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Legal Issues
Nov 16, 2018

What Will the Courts Really Protect Under Trade Secret Law?

Sponsored Content provided by Russell Nugent - Attorney, The Humphries Law Firm

Protecting valuable business information requires careful planning, as there is no system of registration that proves a company has a protectable trade secret. It doesn’t help that the standard for protecting a trade secret is vague at best. 

A review of some of the cases dealing with these issues provides some insight into how North Carolina businesses can protect sensitive information. 

North Carolina law forbids someone from stealing or misappropriating trade secrets belonging to another and allows the trade secret owner to obtain judicial relief in the form of restraining orders and money damages. 

The North Carolina Trade Secrets Act (i) defines a trade secret as “business or technical information” that:

  • Derives independent actual or potential commercial value from not being generally known or readily ascertainable through independent development or reverse engineering by persons who can obtain economic value from its disclosure or use; and
  • Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
"Misappropriation" means acquisition, disclosure or use of a trade secret of another without express or implied permission and excludes situations where the information was independently developed, reverse engineered or lawfully received from someone else (ii).

Generally, North Carolina courts will protect information when a party expends great effort and expense to generate information and to keep the information within the company. When analyzing whether information is a protectable trade secret,
North Carolina Courts look to six factors(iii): 
  • The extent to which information is known outside the business;
  • The extent to which it is known to employees and others involved in the business;
  • The extent of measures taken to guard secrecy of the information;
  • The value of information to the business and its competitors;
  • The amount of effort or money expended in developing the information; and
The ease or difficulty with which the information could properly be acquired or duplicated by others.

When one or more of these factors are not present, a court may find there is no trade secret to protect.

In 2005, the North Carolina Court of Appeals protected Sunbelt Rentals’ customer information and pricing, employees’ salaries, equipment rates, fleet mix information, budget, and information about business structure as protectable trade secrets(iv). High-level employees left and secretly solicited other key employees, allowing a competing company to establish itself in seven new markets in a short period of time.

In going through the six factors, the Court of Appeals found Sunbelt’s information was (1) not generally known outside the company; (2) the information was only discreetly disclosed within the company; (3) it was guarded as secret (e.g. information removed from view when outsiders visited Plaintiff’s company’s premises, pricing kept in special books, passwords used to protect computer access, file removal rules, and salary information kept under lock and key); (4) competitively valuable; (5) developed at significant cost to BPS; and (6) was difficult to duplicate or acquire. 

As a result, Sunbelt was awarded damages and attorneys’ fees. 

More recently, the Court of Appeals allowed a fabric finishing company to protect information about individual customers’ requirements for finished fabrics(v). In that case, the departing employee was employed as a quality control manager whose job was to assess the needs of each customer and develop an optimized process for finishing fabrics to the customer’s specifications. The departing employee took production factors, i.e. information on each step of a fabric finishing process required by each customer, with him to a competitor.  

In going through the six factors, the Court found
  1. the information was not generally known outside of the company;
  2. The company took significant measures to prevent access from unauthorized personnel including using a system of codes that would not reveal the details of the finishing process and using passwords to protect computer system with additional passwords being required to access the company’s production information;
  3. The company also implemented various procedures to prevent access to those that were not part of the company, namely requiring confidentiality agreements and ID badges from third parties visiting the facilities;
  4. The information was valuable in that it could take more than a year to develop a custom finishing process for a customer;
  5. The company spent more than $500,000 a year developing custom finishes for its customers; and
  6. As a result, the information would not have been easy to duplicate without hiring the company’s quality control manager.
However, when one or more of the six factors are not met, the Courts are unlikely to protect the information. The Court of Appeals heard a case involving Combs & Associates (“Combs”), a provider of sales representation for manufacturers of water and wastewater equipment and processes. Combs employed the defendant as one of its sales representatives. 

After working for Combs for a while, the defendant and a third party formed a new company that provided an identical set of services and began servicing one of Combs’ long term clients – Sigma.  

Combs sued to protect: (1) an email message containing sales forecasting information including the names of existing and potential customers of Sigma; (2) a customer database that had been stored on a computer; and (3) a “Territory Review Summary” – a client-generated form concerning Combs & Associates’ sales activities within a particular territory.  

In refusing to extend protection to the information in the email, the Court of Appeals concluded Combs had not taken reasonable measures to ensure its secrecy and the information was available through other means. First, Sigma either already had or could have compiled from its own business records the customer information in the email message and, second, Combs’ president had separately sent that same information to Sigma. 

Note: the Court of Appeals decided that since someone else, namely a customer, already had the information in the email, Combs could not prevent the defendant from using the information. 

The Court also concluded the customer database was not protectable because the information could have been compiled through public listings, such as trade shows and seminar attendance lists. 

Finally, the Court concluded the “Territory Review Summary” was information Combs was contractually obligated to give Sigma, implying (but not stating) that either the information was available through other means or that it was not subject to measures to ensure secrecy. 

Similarly, in 2000, the N.C. Court of Appeals heard a case involving a prosthetics and orthotics dealer suing an employee that resigned and went to work for a direct competitor(vi). The N.C. Court of Appeals declined to protect information concerning the dealer’s customers because there was no evidence the dealer had taken precautions to keep the information secret and the information could be easily found in a phone book. 

The Court also noted that it was normal for the customers the departing employee had worked with to follow him to a new company because he had developed those relationships himself as an employee of a prior company that the dealer had bought.  The Court also said that since the former employee developed personal relationships with these customers, one could expect they would follow him to a competing business.

There is also a line of cases in which the Courts refuse to prevent employees from leaving to work for a competitor and applying knowledge learned in their prior position when there is no evidence that the employee physically took any information in tangible form with them. 

In one of these cases(vii), a paper packing plant sued a former employee after he quit and went to work for a direct competitor. The Court, upon finding no evidence any physical information was retained by the employee, held that customer information in the departing employee’s memory was not a trade secret. 

The Court pointed out that North Carolina Courts are reluctant to prevent a departing employee from working for a competitor solely to protect confidential information and have generally only done so in cases involving bad faith or underhanded dealing.

In another of these cases, a federal District Court held that non-public information regarding the plaintiff’s business strategies and resources for bidding on government contracts, including contract prices and employee information, were not misappropriated – even if knowledge and expertise retained by the departing employee, Tuschen, was used to assist a new employer(viii).

RLM, the plaintiff, could only produce evidence showing Tuschen had possession of confidential information during her employment with RLM and her new employer was able to bid on contracts involving areas of expertise seemingly developed after hiring Tuschen.

Both the District Court and the Court of Appeals for the Fourth Circuit(ix) rejected RLM’s arguments that Tuschen must have provided trade secrets to her new employer because that company started bidding on contracts they had not previously been serious competitors for prior to hiring Tuschen. 

Without proving that Tuschen did anything more than access trade secrets while performing her job, the District and Appeals Courts concluded that “knowledge and expertise” acquired by a departing employee are not protectable trade secrets. 
An exhaustive study of all the relevant case law is beyond the scope of this article, but a brief review prompts certain themes to emerge. 

First, North Carolina Courts are more likely to protect information that a company has developed in secret at great expense, especially if it is in tangible form and cannot be easily replicated by a competitor. 

Second, trade secret law is not a substitute for a valid non-compete agreement in that an employer cannot prevent an employee from going to work for a competitor just because the employee was exposed to confidential or sensitive information during their employment. 

Third, demonstrating specific actions to keep and maintain secrecy is a key requirement to obtaining trade secret protection. Claims for trade secret misappropriation can be won or lost before they ever see the light of a courtroom.

Russell is a native of Wilmington, N.C. and has been practicing law in Eastern N.C. since 2004. Prior to that, he worked in Chapel Hill and Durham as a research technician on teams exploring RNA-based gene therapies, viral fusion inhibitors, and the role Galactocerebroside plays in protein localization near nodes of Ranvier. After passing the patent bar in 2003 and becoming a registered patent agent, Russell received his law degree from Georgetown in 2004. He began his legal career representing clients in personal injury matters but later left personal injury to provide patent prosecution services to law firms in China and Taiwan prior to joining The Humphries Law Firm in 2014. Russell helps individuals and businesses protect their innovations, creations and business information using strategies based in patent, trademark, copyright and trade secret law. His work includes both strategic planning and dispute resolution. He assists clients who want to buy and sell businesses, and license or transfer their intellectual property assets. Russell also assists with the firm’s litigation practice, particularly in insurance and employment disputes.

(i) N.C.G.S. §66–152(3)

(ii) N.C.G.S. §66–152(1)
                     
(iii) Area Landscaping, L.L.C. v. Glaxo-Wellcome, Inc., 160 N.C.App. 520 (2003)
                     
(iv) Sunbelt Rentals, Inc. v. Head & Engquist Equipment, L.L.C., 174 N.C.App. 49 (2005)
                     
(v) TSG Finishing, LLC v. Bollinger, 767 S.E.2d 870 (2014)
                     
(vi) Novacare Orthotics & Prosthetics East, Inc. v. Speelman, 137 N.C.App. 471 (2000)
                     
(vii) Asheboro Paper and Packaging, Inc. v. Dickinson, 599 F.Supp.2d 664 (2009)
                     
(viii) RLM Communications, Inc. v. Tuschen, 66 F.Supp.3d 681 (2014)
                     
(ix) RLM Communs., Inc. v. Tuschen, 831 F.3d 190 (4th Cir. 2016)

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