Trade Secret Protection In the Era of Remote Work

The rapid transition to remote work in the spring of 2020 brought with it new risks for businesses managing their confidential information. Helpfully, existing trade secret law is designed to adapt to circumstances, and can cover the transition to remote work. For proprietary information to continent to qualify as a trade secret, the plaintiff must show that it took “reasonable measures” under the circumstances to protect the secrecy of the information.

Trade secret owners should revisit and upgrade existing policies as they continue to refine their remote work policies. Even a few simple measures, like a review and updating of confidentiality agreements, tracking access to certain confidential information, and documentation of a trade secret protection policy can significantly bolster protection for a company’s trade secrets.

How to Qualify for Trade Secret Protection

In order to qualify for trade secret protection, the owner of the trade secret must demonstrate that it took “reasonable measures to keep such information secret.” Confidentiality agreements are considered the bedrock of any well-managed trade secret protection policy. The presence or absence of a confidentiality agreement is often the most important factor in determining whether the owner of the trade secret took “reasonable measures” to protect the confidentiality of the information. First Fin. Bank, N.A. v. Bauknecht, 71 F. Supp. 3d 819, 842 (C.D. Ill. 2014). Other measures, like ensuring that key employees are subject to noncompete agreements can be part of a well developed trade secret protection program. Restricting access to confidential information to employees with a business reason to know about the information, physically securing the information on site, and protecting the information from publication are also considered “traditional” measures that any company should take to protect its trade secrets.

Pre-Pandemic Case Law

Before the pandemic, some case law already existed on the topic of protecting trade secrets in a remote-work arrangement.

In Computer Assocs. Int’l v. Quest Software, Inc., Northern District of Illinois affirmed that a remote work policy was consistent with “reasonable measures” to protect secrecy because (1) the employees were subject to confidentiality policies set out in employee manuals, (2) employees were reminded of their confidentiality obligations on leaving the company, (3) access to the plaintiff’s main facility was limited by the use of key cards, (4) the alleged trade secret was never made available to the plaintiff’s customers or the general public, and (5) the defendants were aware of the confidentiality measures and understood they were intended to protect the secrecy of the information. 333 F. Supp. 2d 688, 696 (N.D. Ill. 2004). The court ruled the plaintiff’s procedures “could have been stronger,” but nevertheless ruled that the plaintiff had demonstrated it took sufficiently “reasonable measures” to protect the secrecy of its information.

Similarly, in API Americas Inc. v. Miller, the District of Kansas ruled that permitting an employee to work remotely was consistent with “reasonable measures” to protect trade secrets because the company had a confidentiality agreement and a noncompete agreement with its remote worker. 380 F. Supp. 3d 1141, 1149 (D. Kan. 2019). This was the case even though the remote worker sent “trade secrets to and from his personal email account ‘frequently’; and that [his employer] knew about this arraignment and permitted it.”

Trade Secret Policies For the Work-From-Home Era

To ensure maximum legal protection for trade secrets while employees are working remotely, companies should consider doing the following:

  • Review and update confidentiality agreements. Any employee, vendor, or potential business partner who has access to confidential information should be subject to a nondisclosure agreement. Those agreements should be stored in appropriate personnel files and with the legal department’s contract management system.
  • Update remote work agreements. Remote work agreements spell out an employer’s expectations for remote employees. A remote work agreement will reiterate the employee’s confidentiality obligations, set expectations with respect to home working environments, reiterate the importance of safeguarding information, and reiterate network acceptable use policies.
  • Double down on training. Implement a regular schedule of trainings on the business importance of maintaining confidentiality. Training can tend to reduce the number of incidents of trade secret misappropriation. In the event of misappropriation, frequent trainings are good evidence of a trade secret owner’s “reasonable measures” to protect the information.
  • Leverage IT resources. Remote access should only be permitted through a secure VPN with dual factor authentication. For particularly sensitive information, employers can implement individualized watermarking, access logging, and other electronic security features.
  • Appoint an access czar. Appoint an executive to make case-by-case decisions for access of certain information. Doing so ensures that the information is only provided for business-critical reasons and proper records of access are kept. Depending on the information, the trade secret owner might consider making the access czar a high-level executive in the company.
  • Do not skip exit interviews. Meet with departing employees, even if virtually, to ensure return of confidential information and remind the employee of post-employment restrictions. This part of the employee life cycle is an important step in ensuring that information does not leave the company and to support a later claim of misappropriation (if necessary).
  • Update guidelines for vendors and partners. Any sharing of confidential information with third parties should be subject to confidentiality agreements. The trade secret owner should also consider requiring the recipient of confidential information to take their own measures to ensure confidentiality.
  • Document your efforts. Policies should be written down, employee confidentiality trainings should include written materials, employee access logs should be preserved, and decisions about remote access to confidential information by individual employees should be noted (with reasoning).

This post is an adaptation of my article,  “Protecting Trade Secrets in the Era of Remote Working,” Managing IP, June 30, 2020 (subscription required).

Drafter Beware: “No Fly Zone” Nonsolicitation Clauses May Be Unenforceable Under Massachusetts Law

In drafting restrictive covenants, companies often seek the certainty of a “no fly zone” type of restriction on former employees or business partners. Such an arrangement goes further than a traditional non-solicitation provision because they prevent the restricted party from accepting business from certain customers, not just a restriction on reaching out to solicit that business. “No fly zones” are seen as advantageous compared to traditional non-solicitation clauses because they avoid the subjectivity of determining whether certain business can be traced to a solicitation. However, in a recent order, a federal district court in Massachusetts ruled that a “no fly zone” restriction could be unenforceable under Massachusetts law because the restrictions were not reasonable.

The action arose from the termination of a multi-level-marketing contract under which plaintiffs sold defendants’ jewelry. Plaintiffs sought a declaration that the “non-solicitation” provision of the agreement is unenforceable. Under familiar Massachusetts law, a non-solicitation provision is enforceable only if it is “necessary to protect a legitimate business interest, reasonably limited in time and space, and consistent with the public interest.” See 178 Lowell Street Operating Co., LLC v. Nichols, 152 F. Supp. 3d 47, 54 (D. Mass. 2016). The plaintiffs argued that a provision that went beyond prohibiting solicitation and restricted them from accepting business from certain customers was unreasonably broad in scope, and therefore does not protect a legitimate business interest. The plaintiffs argued that the provision effectively forced certain distributors to remain in business with the defendant.

The court held that the non-solicitation provision “may be unenforceable to the extent that it restricts plaintiffs from accepting business that they did not solicit.” Citing Corporate Technologies, Inc. v. Harnett, 943 F. Supp. 2d 233, 238–39 (D. Mass. 2013), the district court ruled that “[a] non-solicitation agreement does not prevent a company from receiving business initiated by the client with no direct or indirect participation by the individual employee bound by the non-solicitation agreement. To hold otherwise would bind third parties to agreements they did not sign or agree to.” In analyzing the contract, the court found that the language of the non-solicitation provision runs “directly afoul of the proposition stated in Harnett” by limiting the freedom of non-contracting third parties to approach plaintiffs. On a motion to dismiss standard, the district court ruled the plaintiffs’ amended complaint plausibly stated a claim that the non-solicitation clause was not enforceable.

[Thanks to Jennifer McDonald for her contribution to this post]

Gertz. v. Vantel Int’l/Pearls in the Oyster, Inc., Memorandum and Order on Defendants’ Motion to Dismiss, No. 19-12036-FDS (D. Mass. July 14, 2020)

Life Sciences Companies Can Face Challenges Enforcing Noncompete Agreements

Gregory Bombard

Noncompete agreements are an effective tool to protect intellectual property in the life sciences industry, but even a well-drafted noncompete agreement may run into challenges when an employer tries to enforce it. Under Massachusetts common law — and the law of many other states — a noncompete agreement is generally enforceable if its restrictions are reasonable and designed to protect legitimate business interests like trade secrets or goodwill. A recent decision from the Massachusetts Business Litigation Session demonstrates how those limitations can play out when a life sciences company seeks to enforce a noncompete agreement. Continue reading “Life Sciences Companies Can Face Challenges Enforcing Noncompete Agreements”

Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption

Your New Orleans restaurant has never been more successful.  Business is booming.  People cannot get enough of your famous crawfish étouffée.  With your success, you’re planning to expand into the lucrative retail hot sauce market.  You have all the supply, manufacture, and distribution contracts lined up.  Suddenly, Judas, your trusted sous chef for ten years, quits your business, takes your secret hot sauce recipe and your business plans, and starts his own hot sauce brand.  How are you protected?

The Fifth Circuit’s recent decision in Brand Servs., L.L.C. v. Irex Corp., 909 F.3d 151 (5th Cir. 2018) addresses this issue and adds to a growing list of cases addressing whether state enactments of the Uniform Trade Secrets Act (“UTSA”) preempt common law claims for conversion of confidential business information. Continue reading “Fifth Circuit Decision Adds to Growing Body of Case Law on the Scope of Uniform Trade Secrets Act Preemption”

Massachusetts Is Set to Adopt the Uniform Trade Secrets Act . . . What Now?

On August 1, 2018, the Massachusetts legislature passed a bill adopting the Uniform Trade Secrets Act in Massachusetts. The bill is headed to the Governor’s desk for approval within ten days. Massachusetts adopting the UTSA will leave New York the sole jurisdiction in the United States that relies only on common law protections for trade secrets.

In large part, the UTSA is consistent with and codifies existing Massachusetts law. In some important respects, however, the new UTSA protections are different from what previously existed. As a result, some immediate questions arise with respect to trade secret litigation under the new UTSA. Until Massachusetts courts decide these issues, the answers will not be certain.

What is a Trade Secret?

Massachusetts previously followed the six-factor test in the Restatement of Torts to determine if information is a trade secret. By contrast, the UTSA defines a trade secret as “information . . . that (i) . . . provided economic advantage, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, others who might obtain economic advantage from its acquisition, disclosure or use and (ii) . . . was the subject of efforts that were reasonable under the circumstances, which may include reasonable notice, to protect against it being acquired, disclosed or used without the consent of the person properly asserting rights therein or such person’s predecessor in interest.”

While the new UTSA definition is similar to the former rule, one new development under the UTSA is that trade secrets are protectable if they have “actual or potential” economic value. Under the former definition, the trade secret had to have actual value, and had to be “used in one’s business.” The new UTSA definition will cover secret information with “potential” economic value, even if it had not being actively used by the victim of the misappropriation.

Are c. 93A Damages Still Available for Trade Secret Misappropriation?

Before enactment of the UTSA, trade secret misappropriation claims in Massachusetts would include a Chapter 93A claim as a matter of course because trade secret misappropriation can be an unfair trade practice under Chapter 93A. See Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 939 (1984).

The UTSA, however, expressly “supersede[s] any conflicting laws of the commonwealth providing civil remedies for the misappropriation of a trade secret.” An open issue is whether Massachusetts courts will find that treble damages under Chapter 93A are “conflicting” with the UTSA’s damages provision that limits exemplary damages to double actual damages in the event of “willful and malicious” misappropriation.

Are Other Business Torts Superseded by the UTSA?

Massachusetts common law includes a tort for misappropriation of confidential business information, even if that information does not meet the technical definition of a trade secret. USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 104 (1979).

It is not clear if the new UTSA will supersede this tort in Massachusetts going forward. Other jurisdictions are split on this issue. Some hold that UTSA preempts all causes of action related to the misappropriation of trade secrets, but others allow such claims to proceed because they are expressly based on claims other than trade secret misappropriation. See Orca Communications Unlimited, LLC v. Noder, 337 P.3d 545 (Az. 2014).

When Will Attorney’s Fees Be Recoverable?

The UTSA includes a new attorney’s fee shifting provision. As mentioned above, most trade secret plaintiffs in Massachusetts already included claims under Chapter 93A, with an accompanying attorney’s fees claim. Under the UTSA, attorney’s fees are recoverable for the plaintiff in cases of “willful and malicious misappropriation.” This may be a more restrictive standard than existed under Chapter 93A for the recovery of attorney’s fees.

The UTSA expressly allows the defendant in a trade secret misappropriation claim to recover fees if the court finds “a claim of misappropriation is made . . . in bad faith.” This fee-shifting provision liberalizes existing Massachusetts law, which would only allow a trade secret defendant to recover attorney’s fees in limited circumstances. This provision may act as a deterrent to trade secret misappropriation claims brought in “bad faith.”

Will Massachusetts Adopt the “Inevitable Disclosure” Doctrine?

The majority of existing UTSA jurisdictions have adopted “some form of the inevitable disclosure doctrine.” Whyte v. Schlage Lock Co., 125 Cal. Rptr. 2d 277, 291 (Ct. App. 2002). The “inevitable disclosure” doctrine arises out of UTSA language that empowers courts to enjoin “[a]ctual or threatened misappropriation” of trade secrets (emphasis added). In the seminal case of PepsiCo, Inc. v. Redomnd, 54 F.3d 1262 (7th Cir. 1995), a high-ranking Pepsi executive quit to work for Pepsi’s “fierce” then-competitor Quaker. Pepsi obtained an injunction against the employee’s continued employment with Quaker because the district court found that the employee’s disclosure of confidential marketing and development strategies was inevitable. The Seventh Circuit affirmed, expressly overruling common law, on the basis of the “threatened misappropriation” language of the Illinois UTSA. The “inevitable disclosure” doctrine has been applied by some courts to impose a de-facto non-competition agreement on employees who have not signed such an agreement in instances where their work for an employer would result in the “inevitable disclosure” of a prior employer’s trade secrets.

Massachusetts courts have previously resisted the application of the “inevitable disclosure” doctrine. One reason is a concern that it could jeopardize employees’ rights to future employment. With the new language of the UTSA, the question may be ripe to be re-visited by Massachusetts courts.