Trilogy of Secrets Part 3 - Protecting Trade Secrets: A Long and Winding Road
March, 2007
The Illinois Trade Secrets Act (“ITSA”) (765 ILCS 1065-1 et seq.) defines a “trade secret” as “information . . . sufficiently secret to derive economic value . . . not being generally known to other persons . . . and . . . is the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.”
While the definition seems straight forward, the process in protecting a trade secret can be daunting and expensive. This is amply demonstrated in a recent decision of the Illinois Appellate Court from the First District. In Liebert Corp. v. Mazur (1 Dist. 2005) 827 N.E.2d 909, a manufacturer of computer network protection equipment and its exclusive sales representative brought an action seeking to enjoin the representative’s former employees from using alleged trade secrets in a new competing business.
Liebert was a company that manufactured equipment consisting of engineered or applied systems for uninterrupted network power and climate control technologies. Liebert entered into an agreement with Zonatherm to be its exclusive representative in the Chicago area. The representative agreement also provided for confidential treatment of Liebert’s confidential, proprietary, and trade secret information, with restrictions on disclosure, use, and dissemination. The dispute arose when employees of Zonatherm left and began representing a company that was in direct competition with Liebert.
Liebert and its sales representative, Zonatherm, brought an action seeking to enjoin the former employees of Zonatherm from using the trade secrets in a new business. The trial court denied the plaintiffs’ motion for preliminary injunction and the appeal followed.
The plaintiffs lost on all counts at the trial level. The trial court felt the plaintiffs had not established that their price books and customer lists were trade secrets and that the plaintiffs’ allegations of irreparable harm were speculative.
Upon review, the appellate court began its analysis with a determination of whether or not the information sought to be protected constituted a trade secret; specifically, that the customer lists, bids, and sales quotations are trade secrets as defined under the ITSA. The two parts of the test are: 1) that the information must be sufficiently secret to give them a competitive advantage; and 2) that they took affirmative measures to prevent others from acquiring or using the information.
In conducting a trade secret analysis, other factors to consider are set out in the common law. These factors were outlined by the Liebert court as follows:
- The extent to which the information is known outside the business.
- The extent to which it is known by employees and others involved in the business.
- The extent of the measures taken to guard the secrecy of the information.
- The value of the information to plaintiff and its competitors.
- The amount of effort or money expended in developing the information.
- The ease or difficulty with which the information could be properly acquired or duplicated by others.
Even after consideration of the foregoing factors, the courts have held that whether or not a customer list is a trade secret depends on the facts of each case. Therefore, even after satisfying each of the foregoing conditions, a review of existing cases must be made to determine whether your particular circumstance constitutes a trade secret deserving of protection.
In the Liebert case, the appellate court felt that the death knell for the customer contact lists and the bids and sales quotations was that Liebert failed to show reasonable security measures as to this information. The appellate court noted as follows:
The record contains no evidence showing Zonatherm’s sales persons understood the sales and quotation information was confidential, they did not sign confidentiality agreements, the information was not labeled “confidential,” and none of Zonatherm’s managers testified that they advised sales persons that the information was confidential. Although the Izzos [Sales Rep.] considered the information confidential and valuable, there is no evidence they ever communicated that fact to their employees.
Having failed with the customer lists and the price quotations, the remaining issue related to the price books. This information was contained on a website with restricted access to those that needed the information for preparing quotes to customers. The appellate court noted that it was conceded that the price books were considered trade secrets. However, the next test was whether or not this trade secret was misappropriated by the defendants. The Liebert case set out the following three elements to show trade secret misappropriation:
- A trade secret existed.
- The secret was misappropriated through improper acquisition, disclosure, or use.
- The owner of the trade secret was damaged by the misappropriation.
The appellate court then made an exhaustive analysis of the evidence including witness testimony and expert testimony in regard to downloading of the price books to a defendant’s computer and thereafter possible transfer to a disc. The analysis even touched upon issues relating to spoliation of evidence. Based on “Mazur’s spoliation of the evidence on the lap top that he destroyed evidence of misappropriation . . .”, the appellate court concluded that the defendant acquired the price books through improper means.
Plaintiffs’ quest for relief did not end at that point. Having found that the price books constituted a trade secret and that they were misappropriated, the plaintiff Liebert was required to satisfy the requirements for a preliminary injunction. The standard and traditional requirements are that plaintiffs seeking preliminary injunctions must show the danger of irreparable harm and the absence of an adequate remedy at law. The problem that Liebert had was that they could not show specific instances in which Mazur actually used the misappropriated information. They contended that the injunction was necessary because there was a real threat or an inevitability that Mazur would use the information that he misappropriated. The appellate court then went into a detailed analysis of the similarity of the business of Liebert and the competitor and found that Liebert had proven trade secret misappropriation by demonstrating that the defendant’s “new employment will inevitability lead him to rely on the plaintiff’s trade secrets.” (Citing Pepsi Co., Inc. v. Redmond, 54 F.3d 1262 at 1269 (7th Cir. 1995).
Therefore, if you cannot demonstrate direct and actual use of the misappropriated information by the defendant, you then must satisfy the “inevitable use” standard.
Even though the appellate court held that Liebert satisfied the finding of inevitable use by the defendant, its quest for relief was not complete. The two remaining standards that it needed to satisfy for injunctive relief were the showing of irreparable harm and inadequate remedy at law. To support its finding in favor of Liebert on these two points, the court relied upon e-mails (resurrected by an expert in computer technology) that the employees intended to underbid Liebert and its sales representative in the existing market. This particular evidence indicated that “ . . . the type of competitive losses alleged here often inflict irreparable injury and lack an adequate remedy at law, due to the difficulty in calculating the loss of existing and future business.”
Even after the foregoing exhaustive analysis, the court admonished the trial court, prior to a remand, that the court should consider all of the facts and circumstances before fashioning an injunction that “should seek to prevent the defendant from gaining competitive advantage through the unlawful misappropriation . . .” but at the same time the trial court must consider “ . . . any harm an injunction would impose on the defendant [as] weighed against the benefit it would provide the plaintiff.”
Lastly, the appellate court remanded to the trial court to determine “what form of preliminary injunction is necessary to reasonably protect plaintiffs . . .” The appellate court also noted that only one of the defecting employees is to be enjoined.
The instruction from the decision is that the company seeking to protect its trade secrets has a heavy burden. The main point, however, to be gleaned from the decision is the prime failure of Liebert: It failed to take steps to protect its information and it failed to communicate to its employees and others (especially its sales representative) that the information was confidential and must be kept confidential. Liebert, like many other companies, included terms in its sales and other agreements that identified and presumably protected confidential information and trade secrets. However, without the additional step of labeling and designating information as secret and/or confidential and communicating that to those who have access to that information, the employment and confidentiality agreements were of no avail.
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