OWNERSHIP OF IP CREATED BY EMPLOYEES AND COLLABORATING OR COMMISSIONED THIRD PARTIES 

16.05.2017

By Lawrence Hoffman

Part IV: Protecting Trade Secrets During and After Employment:

INTRODUCTION

In relation to trade secrets, there are two basic situations. The first relates to protection of the employer’s confidential information by current employees. The second situation involves post employment restrictions on an individual’s use of information acquired during employment. The law regarding the first situation is relatively straightforward. Post-employment restrictions are sometimes more problematic.

PROTECTING TRADE SECRETS:

Employee obligations concerning the employer’s trade secrets must be addressed in all employment agreements. In September 2016, we published a comprehensive article on trade secret law topic (here) with emphasis on U.S. law, including the newly enacted federal Defend Trade Secrets Act (the DSTA). This new law provides nation-wide protection and access to federal courts in parallel with but more comprehensive than existing state laws, mainly under the Uniform Trade Secrets Act (UTSA) which the DTSA does not preempt. In that article, we discuss the owner’s new rights and remedies for misappropriation of trade secrets, and what the owner must do to establish and maintain information as a protectable trade secret.

Our concern here is preventing unauthorized disclosure by employees and ex-employees of the employer’s confidential business information and technical knowhow.

The right to protect trade secrets exists essentially world-wide. For World Trade Organization member, Article 39 of the Trade-Related Aspects of Intellectual Property (the TRIPS Agreement) provides the basic minimum standard for trade secret protection. However, there are also limitations on the obligations which can be imposed. These deal with the public interest in disclosure of illegal activities and the future employment rights of current employees.

In this Part, we will compare the laws in several jurisdictions relative to the following issues:

  • Definition of “confidential material/trade secrets;
  • Notice as to public interest/whistle-blower limitations;
  • Use of Confidential Information by an Employee during and after termination of employment;
  • Other limitations on future employment.

We will also consider various protective clause concepts for incorporation in employment agreements.

Defining Trade Secrets and Other Confidential Information:

Under U.S. law, the preexisting UTSA and the DSTA provide definitions of trade secrets. The DTSA defines trade secrets as including:

all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if—(A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the another person who can obtain economic value from the disclosure or use of the information.

China’s Unfair Competition Law contains a similar definition but in broader terms. Here, a trade secret is defined as:

Technical or business operation information that is unknown to the public, can bring economic benefits to the owner, has practical utility, and for which the trade secret owner has adopted measures to maintain its confidentiality.

In Europe, a recent Directive has been adopted that addresses protection of Trade Secrets. All EU members will need to conform their national laws to the Directive by June 2018.

The Directive includes a definition similar to that in Chinese law. According to the Directive:

‘Trade Secret’ means information which meets all of the following requirements:

(a) It is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;

(b) It has commercial value because it is secret.

(c) It has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

In Israel, Chapter Two of the Commercial Torts Law addresses misappropriation of trade secrets. Section 5 defines a trade secret as:

Commercial information of every kind, which is not public knowledge or which cannot readily and legally be discovered by the public, the secrecy of which grants its owner an advantage over his competitors, provided that its owner takes reasonable steps to protect its secrecy;

Thus, we can see that these definitions all have in common (a) they protect both business and technical information, (b) they exclude information known to the public and information that can legally be discovered, e.g., by reverse engineering, (c) the information provides a commercial advantage, and (d) reasonable steps have been taken to protect the confidentiality of the information.

Limited Immunity:

Additional features sometimes found in Trade Secret laws include exceptions for required disclosure to a public authority and secure disclosure in connection with litigation, sometimes with specific reference to anti-retaliation (‘whistle-blower’) litigation. Protection for freedom of the press is also explicitly mentioned in the EU Directive.

The DTSA specifically establishes immunity for disclosure of a trade secret made in confidence to a government official or to an attorney solely for reporting or investigating a suspected violation of law or made in a court document filed under seal. Immunity is also provided for an employee who files a lawsuit as a result of retaliation by an employer for reporting a suspected violation of law.

It further requires an employer to “…provide notice of the immunity…in any contract or agreement with an employee that governs the use of a trade secret or other confidential information”.

Under the EU Directive, national laws must effectively provide immunity for:

  • Exercising the right to freedom of expression and information as set out in the [EU] Charter, including respect for the freedom and pluralism of the media; (b) for revealing misconduct, wrongdoing or illegal activity, provided that the respondent acted for the purpose of protecting the general public interest; (c)  disclosure by workers to their representatives as part of the legitimate exercise by those representatives of their functions in accordance with Union or national law, provided that such disclosure was necessary for that exercise; and (d)  for the purpose of protecting a legitimate interest recognized by Union or national law.

Under Israeli law, it is not considered a misappropriation of a Trade Secret if “the knowledge latent in the trade secret” came into an employee’s possession as a result of his employment “and such knowledge became part of his general professional skill” or if “[U]se of the trade secret is justified as a matter of public policy. However, the public policy exception is subject to the limitation that if such use results in a benefit, a court may order return of the benefit in whole or in part to the owner of the secret.

There is no specific immunity for disclosure to a governmental body or the like. However, it could reasonably be argued that the public policy exception would apply to such disclosure.

Under Chinese law, there are no immunity limitations.

Use of Confidential Information by a Current Employee:

Existing laws do not specifically address what use and non-disclosure obligations can be imposed on an employee except as may be inferred from definitions of misappropriation of a trade secret. In practice, therefore, clauses related to protection of trade secrets focus on permitted use and non-disclosure during employment and thereafter.

Preventing Post-Employment Disclosure of Confidential Information:

Putting aside for now non-competition agreements generally, injunctions to prevent post-employment disclosure and use of Trade Secrets are generally obtainable. For example, consider the situation in which former employee A, who has knowledge of Trade Secrets and other confidential information belonging to his employer B accepts a position with a competitor C doing similar work to what he had been doing at company B. Former employer B will, of course, want to prevent disclosure of its Trade Secrets by A to C as well as use by C of any information which has been disclosed. Similarly, B will want to prevent disclosure to and use by someone other than C. Or suppose A leaves B to start his own business. B will want to prevent use of its trade secrets by A in such a business. In either situation, what evidence does B need to present to a court to demonstrate ‘threatened’ use or disclosure?

In the U.S., under 1836(b)(3)(A)(i) of the DSTA, a federal court may issue an injunction “to prevent any actual or threatened misappropriation” of a Trade Secret. However, under §1836(b)(3)(A)(i)(I)–(II), such an injunction may not be issued that conflicts with an applicable  state law that prohibits restraints on employee mobility. As we will see later, some jurisdictions severely restrict or prohibit non-competition clauses in employment agreements so a federal court injunction could not prevent A from working for C or from starting his own business in competition with B.

Before enactment of the DTSA, there existed the so-called ‘inevitable disclosure’ doctrine under which A in the above scenario could be prevented from employment by C, either temporarily or permanently when it was inevitable that A would use a trade secret of B in his new employment.

The 1995 case of PepsiCo v. Redmond is considered to best exemplify application of the inevitable disclosure doctrine. PepsiCo was brought under the Illinois version of the Uniform Trade Secrets Act in the Federal District Court on the basis of diversity of citizenship.

At the time, PepsiCo was in what the court characterized as “fierce beverage-industry competition with codefendant Quaker Oats Company”. Redmond held a relatively senior management position with PepsiCo and as such had access to inside information and Trade Secrets related to PepsiCo’s business strategy, etc. Redmond had signed a fairly typical confidentiality agreement with PepsiCo according to which he agreed not to misuse PepsiCo’s confidential business information.

Redmond was offered a senior management position with Quaker and accepted the offer. PepsiCo sought an injunction against Redmond and Quaker preventing Redmond from divulging PepsiCo Trade Secrets and confidential information in his new job and from assuming any duties with Quaker relating to beverage pricing, marketing, and distribution.

The district court granted an injunction barring Redmond from assuming his position at Quaker for a six month period and permanently barring him from using or disclosing any PepsiCo Trade Secrets or confidential information. The court found that Redmond’s new job posed a clear threat of misappropriation of Trade Secrets and confidential information and referred to facts leading it to believe that the threat of misappropriation was real. On appeal, the Seventh Circuit Court of Appeals affirmed.

In its opinion, the Seventh Circuit focused its attention on the need to balance PepsiCo’s rights to protect its Trade Secrets with the public’s interest in free and open competition and assuring an ex-employee’s right to pursue his livelihood. The court particularly noted that the case involved the threat of misappropriation based on inevitability of disclosure by Redmond in his new position. It found only two decisions applying earlier Illinois state law on this issue, both of which essentially required a high level of proof that disclosure was inevitable. In one of these, the Seventh Circuit itself affirmed a lower court’s denial of an injunction, saying “that the mere fact that a person assumed a similar position at a competitor does not, without more, make it “inevitable that he will use or disclose … Trade Secret information” so as to “demonstrate irreparable injury.”

The appellate court expressly disagreed with some of the district court’s reasoning, but based on the evidence, it held that the lower court had not abused its discretion in granting the injunction. It particularly noted the limited duration of the injunction and that it “extends no further than necessary”.

The inevitable disclosure doctrine does not exist under California law but has been applied to one degree or another under some state laws. However, for our purposes, it is important to note that its application has been rejected under the DTSA. According to §1836(b)(3)(A)(i)(I), an injunction may be issued to prevent actual or threatened misappropriation “provided the order does not—(I) prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows…”.

Note that the DTSA does not preempt state law so the inevitable disclosure doctrine will still be valid in some jurisdictions. Nevertheless, courts are likely to apply it strictly so it should not be relied on. Facts demonstrating likely misappropriation should always be presented to the court where possible.

A final thought – would the actual facts of the PepsiCo support any sort of injunction under the DTSA? In an article published in the November 2016 issue of The Colorado Lawyer, it is strongly argued that no injunction could be granted. Certainly, Redmond’s employment by Quaker would not be barred, but, to this observer, it seems that the facts could support restrictions on his duties. The evidence as described by the Seventh Circuit reasonably suggests that Redmond was hired for the purpose of anticipating and countering PepsiCo’s business strategy and not just because he was privy to that strategy. That purpose represented a real threat of misappropriation.

What about in other countries? As noted above, under Israeli law, it is not considered a misappropriation of a Trade Secret if “the knowledge latent in the Trade Secret” came into an employee’s possession as a result of his employment “and such knowledge became part of his general professional skill”. This, however, is not really an impediment to post-employment protection of Trade Secrets. While future employment by a competitor cannot be prevented in general, it is possible for a court to do so in cases involving misappropriation of Trade Secrets, or customer lists.

The EU Trade Secret Directive does not impose any restrictions on workers in their employment contracts and leaves the matter to national law. Nor does it appear to limit employees’ use of the experience and skills honestly acquired in the normal course of their employment. It thus seems that enforceability of post-employment non-disclosure provisions will remain a matter of national law, subject to the definitions and remedies provided for in the Directive.

In China, post-employment protection of Trade Secrets is complicated by the fact that Trade Secret rights are governed by the law of unfair competition and non-competition agreements are governed by labor laws. It is therefore prudent to have a separate agreement covering non-competition. As to misappropriation of Trade Secrets, it should be recalled that the definition noted above requires reasonable measures to preserve confidentiality. Such measures must be implemented and should be brought to employees’ attention and acknowledged as part of the non-disclosure agreement.

The law does not appear to impose time limitations on post-employment non-disclosure obligations. Thus, the non-disclosure obligation can remain in force as long as the information continues to be a Trade Secret.

Non-Disclosure Terms in an Employment Agreement:

(Concept) (1) The agreement should explicitly state that it applies during the term of employment and after termination of employment.

(2) A definition of the term ‘trade secret’ should be stated.

(3) The employee should agree:

  • To treat all Trade Secrets as defined under applicable law and any other information identified or treated as confidential by the Company as the exclusive property of the Company;
  • To use such Trade Secrets and other confidential information only in the performance of his or her duties on behalf of the Company;
  • Not to disclose such Trade Secrets or other confidential information to any other employee or third party except as directed in writing by an authorized representative of the Company;
  • Upon termination of employment or at any other time upon request, to promptly deliver to the Company any and all material in his or her possession or control pertaining in any way to the Company’s Trade Secrets or other confidential information.

(4) The agreement should explicitly state the obligations do not apply to information which has been or becomes lawfully disclosed to the public, or which is otherwise known to the public at large. In Israel, consideration should be given to specifying that the obligation does not apply to “knowledge latent in a Trade Secret came into the employee’s possession as a result of his employment and such knowledge became part of his general professional skill”.

(5) Where the law carves out immunity for disclosure of a Trade Secret made in confidence to a governmental body, or exempts use of Trade Secret information in anti-retaliation (whistle-blower) litigation as in the DTSA, the employee should acknowledge that the immunity has been brought to his attention. It should also require the employee to notify the company promptly if called upon to disclose information to a governmental agency.

(6) The employer’s procedures for protection of confidentiality of Trade Secrets and other confidential information should be referenced or stated, and the employee should acknowledge that he has been made aware of these procedures.

(7) The employee should acknowledge that the employer will not have an adequate remedy at law, i.e., money damages, for breach of the confidentiality obligations.

(Rationale)  The agreement must make clear the non-disclosure obligations remain in force even after termination of employment. There should be no doubt about this.

The agreement should clearly state what information is the subject of the employees obligations. The definition should be in the agreement, and not just referenced. The definition in the DTSA should be considered for use in all jurisdictions even outside the U.S.  The portion of the definition mentioning the need for protective measures should be stated separately (see item 6) so that it can be conveniently acknowledged.

The stated obligations seem to be universally acceptable and can be considered for use everywhere, subject to approval of local counsel.

Although perhaps not essential, possible misunderstanding can be avoided if the agreement states the circumstances under which the confidentiality obligation will not exist, or will cease to exist. Item (4) above can be considered as a way to do this.

The DTSA requires that the immunities provided for should be brought to the employee’s attention. Although disclosure is not necessary under the EU Directive consideration should be given to doing so.

Item (7) should be considered as it may provide a basis for the employer to argue that the employee has consented to issuance of an injunction under reasonable terms. Consideration can also be given to inclusion of a listing of remedies of the employer for breach of the confidentiality commitments in the agreement.

This article is intended only as general information and is not and should not be considered as legal advice. Advice of counsel should be obtained so that necessary agreements can be prepared to take account of specific facts and the applicable laws.

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