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Protecting Proprietary Assets from Wrongful Disclosure: The Uniform Trade Secrets Act - March 2012

March 08, 2012

            A frequently litigated business dispute is the enforceability of non-compete clauses in employment contracts that seek to prevent a current employee from going to work for a competitor, particularly where that former employee might attempt to solicit your customers or clients, invite your current employees to join him at his subsequent place of employment or uses your confidential and propriety procedures, techniques, or methodologies.  Non-compete clauses are generally not favored in the law because they operate to prevent a person from earning a livelihood and restrict competition.  One is enforceable only if “narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.” Home Paramount Pest Control Companies, Inc. v. Shaffer, 282 Va. 412,718 S.E.2d 762 (2011), quoting Omniplex World Servs. Corp. v. U.S. Investigations Servs., Inc., 270 Va. 246, 249, 618 S.E.2d 340, 342 (2005).  Importantly, theemployer seeking to enforce the clause bears the burden of proving each of these factors, Modern Env’ts, Inc. v. Stinnett, 263 Va. 491, 493, 561 S.E.2d 694, 695 (2002), and the courts closely scrutinize the “function, geographic scope, and duration” elements of the restriction. Simmons v. Miller,261 Va. 561, 581, 544 S.E.2d 666, 678 (2001).

            Although non-compete clauses face heightened legal scrutiny, there is another aspect of a business which enjoys clearer protection under the law in no small way due to protection afforded by statute.  Although common law protection of business “trade secrets” has long existed, in 1986, Virginia joined other states in enacting the Uniform Trade Secrets Act (“UTSA”).  Va. Code §§59.1-336 to 59.1-343.  Stated simply, UTSA affords both injunctive relief and money damages if a trade secret is acquired by “improper means” (e.g., theft by a former or current employee or by computer “hacking” ) and thereafter “misappropriated” which includes both the act of disclosing the trade secret to another (e.g., a former employee downloads a trade secret and publishes it in a book) as well as the acquisition of the trade secret by another (e.g., a former employee shares a trade secret another business under circumstances that the other would know that it was acquired by improper means).  UTSA even applies to disclosure of a trade secret acquired by accident or mistake.

            Although the Virginia Supreme Court has not had many occasions to decide cases under the UTSA, during its last term, the Court handed down Collelo v. Geographic Services, Inc., 2012 WL 112329 (No. 101411, Jan. 13, 2012) where a former employee of GSI went to work for Boeing, purportedly doing work different from that which he did at GSI.  While working for Boeing, the employee did in fact do the same type of highly specialized work that he did before and also reported to his new employer that he had developed a quality control tool for checking the work he did.  That tool was the program and methodology used in his prior employment.  GSI brought suit against both the former employee and Boeing claiming, among others, a breach under UTSA.

            At the conclusion of GSI’s evidence, the trial court granted a motion to strike.  While it found that GSI had established the existence of a trade secret, it did not rule on whether the defendants had actually misappropriated the trade secret.  Rather, the court found that there was a lack of evidence of “any loss of business by GSI because of competitive conduct” by Boeing or that Boeing benefited from using the tool in a manner that would affect the business of GSI.  Essentially, the trial court interpreted the UTSA as requiring that Boeing must have been competing against GSI or was doing the same work as GSI.

            Reversing this ruling, the Supreme Court noted that the UTSA “does not require that one who is accused of misappropriating a trade secret use the allegedly misappropriated trade secret to compete with the holder of the trade secret.”  Having established the existence of a trade secret, GSI needed only to show that Boeing “acquired GSI’s trade secrets” and that it knew or had reason to know that they “were acquired by improper means.”  As to the former employee, GSI needed only to show that he disclosed the trade secret without GSI’s consent and he knew or had reason to know that, at the time of his disclosure, his knowledge of the trade secrets was acquired “under circumstances giving rise to a duty to maintain its secrecy.”

            The importance of the Collelo decision is the fact that a claim under UTSA is not dependent upon the use of the trade secret in competition with the bona fide owner.  UTSA’s goal is to protect the owner’s proprietary interest in the trade secret from use by anyone that acquires it through improper means.  This goal is borne out by the fact that statutory remedial framework provides not only for injunctive relief to proscribe future unauthorized use of the trade secret, Va. Code § 59.1-337, but also actual loss and the unjust enrichment caused by the misappropriation and, in certain cases, imposition of liability for “a reasonable royalty for the misappropriator’s unauthorized disclosure or use of a trade secret.” Va. Code § 59.1-338.  UTSA recognizes that a trade secret has monetary value to the end that one who has misappropriated it is liable for it use regardless of whether it is used to compete with the bona fide owner.

            In any effort to enforce a claim under the Act, a key issue will always be whether the item in dispute is in fact a “trade secret.”  The Act only defines “trade secret” in broad terms as information that “[d]erives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use . . . and …[i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  In this regard, it is recommended that businesses take specific steps to include in employment contracts and employee manuals language prohibiting disclosure of internal procedures, methodologies, processes, etc. and to describe the potential consequences of any unauthorized disclosure whether during the course of employment or following separation from employment.  Equally important is the clear identification of such information specifically as a trade secret.  Such steps must be developed on an individualized basis and are beyond the scope of this short article.

Written by Michael E. Ornoff.