Trade Secrets: The Courts and You
June 1968 Electronics World

June 1968 Electronics World Table of Contents  Wax nostalgic about and learn from the history of early electronics. See articles from Electronics World, published May 1959 - December 1971. All copyrights hereby acknowledged.

This 1968 Electronics World magazine article nails the basics of trade secrets law that still hold today: if you learn your boss's secret info - like formulas, processes, or customer lists that give them a business edge - you can't share it with a new job, even by accident, and your new employer can get sued if they know about it and use it. No signed paper needed; courts protect "real" secrets (not public stuff or your general skills) with court orders to stop use or money damages. Good faith matters - act fair, don’t copy files or exact products, and you have defenses like competing honestly. Big changes now: almost all states follow uniform rules (UTSA) plus a 2016 federal law (DTSA) for nationwide lawsuits, seizures of evidence, whistleblower shields, and bigger penalties for bad actors. Bosses must prove they guarded secrets (NDAs, passwords). Non-compete deals are weaker (banned in places like California). Tech makes proving theft easier with emails/devices; job-hoppers get checklists, talks, and insurance from new bosses amid more lawsuits.

Trade Secrets: The Courts and You

By and Maurice J. Hindin,
Hindin, McKittrick & Powsner, Attorneys at Law

Pick up almost any Sunday paper and you'll find the classified sections weigh almost half as much as the entire issue. Prominent among the want ads are calls for scientists, engineers, and technicians. Not so evident are the problems these men face when they change jobs.

Job jumping, job stealing, and indeed trade-secret stealing have become almost a way of life in the professional world. Most companies hire personnel because they have need for that person's professional competence. But sometimes the employee's new company is a direct competitor of the organization he is leaving and sometimes it is the possibility that the employee has certain proprietary knowledge (other than his professional skills) which makes him valuable to the new company.

The professional man should know his responsibilities - but often he doesn't, and perhaps an employer should protect his employee - but usually he doesn't. Most employees do not know how to protect themselves. The problem is that when an employee learns his employer's trade secrets, he may, quite innocently, carry these secrets with him to his new job. This frequently results in litigation between the former employer, the employee, and the new employer. The number of legal suits is rising, and more and more employees are being enjoined in the litigation with their corporate employers.

A Matter of Law

The law is very clear. Everyone. be he an engineer or technician, who learns trade secrets from his employer, is legally bound not to disclose such secrets to anyone, including his new employer. Likewise, the new employer is not bound to protect his employee unless there is a contract between them in which the employer agrees to protect, indemnify, and defend the employee against his former employer's charges. Also, the new employer becomes personally liable if he knowingly uses trade secrets brought to him by his new employee. These are matters of law which have been established by legal precedents.

The principle of law can be stated simply: Every employee is under a legal obligation to preserve his employer's trade secrets learned by him in the course of his employment and not to disclose or divulge them to anyone, including his new employer. If the employee, innocently or through intent or design, discloses to his new employer the former employer's trade secrets. the former employer has available to him a number of legal remedies. One type of action is a suit by the former employer against the new employer as well as a suit against his former employee for an injunction. In this type of case, the court is empowered to issue an injunction against use of the trade secrets. Another type of action is against the new employer and the former employee for damages (if the former employer can establish damages). The same liability exists if the former employee goes into business for himself. Since the employer is often well aware of his legal rights and since the employee seldom has a clear idea of what is involved, this article is limited to an analysis of the problem from the standpoint of the employee.

Any analysis of the problem of trade secrets should consider some of the more fundamental questions presented by the subject. These are: (1) What is a trade secret? (2) What are some defenses available to the employee? (3) What can the employee do to protect himself?

The problem is further accentuated by the very widespread belief held by many employers that in hiring a man they are entitled to all of the knowledge acquired by the employee while working for a former employer. Therefore, it is not difficult to see how an employee may, in good faith, be induced to overstep the limits and subject himself to liability.

In recent years a large number of employers, especially in fields of engineering research, have required employees to sign so-called secrecy agreements. These agreements normally refer to patent rights relating to discoveries or inventions developed by the employee in the course of his employment. In this article, no attempt is made to analyze or discuss the legal effect of such agreements insofar as they relate to patents. Many of these agreements, however, also purport to cover trade secrets. The agreement is not a solution because the real problem involved is not whether or not the employee has executed an agreement to preserve trade secrets, but what are the trade secrets which he has agreed to protect. The law imposes upon the employee the same duty cf preservation of his employer's trade secrets whether or not he has signed a secrecy agreement. If he has signed such an agreement, it simply gives the employer an added ground for legal action, namely a cause of action based on breach of contract.

What is a Trade Secret?

The Restatement of the law of Torts, Section 757, Comment b, defines a trade secret as follows: "A trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it." The problem of definition is further accentuated by the language of the courts in dealing with trade secret cases. For example, the courts exclude from protectable trade secrets matters of public knowledge or matters of general knowledge. In an industry where an idea is well known or readily ascertainable, courts have held that there is no legally recognizable trade secret. Likewise, it is not necessary that a trade secret be a novelty or invention. A good statement of one of the problems is found in the court's opinion in the case of A.O. Smith Corp. vs Petroleum Iron Works [73 F. 2d 531 (CA 6)]. In that case the court used the following language:

"A process may, however, be maintained in secrecy and be entitled to equitable protection even though invention is not present.... The mere fact that the means by which a discovery is made are obvious, that experimentation which leads from known factors to an ascertainable but presently unknown result may be simple, we think cannot destroy the value of the discovery to one who makes it, or advantage that competitor who by unfair means, or as the beneficiary of a broken faith, obtains the desired knowledge without himself paying the price in labor, money, or machines expended by the discoverer."

The Restatement of the Law of Torts comments on six criteria which may be used to determine Nv het her certain information amounts to a trade secret. In effect, the Restatement says:

"... Some factors to be considered in determining tvhether given information is one's trade secrets are: (1) the extent to which the information is known outside of lais business; (2) the extent to which it is known by employees and others involved in lais business; (3) the extent of measures taken by lain: to guard the secrecy of the information; (4) the value of the information to lama and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be properly acquired by others."

It's easy to see that it is extremely difficult to establish whether particular information obtained by an employee during the course of his employment does, in fact, encompass his employer's trade secrets. It can require weeks or months of technical expert testimony.

When the cases are analyzed, however, we see that the conduct of the employee has much to do with the relief which the former employer may obtain. Where there is evidence of an employee's bad faith, that is, where there is an apparent desire to take unfair advantage of knowledge he gained from a former employer, the courts have said trade secrets exist. On the other hand, in similar cases the courts have been unwilling to find the existence of a trade secret where the evidence showed the employee has attempted to act fairly and honorably and tried to preserve his former employer's confidences. Two examples of unfair dealings or unfair conduct by a former employee are: where an employee has made an exact duplication of his former employer's product or process, or where an employee has taken without permission his former employer's papers or records. Likewise there are cases of an employee being held equally responsible with his new employer because the new employer actively induced the employee to breach his former employer's confidences. (B.F. Goodrich vs Wohlgemuth, 192 N.E. 2d 99; Minnesota Mining & Manufacturing Co. vs. Technical Tape Corp., 192 N.Y.S. 2d 102.)

Consequently, whenever an engineer or technician moves from one job to another he must in all respects deal with honesty and fairness toward both his old and new employers. Sometimes this is difficult because the new employer is in direct competition with his old boss.

Some Defenses for the Employee

Just because an employee knows his former employer's trade secrets, it does not mean he is automatically in danger. Other factors must be analyzed. The employee is also en- titled to the protection of the courts. The principle of law which protects the employer and his trade secrets also has another equally well established concept, that is, an employee may freely compete with his former employer. An additional problem is presented where the former employer has obtained a non-competition agreement with the employee. No attempt is made here to discuss the limitations of such non-competition agreements. The courts have imposed severe limitations and restrictions on the enforceability of such agreements, but they nevertheless do represent a problem of concern and require independent legal analysis. There is usually a limit to the time that the employee can be prevented from competing and generally limit the area of his competitive activities. A good legal discussion about competition and its philosophy can be found in the opinion of the court in the ruling on the Continental Car- Na -Var Corp. vs Moseley case (24 Cal. 2d 104, 148 P. 2d 9).

Again, the key to the conflict between the two opposing theories of law is very often the element of the good faith of the employee. To be protected, the competition must be fair competition, and fairness, although often a question of fact, determines whether or not the employee will be enjoined from his new activity or not.

Also, an employer must have considered the item or process a secret before his employee left him. If he did not previously consider the information which his employee acquired a secret, or if he took no reasonable steps to guard it as a secret, then the employee need not treat it as a secret. There is also a difference between matters of public knowledge and matters which are peculiarly within the knowledge of the employer. A frequent defense raised by employees when they are charged with unauthorized disclosure of their employer's trade secrets is that what they learned from the employer was only general knowledge which anyone skilled in his work could gain from similar employment. When this is established, it is a valid defense. According to the Supreme Court of Indiana in the case of Donahue vs Permacel Tape Corp. [234 Ind. 398; 127 VE(2)241]:

"... Knowledge, skill and information (except trade secrets and confidential information) become a part of the employee's personal equipment. They belong to him as an individual for the transaction of any business in which he may engage, just the same as any part of the skill, knowledge, information or education that was received by him before entering the employment. Therefore, on terminating his employment he has a right to take them with him."

It is difficult for the courts to determine what is general knowledge or what is specific knowledge. Consequently, the concept has been the subject of many lawsuits.

To ask an employee to make such a judgment is to ask him to determine something which, for the most part, he will be unable to answer.

Employee Protection?

The purpose of this article is not only to alert the reader to the existence of the problems, but to offer some concrete suggestions which he can use to minimize his risk. The following questions can be utilized as a check list to assist the engineer or technician changing jobs or contemplating going into business for himself in determining if there is a real risk involved.

  1. Will I be doing the same kind of work in my new job as I did in my last position?

  2. Will I be required to use the same techniques for my new employer as I used for my former employer?

  3. Did my old employer have a proprietary product or service which is in competition with products or services of my new employer?

  4. What has been the attitude of my former employer with respect to the subsequent employment of his employees?

  5. Did I learn something of a proprietary nature while working for my former employer, either as to research, production techniques, or processes which I will be called upon to use for the benefit of my new employer?

  6. Is my new employer in direct competition with my former employer?

  7. If I were my former employer, would I feel imposed upon by what I intend to do in connection with my new employment?

If the answer to any of these questions is "yes," then there is a potential legal problem. And if the answer is "yes ", there are several things that can be done to protect yourself and your new position. Some of these are:

  1. Have a frank discussion with your new employer. Point out that in the course of your former employment you may have learned of your former employer's trade secrets. Point out that in fairness to him and to yourself you want to be assigned to work in which you will not be required to reveal trade secrets of your former employer.

  2. Obtain from your new employer an indemnification agreement. This agreement should say that in the event you are accused of unauthorized use of your former employer's trade secrets, the new employer will defend you in any law suit and pay your attorney fees and court costs and satisfy any judgment that may be rendered against you.

  3. If requested to reveal anything which in good conscience you believe to be a trade secret, ask to discuss the problem with your new employer's attorney. You will find that top management will appreciate your concern since the new employer will not want to get involved in unfair trade litigation, and second, it stamps you as an honorable person in whom the new employer may repose trust and confidence.

  4. If your new employer does not respond favorably to your suggestions, you should take a further hard look at your overall exposure. Perhaps you should consult an attorney of your own choosing, state fully the facts and circumstances and obtain from him a written opinion as to your exposure to liability.

As in most cases where there is danger of legal complications, the cost of prevention is much less than the cost of defense. This is especially true in matters affecting the commercial aspects of the law. The incidence of litigation with former employers seems to be increasing and with the pressures of competition on the increase, there is little prospect that such problems will decrease in the future.

(EDITOR'S NOTE: The author is very much aware of the legal problems of technicians and engineers. Recently he was involved in a six-month court battle in which half-a-dozen technical personnel were enjoined with their corporate employer in a case alleging that they misappropriated the trade secrets of a former employer.)