United States: The [Trade] Secret Is Out: What All Government Contractors Need To Know About Proposal Information And The Uniform Trade Secrets Act

In a time of shrinking budgets and contracting opportunities, government contractors should be aware that the information compiled in their proposals has grown increasingly more valuable. Fortunately, the Uniform Trade Secrets Act (UTSA) is a tool contractors can use to protect their trade secrets, but they must employ basic protections by:

• Always marking their proposal documents with restrictive legends;
• Imposing restrictions on subcontractors' or consultants' use of trade secrets;
• Requiring each employee to execute a nondisclosure agreement; and
• Carefully checking to ensure former employees do not make unauthorized disclosures of trade secrets, including proposal information.

Overview of Risks of Disclosure of Trade Secret Information

Every day, hundreds of government contractors submit proposals in response to various government solicitations – the culmination of a process that may involve months, if not years, of research and planning, the expenditure of significant amounts of money, and the participation of multiple individuals. Of course, one of the risks of such a process is that a former employee may misappropriate a contractor's proposal information, either in whole or in part by, for example, refusing to return certain data when leaving the company, distributing such information without the proper permissions to his/her new employer, and/or subsequently using such information in a competitor's proposal.  In such instances, the contractor's options for legal recourse may depend upon one key issue – whether the contractor's proposal qualifies as a trade secret. Under the Uniform Trade Secrets Act, it likely does and, thus, the contractor may sue the former employee and his new employer for misappropriation of a trade secret.

Compilation of Information is a Trade Secret

The UTSA is an act that has been adopted in 47 states(Massachusetts is currently contemplating its implementation), the District of Columbia, Puerto Rico, and the U.S Virgin Islands, and while each state's/territory's version may vary slightly, the essential parameters are the same. Specifically, the UTSA defines "trade secret" as:

As such, the UTSA recognizes that the compilation of information may be a trade secret, even if a portion of such information is known. See Enterprise Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 3 P.3d 1064, 1069-70 (Ariz. App. 1999) (citing Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 475 (1974)) ("Although matters of general knowledge cannot be appropriated as secret, a trade secret may consist of a combination of elements even though each individual component may be a matter of common knowledge."). Indeed, courts have repeatedly recognized that compilations of business information comprised of mostly of publicly available information and limited proprietary information nonetheless qualify for trade secret protection. See AvidAir Helicopter Supply, Inc., v. Rolls-Royce Corp., 663 F.3d 966, 972-75 (8th Cir. 2011); see also Northern Elec. Co. v. Torma, 819 N.E.2d 417, 420 (Ind. Ct. App. 2004). In such instances, key considerations include whether the combination of non-secret and secret information "affords a competitive advantage and is not readily ascertainable[,]" as well as whether duplication of the information "would require a substantial investment of time, effort and energy" "as the effort of compiling useful information is, of itself, entitled to protection even if the information is otherwise known." AvidAir, 663 F.3d at 972-73 (internal citations omitted).

Proposals are Compilations of Information

Because the compilation of information may qualify as a trade secret, the key for a government contractor is demonstrating that its proposal constitutes a compilation of information within the context of the UTSA's definition of, and the courts' interpretations of, trade secret. To this end, a contractor should be prepared to outline how (1) it combined various source information into a "unique effort" that is the product of "considerable time and effort," (e.g. the proposal "contains information and elements the company has used repeatedly in previous and subsequent Proposal Documents..." (Curcio Webb v. Nat'l Benefits Programs Agency, 367 F. Supp. 2d 1194 (S.D. Ohio 2005)) and does not simply represent copying and pasting of information); (2) the proposal holds significant independent economic value from not being generally known (i.e. the proposal has a competitive advantage in the marketplace; for example, proposals of a similar or identical nature have generated significant contract revenue), and (3) the contractor pursued reasonable efforts to maintain the proposal's secrecy (e.g. included a protective legend, required employees to execute non-disclosure agreements).

Though government contractors have successfully argued that their proposals constitute trade secrets under the UTSA, contractors should be prepared to zealously litigate this issue as former employees and their new employers may argue that mere coincidence or their ability to gather information from other sources explains their use of identical content in a competitor's proposal. To resolve such arguments, courts will examine, among other factors, whether the evidence confirms that the former employee and his new employer actually copied ("cut and pasted") the contractor's proposal, whether the former employee and his new employer actually invested the resources to compile the information on their own accord or whether their proposal development efforts were essentially limited to the misappropriation effort, whether the new employer is/was aware that its employee used information taken from his/her former employer to generate proposal content, and whether the former employee and/or the new employer tried to "cover-up" his/her use of this information.

Recommendations

Pursuing a misappropriation of trade secrets lawsuit against a former employee and/or his/her subsequent employer is not the government contractor's only option. Indeed, in an effort to avoid the situation altogether or to limit the likelihood of the misappropriation, government contractors should take the following steps:

• Always marking proposal documents that contain proprietary or confidential information with the applicable restrictive legend notifying all those with access to the proposal that their use of the data within the proposal is restricted (e.g., FAR 52.215-1(e) identifies the process that the contractors must follow to mark proposals submitted to federal agencies);
• Requiring employees involved in the proposal preparation process to execute non-disclosure agreements that define company confidential and proprietary information, and the express limits on the use of such information;
• As part of the departure process, requiring employees to execute certifications attesting that they returned all company property, materials and data, that they understand the constraints on their ability to use and share certain company information, particularly company proposal documents, in the future employment opportunities;
• Requiring any and all subcontractors and/or consultants to execute non-disclosure agreements before involving them in the proposal preparation process and sharing confidential and/or proprietary information with them; and
• Tracking the connection between a former employee and his/her new employer's pursuit of competing contracting opportunities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.