current and former employees from using your secrets. The law is designed to look out for you. Simply do your best to maintain your secrets from the public’s watchful eye.
Better: While the law does offer some protections, there are some easy additional precautions you can take that are worthwhile. Have a policy in your employee handbook explaining some information is secret and protected. Many employees will not have the first thought about this type of issue until you bring it to their attention. As part of your new hire consents and acknowledgments, have employees sign off on a confidentiality agreement. Even though it probably just recites the protections you have, employees are more likely to feel bound by it when they leave.
Best: For the most protection available, have employees enter into a covenant not to compete and an assignment agreement regarding all patents the employee might develop while working on the company clock.