Confidential Information v. Trade Secrets
Now that we know what confidentiality clauses are and what they are supposed to do, what exactly are they supposed to protect? We have already established that employers should aim to keep certain information confidential. We already know that employers have a fair amount of discretion determining what information will be “confidential”. What are trade secrets? Is there a difference between trade secrets and confidential information? If so, does the difference really matter? The short answer is “yes” and “sometimes”. Let’s start by defining “trade secrets”.
A trade secret is a formula, pattern, device or compilation of information, used in one’s business, which gives the business owner an opportunity to gain an advantage over competitors who do not know or use it. All trade secrets are confidential information, but not all confidential information is a trade secret. Some confidential information, such as employees’ or customers’ personal information does not provide the business owner a competitive advantage. Remember you, as the employer can designate almost any information as “confidential”. It can remain confidential as long as you take reasonable steps to keep it confidential. If, however, the information, and its confidentiality does not provide a distinct competitive advantage, it is not a trade secret. Why does it matter? We learned in the last two posts that confidential information is entitled to protections and that employers/business owners can get legal redress for breach of confidentiality. Trade secrets, however, will, in many cases be entitled to greater protection.
In Brown v. Rollet Brothers Trucking Company, Inc et al 291 S.W. 3d 766 (2009) the Missouri Court of Appeals ruled that customer contact lists, rate sheets and pricing processes, in and of themselves are not trade secrets. In reaching this decision, the Brown court relied on precedent, namely, Kessler-Heasley Artificial Limb Co., Inc v. Kenney 90 S.W. 3d 181, 188 (Mo. App. 2002); and National Rejectors, Inc. v. Treiman 409 S.W.2d 1, 18-19 (1966). The courts in these cases generally started by considering the following factors:
Extent to which the information is known outside the business: matters of public knowledge, or information generally known within the industry are not trade secrets.
- Extent to which employees and others in the business know it: Do all your employees have access to all your information, or do you restrict access only to those with a need to know?
- Extent to which the business takes measures to guard the secrecy of the information: Where do you keep the information? What steps have you taken to ensure that outsiders or employees without a need to know are unable to gain access? Have you disclosed the information to outsiders? Do you have signed nondisclosure and non-use agreements from everyone to whom you have disclosed the information?
- Value of the information to the business and its competitors: How much would it hurt your business and/or help your competitors, if the information were to suddenly go public tomorrow?
- Amount of effort or money expended by the business in developing the information: Is the information merely a compilation of facts that anyone could find in the public domain, or is it a process or formula that took years of research and trial and error to develop?
- Ease or difficulty with which others could properly acquire or duplicate it: Could others simply do a few hours of poking around on the internet to come up with essentially the same thing or would it take someone with exceptional knowledge, ability and originality to produce it?
Why might customer contact lists, rate sheets and pricing processes not qualify as trade secrets? According to the Brown court, pricing information can be a trade secret “if the employer uses a specifically developed code or formula to churn out bids.” The problem with the pricing information in Brown is that it was “fleeting”. Sales managers given a fair amount of discretion to match competing bids or adjust prices based on fluctuating costs of materials. It cannot be “information as to single or ephemeral events in the conduct of the business, as for example the amount or other terms of a secret bid for a contract or the salary of certain employees”. Again, this information may be confidential, but it will not rise to the level of trade secrets.
OK, so we have some examples of confidential information that are not trade secrets, or negative examples. How about some positive examples. Here again, Brown provides some help:
“Generally it relates to the production of goods, as for example a machine or formula for the production of an article. It may, however, relate to the sale of goods, or to other operations in the business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.”
Again, the less known the information, the harder to develop or compile, the more effort expended, the greater likelihood it will be worthy of trade secret protection.
Assuming that you, as an employer have trade secrets, what must you do to ensure that your trade secrets receive greater protection than your other confidential information? We already know that a non-disclosure/non-use agreement is important to protect all confidential information. Some states however, require such agreements to impose a time limit on non-disclosure/non-use obligations regarding non-trade-secret but confidential information, without which the non-disclosure provisions may not be enforceable. Trade secrets do not need such time limits. How do you ensure that trade secrets remain protected forever, while limiting the non-disclosure non-use requirements as to the other “confidential information”? One possibility is to have a bifurcated provision, with a time limit as to the non-disclosure of all information that is not a trade secret. Without this bifurcation, a court could decide that information you believe to be a trade secret should not be protected as such. If your business relies heavily on trade secrets, you should also consider having a trade secret policy that identifies and prioritizes your secrets based on their value and sensitivity. You will also want to keep track of your trade secrets and keep records showing who developed them and how. Once again, you also want to restrict access to those personnel with a need to know it or use it, subject to proper security checks. Competent counsel in your state can help you accomplish these aims.
Your employment agreement with its well-written confidentiality provisions will go a long way toward protecting that information which puts you and your business at a competitive advantage–speaking of which…C’mon back next week to hear about whether, how and when restrictive covenants (aka non-competes) can provide additional help protecting your confidential information and trade secrets, and remedies available to employers for breach of confidentiality, and misappropriation of trade secrets.
Click here to learn more about Janette Levey Frisch, author of The Emplawyerologist.