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Trade Secrets in the Realm of Commercial and Employee-Employer Disputes

Trying to determine what is and what is not a trade secret is often a complicated venture. A clear example, and one of the most heavily guarded of trade secrets, is the recipe for Coca Cola. However, the definition of trade secret can be interpreted as an all-encompassing category with little clarification as to what specific information is protected.

The New Jersey Trade Secrets Act, recently passed into law in January of 2012, defines trade secrets as:

Information, held by one or more people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process, that: (1) Derives 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 (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

The Act codified accepted case law. Indeed, trade secrets have long been defined to include the any portion of technical information, designs, processes, procedures, and improvements which are secret and of value to the business holding them.

In one case, New Jersey’s Supreme Court examined trade secrets in the context of a dispute between an employer and two employees who started a competing business in the case of Lamorte Burns & Co., Inc. v. Walters. The employer, Lamorte, was in the business of investigating and adjusting claims for liability insurers. Part of the employees’ jobs was to bring in and retain new clients for the business. The employees signed an employment agreement with Lamorte promising to (1) not engage in any other business without written consent from the Company; (2) maintain in confidence all proprietary and confidential information obtained or developed by the employee in the course of employment; and (3) not solicit business or clients from Lamorte.

The employees started a new, competing business while still working for Lamorte and kept records of Lamorte’s client list for later use in their business. The employer sued the employees, claiming that they breached the employment agreement, breached their duty of loyalty, wrongfully used confidential information, and wrongfully interfered with the employer’s economic advantage.

The employees claimed that they did not know that the client lists were confidential and proprietary, and that the employer had never informed them of such. The New Jersey Supreme Court stated that, even without an agreement, the law would protect confidential and proprietary information. The Court explained that customer lists of service businesses are afforded protection as trade secrets as long as the information is maintained at some substantial level of secrecy.

However, the Court also went on to say that information need not rise to the level of a trade secret to be legally protected. When considering the time and circumstances of the disclosure and the intended use of the information, there can be valid claims (such as a breach of loyalty or unfair competition) even if the information is publicly available to a limited extent.

Regardless of this, the Court found that the client information taken by the employees did constitute confidential, protected trade secrets because it was not generally available to the public and the employees would not have been aware of the information if they had not obtained it through their employment. The client lists provided the employees with an advantage in soliciting those clients from Lamorte for their new business. The fact that the employees were asked to sign the employment agreement, regardless of whether or not the agreement was enforceable, put the employees on notice that Lamorte had an interest in protecting the information.

Understanding what is considered a trade secret helps businesses ensure that their information is protected as a trade secret. For instance, trade secrets are presumed to be protected when the owner takes measures to prevent information from becoming available to persons other than those selected by the owner. The owner must ensure that the information is not open and ascertainable by the outside public.

The following are some ways a business can keep their information protected as a confidential trade secret:

  • Identify the procedures, processes, recipes, designs, software, or other information your business wants to protect as a trade secret;
  • Restrict and limit who knows and/or has access to the information. Do not reveal to anyone unless it is necessary to do so;
  • Restrict physical access to the information by keeping it in a secured/locked place;
  • Have those who do have access or knowledge agree in writing that they will not disclose the information;
  • Stamp or otherwise mark any documents with trade secrets as “confidential,” “proprietary,” and/or “trade secret.”

Once an employee has confidential information it cannot be magically erased from her mind once her employment is terminated. As one New Jersey appellate court noted, an employee is:

not compelled to shut his eyes to what goes on in his place of employment nor is he required to wipe his memory clear of those matters which he learns during the course of that employment. So long as no contract express or implied prohibits him from divulging the information learned during his employment, the employee may use that information for his own benefit.

Trade secrets will retain their protected status as long as no one has independently ascertained the information and it is not public. Especially in our current state of internet and social-media obsession, once information is out – it is public for the whole world to view. If the trade secret is revealed, you may be able to sue for damages, especially if there is a non-disclosure agreement, but it will nevertheless be difficult, if not impossible to return that information to its trade secret status.

The New Jersey Trade Secrets Act protects trade secrets by requiring that courts preserve their secrecy by reasonable means, providing for a presumption in favor of granting protective orders. The Act also provides that not only can a company sue for misappropriation of a trade secret (within three years), a company can also apply to the court to prevent such a disclosure.

However, to succeed in these cases, it is prudent to identify and protect confidential information before disclosure, rather than fight to put the genie back in the bottle afterward.

The attorneys at McLaughlin & Nardi, LLC are experienced in the law of trade secrets. The firm can not only aid you or your business in commercial or employment litigation involving trade secrets, but it can help to help your business prevent trade secret disputes from arising.

To learn more about what we can do to help, please visit our website or contact one of our lawyers at (973) 890-0004.