An article recently published in the New York Law Journal explores an employee's duty of loyalty and the permissible steps that employee may take, prior to termination of employment, in preparing to compete with the employer.
A recent Alabama Court of Appeals case, Jones v. Hamilton, Case No. 2081077 (January 22, 2010), illustrates how a failure to take reasonable steps to maintain the confidentiality of documents and information will result in the loss of trade secret status.
In Jones, the parties' trade secret dispute centered on the alleged misappropriation of confidential and sensitive documents that were left in an unmarked cardboard box for at least a week in the backseat of a company-owned car to which various company employees had access. The documents were not marked "confidential," and the keys to the vehicle were either kept "on a peg" or in the front of an office where they were widely accessible. Even though there was no evidence that anyone other than the defendant accessed the vehicle or the documents without authorization, "[t]he documents were left vulnerable to whomever chose to enter or to drive the vehicle."
Based on this vulnerability, the Court held that the documents were not "trade secrets" within the meaning of Alabama's version of the Uniform Trade Secrets Act and that the defendant therefore was not guilty of trade secret misappropriation. In reaching its conclusion, the Court did not focus on the sensitivity of the documents; rather, by itself, the company's failure to take reasonable steps to ensure the security of the documents precluded them from qualifying as trade secrets.
Hence, this case illustrates the importance of taking reasonable steps to protect the secrecy of alleged trade secrets. Although what is "reasonable" will vary depending on the circumstances, the bottom line is that if a company hopes to protect documents or information as a "secret," they need to be treated as such.
The importance of corporate security and vigilance with regard to trade secrets was demonstrated by recent events in Syracuse, New York. On February 3, 2010, the FBI and the U.S. Attorney’s Office in Syracuse announced the arrest of 29 year-old Shalin Jhaveri. Jhaveri is charged in a complaint with stealing trade secrets, in violation of 18 U.S.C. §1832, from his employer Bristol-Myers-Squibb, where he worked from November 2007 through February 2, 2010.
It is alleged that Jhaveri planned to establish a pharmaceutical firm in India which could compete with Bristol-Myers-Squibb in various markets around the world. Reportedly, some of the confidential information stolen included Bristol’s procedures in development to produce a multi-million dollar drug to treat malignant melanoma, a deadly form of cancer. Jhaveri allegedly downloaded over 45 gigabytes of information from Bristol. Bristol began tracking Jhaveri’s actions after finding suspicious documents on his work laptop, including an application to the government of India to start his own biopharmaceutical company.
It is critical in order to pursue claims against a disloyal employee that a Company maintain a strong confidentiality and trade secrets program. Proper policies and agreements should be in place for all employees, consultants and contractors. A routine "due diligence" trade secrets check-up should also be conducted in order to ensure safeguarding of Company information. Absent such steps, proprietary information will be in jeopardy.
* Co-authored by Kathryn T. McGuigan.
In the recent case of Dowell v. Biosense Webster, Inc., No.B201439, the California Court of Appeal stated in dicta that it doubted the continued viability of the common law trade secret exception to covenants not to compete. The Dowell Court left open the question as to whether or to what extent courts will enforce agreements to protect trade secrets.
On January 29, 2010, in an unpublished opinion, Majestic Marketing, Inc. v. Nay, No. E047085 (Fourth District, Division Two), at least one California Court of Appeal appears to have recognized the viability of the trade secret exception to California Business & Professions Code ¶16600 prohibition of employee non-competition agreements.
The Majestic Marketing employee handbook included a clause which, among other things, identified company trade secrets and prohibited employees from using those trade secrets. Majestic brought suit against two former employees claiming that while they were still employed and after, the employees had misappropriated trade secrets (customer lists), in violation of the clause to form another company. The trial court entered a preliminary injunction prohibiting the defendant employees from using any Majestic customer information and barred them from doing business with about 3,000 Majestic customers for the two-year prohibition period contained in the employee handbook. The employees were also required to return all Majestic information and property. The Court of Appeal affirmed.
The Court agreed with the trial court that Majestic’s customer information was a protectable trade secret as defined under the clause in Majestic’s handbook and stated that “[d]espite California’s broad prohibition against noncompetition agreements, covenants not to compete may be enforced to the extent that enforcement is necessary to protect a company’s trade secrets.”
The Majestic Court decision therefore gives some indication that the trade secret exception may operate where the employer can establish that the information at issue is a trade secret. However, the California Supreme Court has yet to weigh in and for now, the viability of the trade secret exception remains an open issue.
Written by
Peter L. Altieri
David J. Clark
Peter A. Steinmeyer
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