TRADE SECRETS By: Gregory C. Cook Trade Secrets Defined Trade secrets have become increasingly important in the modern economy as business competition becomes more intense, as employees stay with businesses for shorter periods, and as intellectual property becomes more critical to the economy. To protect trade secrets, Alabama has adopted its own trade secrets act, superceding the common law of trade secrets originally adopted in Alabama. See e.g., Ala. Code 8-27-1 et seq. 1 The Alabama Act defines trade secret as follows: (1) TRADE SECRET. A "trade secret" is information that: a. Is used or intended for use in a trade or business; b. Is included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique, or process; c. Is not publicly known and is not generally known in the trade or business of the person asserting that it is a trade secret; d. Cannot be readily ascertained or derived from publicly available information; e. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy; and f. Has significant economic value. Ala. Code. 8-27-2(1). A trade secret need not be registered with the government to receive protection and its protection can, theoretically, last forever.
Improper Means And Breach of Confidence Prohibited The Act only protects against the misappropriation of trade secrets. Thus, unlike the protection provided by a patent, a competitor may independently develop an identical idea or process (or reverse engineer ), 2 even if a process or product is a trade secret. The Act, however, defines misappropriation broadly to include instances where the defendant learned the information innocently but obtained the information from other persons who discovered it using improper means. 3 The Trade Secrets Act states: A person who uses or discovers the trade secrets of another, without a privilege to do so, is liable to the other for misappropriation of the trade secret if: (1) That person discovered the trade secret by improper means; (2) That person's disclosure or use presents a breach of confidence reposed in that person by the other; (3) That person learned the trade secret from another person and knew or should have known that (i) the information was a trade secret and (ii) that the trade secret had been appropriated under circumstances which violated provisions of (1) or (2) above; or (4) That person learned the information and knew or should have known that it was a trade secret and its disclosure was made to that person by mistake. Ala. Code 8-27-3 (emphasis added). The Act describes improper means as follows: (2) IMPROPER MEANS. "Improper means" are means such as: a. Theft; b. Bribery; c. Misrepresentation;
Ala. Code 8-27-2(2). d. Inducement of a breach of confidence; e. Trespass; or f. Other deliberate acts taken for the specific purpose of gaining access to the information of another by means such as electronic, photographic, telescopic, or other aids to enhance normal human perception, where a trade secret owner should be able to reasonably expect privacy. Trade Secret If Subject to Efforts That Are Reasonable Under the Circumstances to Maintain the Secrecy The dominant issue in Alabama trade secret litigation has been whether the alleged trade secret was "subject to efforts that are reasonable to the circumstances to maintain the secrecy." See 8-27-2(i)(e). For instance, in Saunders v. Florence Enameling Company, Inc., 540 So. 2d 651 (Ala. 1988), the Court held that the creator of a pipe coating process was entitled to trade secret protection. Further, the Court held that after leaving the plaintiff s employ, a former employee had used information gained from working at the plaintiff's business to compete against the plaintiff. Since there was no evidence that the defendant took any documents, the plaintiff used photographs of both pipe processes to prove the use of the trade secret. In finding that a trade secret existed, the Court seemed very impressed with the steps the plaintiff had taken to protect the trade secrets, including (1) that the employees knew of the intention to keep the process secret; (2) that there was an employee manual that stated the process was secret; (3) that the ex-employee had, in the past, kept other persons from viewing the pipe process because he knew it was secret; (4) that the ex-employee helped draft the handbook and was familiar with the section on secrecy; and (5) that the ex-employee admitted he got the idea for the pipe process when he saw the process at his former
employer's business. Further, there was evidence of no trespassing signs and "authorized personnel only" signs; there were covers on the gear boxes of the equipment; there were materials stacked in front of the door so people couldn't see in; there were periodic meetings where employees were reminded of secrecy; and the plaintiff barred cameras from its business. 4 Another example is Allied Supply Company, Inc. v. Brown, 585 So. 2d 33, 36 (Ala. 1991). There, a number of employees resigned "en masse" and left their employment to go work for a competitor. The former employer sued, alleging, among other things, theft of trade secrets including customer lists. The Court affirmed summary judgment for the defendant and stated that the particular customer lists did not qualify for protection because, At least ten Allied employees had free access to the lists. In addition, the lists were not marked confidential; the lists were taken home by employees; multiple copies of lists existed; and the information was contained in the receptionist's Rolodex file. 5 Thus, the Court held that the plaintiff had taken insufficient steps to maintain secrecy, and could not receive trade secret protection. The original Alabama case on trade secrets, Drill Parts v. Joy Manufacturing, 439 So. 2d 43 (Ala. 1983), also involved the question of whether or not there had been sufficient secrecy. There, a company manufactured and designed special drills. These drills took over two years to develop and for each drill there were technical drawings containing detailed specifications for parts, tolerances, heat treatments, etc. A competitor began developing competing drills. There was evidence that a subcontractor had allowed the competitor to pull such technical drawings from the trash bins. The plaintiff argued that he had taken sufficient steps to maintain secrecy because the
technical drawings had restrictive language on them stating that they were property of the plaintiff, and all rights were reserved. Further, each contract with each vendor specifically stated that all information and drawings were confidential, and the plaintiff maintained a paper shredder on its site. It was undisputed that the plaintiff did not provide consent to the defendants to obtain such drawings from the trash. The Court held that it was a question of fact for the jury whether or not the drill designs were a trade secret. The court noted that "absolute secrecy is not required; a substantial element of secrecy is all that is necessary to provide trade secret protection. Remedy If the plaintiff is able to establish a violation of the Alabama Trade Secrets Act, there are five powerful remedies available. The plaintiff may be entitled to: (1) injunctive or equitable relief; (2) any profits received by the defendant (and the burden of proof is on the defendant to show expenses lowering profit); (3) actual damages that the plaintiff has suffered; (4) reasonable attorneys' fees if bad faith or willful and malicious misappropriation has occurred; and (5) punitive damages not to exceed the actual award but not less than $5,000 if willful or malicious misappropriation exists. Further, the plaintiff may receive an express accounting for profits, and the damages are intended to be cumulative. 6 Examples - Computer Software, Customer Lists, Departing Employees, Sales of Businesses The Alabama Supreme Court has implied that an off-the-shelf computer program may not be entitled to trade secret protection. See Public Systems v. Towry, 587 So. 2d 969 (Ala. 1991). There, the plaintiff had taken an off-the-shelf spreadsheet package and compiled publicly available information which it then marketed. The Court held that
the data could not constitute a trade secret. However, if the computer program were marketed to a limited number of customers, rather than being an off-the-shelf package that could be bought at the neighborhood store, it might be entitled to protection. 7 The Alabama Supreme Court has also implied that customer lists may be trade secrets if they contain information beyond simply the list of the customers, and if they have been developed and are kept secret. 8 Further, other courts have held that ideas, even if not yet commercially feasible, can be protected under trade secrets. 9 Typically, trade secret litigation concerns employees who leave and allegedly misappropriate trade secrets. Again, Saunders v. Florence Enameling Company, Inc., 540 So. 2d 651 (Ala. 1981) is an excellent example. There, the employee left the employment of the pipe manufacturer and used the trade secret information in competition with his former employer. Of course, if the employee takes documents or things, the employee may be liable for conversion as well as for misappropriation of trade secrets. 10 Another theory used against ex-employees is that they were disloyal and therefore breached a duty owed to their principal. 11 Another area where trade secret protection comes up is during negotiations of sales of businesses. Some courts have held that there is a duty, either expressly or implicitly, for a purchaser who, during negotiations, learns confidential information or trade secret information not to reveal that information later or to use that information later if the sale of the business fails. 12 Steps to Protect Trade Secrets The most important thing to emphasize to clients is that they must institute a policy to protect their trade secrets. Examples of steps which could be used to protect
trade secrets may include the following: (1) Employee confidentiality agreements which (a) are signed by every employee (usually a part of the orientation process), (b) include a general definition of what is proprietary information and a catch-all definition, (c) include a promise to return to the company upon termination all written or tangible material embodying confidential information, (d) include a promise not to undertake during a term of employment a consulting or moonlighting position in a competitor's business, (e) include a representation that the employee is not subject to any other obligations, (f) include an agreement by the employee to assign to the employer all ideas or inventions developed during his employment, and (g) include the employee's consent to injunctive relief; (2) Agreements with contractors or temporary employees for confidentiality; (3) Non-disclosure agreements by any other parties such as vendors, customers, or potential business partners or purchasers; (4) Control of physical access to the facility, including requiring identification badges, limiting access to sensitive rooms, requiring all visitors to sign in, locking important documents or rooms, using monitoring cameras, marking documents as confidential or secret, and conducting exit interviews. Further, employers should consider special bins for confidential trash, requiring a clean desk policy, and not locating copying machines in close proximity to public areas. 13
1. See Drill Parts v. Joy Manufacturing, 439 So.2d 43 (Ala. 1983) (adopting the common law of trade secrets based upon the original Restatement of Torts (1939)). The Alabama Supreme Court has now clearly stated that the Alabama Trade Secrets Act has superseded the common law in Alabama on trade secrets. See e.g., Allied Supply Company, Inc. v. Brown, 585 So. 2d 33, 37 (Ala. 1991); see also Long "The Alabama Trade Secrets Act," 18 Cumb. L. Rev. 557, 562 (1988); see generally Thomas J. Methvin, Business Torts From A Plaintiff s Perspective, 60 Alabama Lawyer 415 (Nov. 1999). 2. The comments of the Alabama Trade Secrets Act expressly state that reverse engineering is a lawful means of acquiring technology. See Ala. Code 8-27-4, Comments. 3. See IMED Corp. v. Systems Engineering Associates Corporation, 602 So. 2d 344 (Ala. 1992) (defendant liable if it was provided notice that the information had been misappropriated). 4. Compare Soap Company v. Ecolab, Inc., 646 So. 2d 1366 (Ala. 1994) (jury question whether documents retrieved from a trash dumpster were trade secrets, including proposals to specific customers, customer complaints, and price lists); Ages Group, L.P. v. Raytheon Aircraft Company, Inc., 22 F. Supp. 2d 1310 (M.D. Ala. 1998) (refusing summary judgment where there was a factual dispute over how defendant obtained documents). 5. See Alagold Corporation v. Freeman, 20 F. Supp. 2d 1305 (M.D. Ala. 1998) (citing Allied Supply and granting summary judgment to defendant where information was stored in unlocked file cabinets freely accessed by employees, the documents were not stamped confidential, there was no instruction to employees that information was confidential, no confidentiality agreements, and no non-compete or non-solicitation agreements). 6. The Act also provides that a defendant may recover legal fees. Recently the Alabama Supreme Court held that such fees may only be recovered in cases without substantial justification and that this term means the same as in the Alabama Litigation Accountability Act. See Ex parte Waterjet Systems, Inc., 1999 WL 301827 (Ala. 1999) (also liberalizing the standard for when a recovery can be made for wrongful injunction). 7. See e.g. Trandes Corp. v. Guy F. Atkinson Company, 996 F.2d 655, 662 (4th Cir. 1993) (source code protectable as a trade secret because it was kept completely secret but jury issue whether or not object code was sufficiently held secret, even though it had been marketed to several customers who signed license agreements promising not to copy or reveal the information to others); see also Structural Dynamics Research Corp. v. Engineering Mechanics Research Corp., 401 F. Supp. 1102 (E.D. Mich. 1975);
ComShare v. Computer Complex, Inc., 338 F. Supp. 1229, 1234 (E.D. Mich. 1971); but see MAI Systems Corp. v. Peak Computing, Inc., 991 F.2d 511, 522 (9th Cir. 1993). 8. See e.g. Public Systems v. Towry, 587 So. 2d 969 (Ala. 1991) (plaintiff admitted it distributed to prospective clients a booklet containing a listing of its customers and therefore there was no trade secret protection to the customer list); Public Systems v. Towry, 587 So. 2d 969, 973 (Ala. 1991). 9. See e.g. Intermedics v. Ventritex, 152 F.R.D. 188, 189 (N.D. Cal. 1993). 10. See e.g. National Surety Corp. v. Applied Systems, Inc., 418 So. 2d 847 (Ala. 1982) (holding that a computer program could be the subject of conversion where an ex-employee had taken such programs). 11. See Allied Supply, Inc. v. Brown, 585 So. 2d 33 (Ala. 1991) (holding that an employee had not breached his duty of loyalty to his employer simply because employees left as a group and did not provide prior notice to the employer). It is a breach of the duty of loyalty to lure customers or employees away from an employer when the employee is still employed. See also Head v. Rolling, 90 So. 2d 828 (Ala. 1956). There is some isolated authority for the proposition that even without violating fiduciary duties to his employer or conversion or misappropriation of trade secrets, an injunction could lie against an ex-employee working for a competitor under the "Inevitability Doctrine." See e.g. Pepsi Co. v. Redman, 54 F.3d 1262 (2nd Cir. 1995) (high level officer at Pepsi responsible for "All Sport" drinks who left to join Quaker Oats Company's "Gatorade" team was enjoined because he was privy to Pepsi Co.'s highly confidential strategic sales plan and it was inevitable that he would disclose this proprietary information). 12. See e.g. Phillips v. Frey, 20 F.3d 623 (5th Cir. 1924); but see Smith v. Snap-On Tools, 833 F.2d 578 (5th Cir. 1987) (holding that in the absence of an express agreement, no confidential relationship existed and a duty not to disclose or compete existed). 13. See J. Tatum, D. Harvey, "Trade Secret Audits, Risks of Loss and Strategies for Protection," 429 PLI/pat 383 (1996).