United States: "Confidential" vs. "Trade Secret" – A Non-Binary Dilemma

Virtually all life sciences companies use routine protocols which they believe will protect their intellectual property and other confidential or "trade secret" information. Among these routine proactive protocols are having a standard confidentiality/nondisclosure agreement (sometimes referred to below as "NDA"), limiting access to confidential and trade secret information, periodic internal audits of safeguarding methods, and more. But are "trade secrets" the same as "confidential information?"

Most confidentiality/nondisclosure agreements will include references to "intellectual property," "trade secrets," and "other confidential information." The agreements usually contain a boilerplate laundry list of the types of information the company deems to be protected under the agreement – formulae, protocols, cell lines, and so on. Many agreements define "trade secrets and other confidential information" far too broadly — for example, a clause defining as confidential "all other information about the company or its business." There is an inherent tension between defining a company's confidential/trade secret information too narrowly (the risk being that something important is not defined as confidential or trade secret) or defining such information too broadly (the risk being that a court will conclude that the definition is overly broad and will refuse to enforce the agreement). A discussion on striking the right balance in a company's definition of its confidential or trade secret information is a topic for another blogging day. Stay tuned.

Today's blog will focus on two alternate paths a company might take in seeking to protect its confidential or trade secret information. We will work under the assumption that an individual formerly employed by biotech Company A has now left and is working for biotech Company B in the same capacity, a high level research position. We will further assume that the worker had access to highly confidential trade secret information belonging to Company A, and that he or she did execute a confidentiality/nondisclosure agreement while employed by Company B. Company B heralds the employee's arrival with press releases, and soon thereafter, Company A learns that Company B is now doing research that sounds remarkably similar to that which the employee spearheaded while at Company A. What are Company A's options?

First and foremost, Company A needs to evaluate and identify the specific information it believes that the employee is now disclosing and/or using for the benefit of Company B. The reader will note that I specifically stated that the employee is working in the same capacity at Company B as when he or she was employed at Company A. Some states recognize what is known as the "inevitable disclosure" doctrine, which presumes that the individual will inevitably use or disclose confidential or trade secret information, gained through former employment, if he or she works in the same or closely similar capacity in a subsequent employment. California is a state which does not recognize the inevitable disclosure doctrine. So, to make this exercise even more fun, we'll assume that the worker is in California, and that Company A will not be able to rely upon the inevitable disclosure doctrine to build its case.

One path that Company A may have available to it is a lawsuit (or arbitration, if Company A and the employee entered into a binding arbitration agreement) against the employee for breach of his or her confidentiality/nondisclosure agreement. Company A may also be able sue Company B in the same action if it has a basis for alleging that Company B knew of and encouraged the employee to breach his or her NDA with Company A. (Note that suing the former employee and Company B in the same action may be complicated if Company A has an arbitration agreement with the employee, since Company B is not a signatory to such agreement. Joining non-signatory defendants into an arbitration proceeding is yet another topic for another blogging day.)

A second pathway that Company A might consider is a suit against the employee and Company B for violation of the Uniform Trade Secrets Act ("UTSA"). The UTSA is a statute that has been adopted in 47 states, as well as by the District of Columbia, Puerto Rico and the U.S. Virgin Islands. This claim would allege that Company A had "trade secrets," and that the employee wrongfully disclosed such trade secrets to Company B, or wrongfully used Company A's trade secrets for the benefit of Company B. (Once again, Company A will need to assess whether it can proceed against both defendants in a single action. The existence of an arbitration agreement with the employee might affect Company A's options, depending upon the wording and scope of the arbitration agreement — yet a third topic for another blogging entry!)

As a practical matter, if the action is pursued against both defendants in a single action, Company A is likely to allege both theories — the employee's breach of his/her NDA (and Company B's complicity in same), as well as both defendants' violation of the Uniform Trade Secrets Act.

However, in order to prevail on a claim brought under the UTSA, Company A must show that employee and Company B have misappropriated "trade secrets" belonging to Company A. To meet this burden, Company A must show that: (a) the information in question is not generally known to the public; (b) the non-public nature of the information confers an economic benefit to Company A – in other words, Company A has an economic or competitive edge because it possesses this information and because that information is not known to the public; and (c) Company A takes reasonable steps to protect the information from public disclosure. Thus, while all "trade secrets" would undoubtedly be considered "confidential," the reverse is not necessarily true. For example, the details and cost of Company A's contract with its janitorial service may well be "confidential," but it unlikely to be considered a "trade secret."

Yesterday, my colleagues reported on an unpublished decision of the Sixth Circuit Court of Appeals, Orthofix v. Hunter, ___ Fed.Appx. ___, 2015 WL 7252996, at *1 (6th Cir. Nov. 17, 2015) [insert link to Lexology], in which the court ruled that a former employer could recover against a former employee for breach of a confidentiality agreement, even though the information the former employee took, used or disclosed did not rise to the level required for trade secret protection.

This decision and others like it raise the question, "why would a company choose to pursue a trade secrets claim rather than the apparently easier course of only pursuing its claim for breach of an NDA?" While the answer will truly depend upon the facts of a particular case and the specific nature of the information disclosed or used, some considerations include:

  • Only the former employee is a party to the NDA contract. If Company A chooses to pursue only a breach of contract claim, it may not be able to successfully sue Company B unless it has (or develops during discovery) evidence that Company B encouraged the employee to breach the contract or was a knowing beneficiary of the breach.
  • If Company A chooses to pursue only a breach of contract claim, it can only recover damages for the breach of contract. Company A will have the burden of showing how it has been damaged by the employee's breach and will have the burden of quantitating that damage. In many cases, the damages will be speculative and not capable of being quantified.
  • Punitive damages are not available even if Company A is able to prove a clear breach of the NDA and resulting monetary damage.
  • Depending upon the language of the NDA, Company A may or may not be able to obtain contract-based injunctive relief. Injunctive relief can be crucial to stop violations while the litigation is still pending, as well as to insure that violations do not reoccur.
  • As noted above, only the former employee is a party to the NDA agreement. If the former employee and Company A have an agreement to arbitrate all disputes between them, this can drive whether or not Company A can bring its claim in court, or whether it will have to arbitrate.
  • Depending upon the language of the NDA, Company A may have to bear its own attorneys' fees and costs incurred in enforcing its rights.

While bringing and maintaining a claim under the UTSA is more burdensome in terms of the evidence that Company A must possess, Company A may have a larger universe of relief available to it for claims premised on the UTSA:

  • The UTSA provides for injunctive relief to address actual, as well as threatened, misappropriation of trade secrets.
  • Company A may recover money damages for the actual loss it sustained as a result of the misappropriation, as well as an award for the "unjust enrichment" enjoyed by Company B as a result of the misappropriation. The unjust enrichment award is not taken into account in computing Company A's actual damages or loss.
  • Company A may recover exemplary damages of up to two (2) times the actual and unjust enrichment damages if it can show that the misappropriation of its trade secrets was "willful and malicious."
  • Finally, Company A may be awarded its attorneys' fees if the court determines that the misappropriation of Company A's trade secrets as willful and malicious. However, Company A should also be aware that if the court concludes that its claim under the UTSA was made in bad faith, Company A will lose not only its UTSA claim, but can be ordered to pay the defendants' attorneys' fees. For this reason (among others), companies need to be careful when weighing whether to assert claims under the UTSA.

In closing, the concepts of "confidential information" and "trade secrets" are intertwined, and a company seeking to enforce its rights to protect its own confidential and trade secret information will most certainly want to have a carefully drafted confidentiality/NDA agreement. It will also want to evaluate how other employment-related agreements — such as arbitration agreements — might impact the company's options in enforcing the NDA, or in initiating an action against a former employee and his or her new employer. Ideally, an employer will have written agreements with its employees that are well crafted and likely to be upheld and enforced and still afford the employer the greatest degree of flexibility in the event that the employer needs to initiate action against a former employee and a third party.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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