Protecting Trade Secrets and Other Valuable Proprietary Information

Proprietary information is the lifeblood of most companies. Often referred to as trade secrets, this term encompasses any valuable information that provides a business with an economic advantage over competitors who do not have access to the same information. Under the law, such information must be generally unknown within the industry to be protectable.

Proprietary information can include a company's methods of operation, unique know-how, customer identities, customer lists and other customer information. It can also encompass financial data, ideas, compilations of data, inventions and formulas—almost anything, provided the information is not generally known in the relevant industry and would be valuable to a competitor. Take, for example, profit margins or a company's intended bid on a particular project. In the wrong hands, this information would create an obvious advantage for a competitor. Similarly, if a business had a unique method of operation that made it more efficient than other players in the industry, that company would want to prevent its employees from sharing the information with competitors.

No Protection without Proper Precautions

The Illinois Trade Secrets Act offers some protection, provided a company makes it clear to its employees that certain information is confidential and proprietary. Under the act, failure to do so will leave the company vulnerable. The limitations of the act were played out recently in Exhibit Works, Inc. v. Inspired Exhibits, Inc., 2005 WL 3527254 (N.D.Ill). In that case, Exhibit Works accused a group of former employees of misappropriating trade secret information in order to establish a competitor company, Inspired Exhibits, that would service a former customer of Exhibit Works. The court noted that the employer had not "presented evidence that it took any reasonable steps to secure and protect the information allegedly taken by the defendants." For that reason, among others, the court ruled in favor of the former employees, in effect allowing the newly formed competitor company to use the Exhibit Works information.

Scenarios like this play out frequently when businesses fail to take proper precautions regarding proprietary information. For example, let's say the fictitious Alpha Mfg. is a relatively small business with a sales force of five people. Over the years, that sales force has developed a comprehensive database of information that Alpha believes is not generally known to its competitors. The database contains detailed business and personal information about its customers, including their buying habits, preferences and birthdays. This customer list not only resides on Alpha's server but has been downloaded onto the salespeople's laptops, handheld devices and home PCs. Given the small size of the company, information is exchanged freely and the sales force is fully aware of all profit margins and bids. Furthermore, Alpha has not executed employment agreements or trade secret policies because it views itself as a close-knit "family" where such formalities are not necessary.

When two key employees decide to jump ship to work for Beta Inc., a primary competitor, they take with them a substantial amount of information stored on their own PCs that Alpha believes is proprietary. However, all of the information was transferred to those computers with Alpha's knowledge and authorization while the employees were still on its payroll. Because no steps—reasonable or otherwise—were taken to protect the information internally and maintain its confidentiality, Alpha may have no recourse against its former salespeople and their new employer.

Creating an Action Plan

Fortunately, there are a number of ways to avoid the frustrating circumstances that plagued Alpha Mfg. With the help of an attorney who has extensive experience in matters involving the protection of proprietary information, companies of every size should institute a formal action plan, which may include the following:

• Stamp "Confidential" on all documents—both hard copies and electronic data—containing proprietary information.
• Limit access to those with a need to know.
• Control who can download sensitive information and obtain appropriate acknowledgements.
• Institute a trade secret policy for the entire company.
• Make sure all employees understand the policy and formally sign off on it.
• Consider executing individual confidentially agreements, particularly with employees who have access to sensitive information.
• If you need to disclose proprietary information to third parties, such as suppliers or customers, have them sign confidentially agreements, or at least stamp the disclosed documents as confidential.
• Conduct exit interviews when employees leave and ask them to return all items belonging to the company. If possible, have them sign an acknowledgement stating that they have returned everything, including all documents.
  

Although there are no guarantees when it comes to protecting trade secrets, companies that plan ahead and follow these steps will be in a better position to safeguard their vital information and remain competitive.

Anthony C. Valiulis is an accomplished litigator with more than 30 years of experience in a broad range of state and federal civil trial and appellate matters. His practice encompasses all types of complex business and financial litigation, including trade secrets, business disputes, non-compete agreements and insurance coverage. If you have questions concerning the protection of trade secrets and other proprietary information, please contact Tony at 312.521.2691 or tvaliulis@muchshelist.com.

This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances.

© 2008 Much Shelist Denenberg Ament & Rubenstein, P.C. All rights reserved.