Trade secrets need to be kept secret. Obvious as this point may seem, it is often overlooked. A company with valuable information—customer data, unreleased products, engineering specifications, unique manufacturing methods, to name just a few possibilities—must treat it like the precious asset it is.
Sensible security measures will make it less likely that an employee, vendor, partner, or competitor will steal or misuse a company's trade secrets. Equally important, in the event legal action ever becomes necessary, the court will require the trade secret owner to show that it too reasonable steps to maintain the secrecy of its information. Here are five things your business can do to protect itself.
Five Ways to Protect Trade Secrets:
Identify and Label Confidential Documents
The first step a business should take is to work with an attorney to inventory business and technical information eligible for trade secret protection. Once identified, key documents and files should be clearly marked as "CONFIDENTIAL" so that there can be no mistake that the company regards them as confidential. Such labeling will be more effective if the company is selective in what it designates.
Restrict Access to Information
Do all employees need to be able to review, for example, a company's pricing, cost, and margin information? If not--and in all likelihood they do not—the company should strongly consider protocols limiting access to those whose job responsibilities actually require them to access such information.
Implement Employee Confidentiality Policies
A business with valuable trade secrets should ensure that its employee handbooks and policy manuals carefully address matters of confidentiality. The company should communicate clear guidelines for when, how, and for what purposes an employee may access the company's confidential information. Written policies are invaluable for promoting confidentiality and documenting any breaches.
Use Nondisclosure and Noncompete Agreements
A business that shares confidential information with employees, customers, vendors, partners, or others should be sure that the information is covered by a nondisclosure agreement, which will give rise to liability for breach of contract in the event the information is misused or wrongfully disclosed. In many cases, a carefully crafted non-compete agreement with employees and executives will be appropriate and even critical for keeping a company's information from falling into the hands of a competitor.
Conduct Exit Interviews
A best practice is to conduct an exit interview with any employee leaving the company. Exit interviews provide an occasion to remind an employee of his or her post-termination obligations and help avoid later allegations that the employee is unaware of his or her obligations. An exit interview can also be an opportunity to gather facts about potential risks posed by the employee's next position.
Trade secrets can be among a company's most valuable assets, and technology has made trade secret misappropriation shockingly easy. Reasonable confidentiality measures such as those outlined above can be highly effective in preventing misappropriation. Such measures will also make a business more likely to obtain court relief in the unfortunate event that trade secret misappropriation occurs.
When many think of trade secrets, they think of the formula for Coca-Cola, KFC's 11 herbs and spices, or Google's search algorithm. But the world of trade secrets goes far beyond these famous examples. In fact, chances are good that your business, large or small, has trade secrets worth protecting.
What Is a Trade Secret?
Trade secrets enjoy strong legal protections, and the importance of trade secrets is growing. Under federal law and the laws of most states, a trade secret is competitively valuable information that:
Trade Secrets Include Customer and Business Information
Trade secrets are not the exclusive domain of tech companies. Businesses in every industry gather and use information every day that can potentially be protected under trade secret law, including:
Trade Secrets Include Technical Knowledge
With patent protection subject to increasing pressures and challenges, more businesses are looking to trade secret law to protect innovation. Protectable technical information includes, among other things:
Know What You Have and How to Protect It
Most businesses have actual or potential trade secrets. In many cases, trade secrets—whether classifiable as "business" or "technical"—are among a company's most precious assets. A trade secret attorney can help your business inventory its trade secrets and implement policies to maximize their value, help prevent devastating damage, and facilitate recovery in the event of theft of misuse.
LinkedIn has become an essential tool for many professionals. The site provides a platform for making business connections, sending direct messages, gathering marketplace information, and posting updates and content. But the very features that make the site useful for business and career development can also stir up trouble where non-competes and non-solicits are involved.
A number of courts have grappled with the impact of social media sites like LinkedIn on non-compete and non-solicit agreements. Most recently, in Bankers LIfe and Casualty Company v. American Senior Benefits, LLC et al, an Illinois appellate court considered whether a former branch sales manager for a life insurance company violated his agreement not to solicit company employees when he used LinkedIn to make connections with former colleagues after he left to work for a competitor.
Merely inviting a former co-worker to connect on LinkedIn seems a far cry from an improper solicitation —although I have seen lawsuits and cease-and-desist letters based on grounds even flimsier than this. "Non-solicit" does not mean "cut off all contact whatsoever." In this case, however, there was a small twist: The former sales manager had also published a job posting for his new employer on his LinkedIn page that could be viewed by those with whom he was connecting.
Neither action—connecting with former colleagues and publishing a job posting—would seem to constitute a solicitation all by itself. But what about the two actions taken together? The former employer argued that the contacts and the job posting did run afoul of his non-solicitation agreement, particularly when considered alongside the defendant's supposed modus operandi of making LinkedIn connections as a first step in recruiting its employees. The idea, apparently, was that the former branch sales manager was wrongly using connection requests to lure his former colleagues to the job posting.
The court disagreed. Ruling in favor of the former sales manager, the court reasoned:
The generic e-mails did not contain any discussion of Bankers Life, no mention of ASB, no suggestion that the recipient view a job description on Gelineau’s profile page, and no solicitation to leave their place of employment and join ASB. Instead, the e-mails contained the request to form a professional networking connection.
The court explained further:
Upon receiving the e-mails, the Bankers Life employees had the option of responding to the LinkedIn requests to connect. If they did connect with Gelineau, the next steps, whether to click on Gelineau’s profile or to access a job posting on Gelineau’s LinkedIn page, were all actions for which Gelineau could not be held responsible. Furthermore, Gelineau’s post of a job opening with ASB on his public LinkedIn portal did not constitute an inducement or solicitation in violation of his noncompetition agreement.
In short, the former employee's connection requests were generic in nature, and did not so much as mention his new company or the job opportunity there. Any further steps taken by former colleagues at his old company—such as accessing his profile and viewing the job posting—were their responsibility alone.
Accordingly, there was no solicitation, and no violation of the agreement.
It might be tempting to look for a categorical rule permitting or forbidding the use of LinkedIn across the board by those subject to a non-compete or non-solicit agreement. But LinkedIn invitations, messages, and postings are like any other form of communication. They can be innocuous, or they can violate one's obligations to a former employer, depending on the content and context. As with most aspects of non-compete law, the permissible use of social media requires a fact-specific analysis. The Bankers Life opinion provides some useful guidance in this developing area of law.
Last year I launched an organization for lawyer, judges, professionals, and academics called the Society for Law and Culture. Through engagement with the best of philosophy, literature, history, theology, and the arts, the Society aims to strengthen the ties between law and culture and promote a renewed sense of law as a vocation and humane profession.
The next Annual Gathering of the Society for Law and Culture will be held May 19, 2018 at the Russell Kirk Center for Cultural Renewal in Mecosta, Michigan. As with the Society’s inaugural gathering, attendees are expected from around the country. The Society has confirmed an amazing roster of distinguished speakers to address the theme, “Moral Imagination and the Law.”
Please watch the Society for Law and Culture website in coming months for more details. If you would like to receive periodic updates about the Society, please email me.
Different states take different approaches to the payment of referral fees between attorneys. I am fortunate to practice in Michigan, where referral fees are permitted, within certain limitations.
I think it's important for colleagues and clients to know where I stand on attorney referral fees. As I have said, before, I believe the referral fees are a win-win-win. When done right, they are:
Referral fees are particularly important for smaller law firms and solo practitioners--and the clients who hire them. Large firms essentially have a parallel system: A client will call a lawyer at the firm, and if that lawyer is not suited to the matter, the lawyer will pass it on to a colleague within the firm with the necessary expertise. And both will be compensated—the first lawyer for originating the work, the second for performing the work. Referral fees allow smaller firms and their clients to enjoy similar benefits.
I am pleased to announce that the State Bar of Michigan's Litigation Journal has published my article, Pleading and Proving a Defamation Case. I write in the article:
“Defamation is notoriously tricky to plead and prove. In Michigan, defamation must be pled with specificity. Only statements of fact, not opinion, can be defamatory, and the plaintiff bears the burden of proving the statement’s falsehood. The very nature of the conduct (words) and injuries (reputational harm) can create unique evidentiary hurdles. And free speech protections under the First Amendment give rise to defenses that may defeat an otherwise viable claim."
The article explains how to properly allege defamation, discusses privileges that may shield a speaker from liability for an otherwise defamatory statement, and explores the rules for "unmasking" anonymous defendants -- i.e. the standards that courts use to decide whether to force a third party (such as an internet service provider) to disclose the identity of an anonymous blogger or commenter.
Defamation is a fascinating and still-developing area of law. It has taken on heightened importance in the era of the Internet and social media, when anyone can reach a worldwide audience with the click of a button. If you would like to read the whole article, you may find it HERE.
Too many employers play games with sales commissions. They delay payment. They use flimsy pretexts to withhold payment. They use accounting tricks to lower the amounts paid. They hold commissions over the heads of their salespersons to keep them in line.
Fortunately, Michigan law affords robust protections to sales professionals. Under the Sales Representative Commission Act (SRCA), an employer that fails to pay a commission when due is liable for damages—and double damages it the failure was intentional. Notably, no showing of bad faith is required. To be liable for double damages, the employer simply must have withheld money owed to the sales representative on purpose. In addition, a sales representative who is forced to sue to recover a commission is entitled to recover the legal fees expended in obtaining a judgment against the employer.
(Note: Though this post focuses on employment relationships, Michigan law regarding sales commissions applies equally to independent contractor and other agreements.)
What If an Agreement Does Not Specify When Commissions Are to Be Paid?
Whether unintentionally or by design, some sales representative commission agreements are not models of clarity. In particular, an agreement may not make it clear when payment of a commission to the sales representative is actually due. The SCRA addresses this common situation. Under the statute, past practices between the parties shall control, and if there are no past practices, then courts must look to industry custom to determine when payment is due.
Many businesses require top executives and sales professionals to sign non-compete agreements. These individuals typically have access to vital trade secrets or customer relationships that could be used to damage the business if the person leaves to work for a competitor or set up a competing venture.
Increasingly, however, non-competes are used with low-level employees such as fast food workers, customer service representatives, and hair stylists. This practice has met with a flurry of criticism. (For some recent examples, see here, here, and here.) One prominent critic contends that non-competes enable employers to “use the threat of litigation to constrict wages and employee mobility,” and that “[w]orkers bound by noncompetes cannot rely on outside offers and free-market competition to fairly value their talents.” An opinion from the Michigan Court of Appeals sheds light on the subject. The case, BHB Investment Holdings, LLC v. Ogg (Feb. 21, 2017, unpublished), involved franchises of two competing swim instruction chains, Goldfish Swim School and Aqua Tots. Goldfish Swim School of Farmington Hills (“Goldfish”) sued a part-time instructor who was terminated and went to work for Aqua Tots Canton (“Aqua Tots”) in alleged violation of his non-compete and non-solicit agreements. Goldfish also brought claims against Aqua Tots. The instructor earned $12.50 per hour at Goldfish and $11 at Aqua Tots.
Though Michigan tends to be more favorable towards non-compete agreements than many states, the court ruled against Goldfish, finding that the instructor’s non-compete was invalid and that the non-solicit had not been violated. To be enforceable, a non-compete must protect a reasonable competitive business interest. Goldfish claimed that the instructor knew trade secrets in which it had a legitimate interest. It argued that “although Ogg was a low-level employee, he had access to the most valuable of Goldfish’s proprietary information—the swim training curriculum, which he had memorized.” The court should enforce the non-compete, it suggested, to keep this valuable information away from competitors. The court disagreed, pointing out that the company’s instructional methods were anything but a secret: [Plaintiff] and other Goldfish franchisee display the Goldfish instructional method in front of hundreds of people daily. The instructors use the instructional techniques and employ Goldfish-specific terminology to teach students under the observation of the students’ family members. Any member of the public can enter the facility and watch the lessons as well.
It concluded that because the information “is revealed to the public on a daily basis, it cannot be deemed a trade secret or proprietary.” The non-compete was therefore invalid. As for the non-solicit, the court found this restriction to be reasonable in principle, citing Michigan cases establishing that an agreement preventing a former employee from using the employer’s information to solicit clients on behalf of a competitor is enforceable. Nevertheless, there was no evidence that the instructor had actually influenced any Goldfish clients to follow him to Aqua Tots. Therefore, no relief was warranted under the non-solicit, either.
A takeaway for non-compete litigants generally is that confidential information, to be protectable, must be kept confidential. This point may seem obvious, but there is often a real dispute over whether sufficient steps—or any steps at all—have been taken to protect the information at issue. Whatever the agreement might say, there is no reasonable competitive business interest in protecting "secrets" that a business freely makes known to the public. Another takeaway is that it is hard to prevail on a non-solicit claim without direct evidence that the company lost business. Goldfish argued that “instructors at the swim schools are the face of the organization.” But its claim failed because could not identify any customers actually taken by the instructor.
What about non-competes for low-level workers in particular? The majority opinion notes in more than one place the defendants' contention that “entry-level employees” should be treated differently from “high-level employees," but it does not directly invoke this distinction in reaching its conclusions. However, a separate concurrence by Judge Gleicher is instructive: Preventing Ogg from being a swim instructor for a one-year period to protect Goldfish secrets is akin to making a teenaged minimum-wage McDonald’s employee promise not to work for Burger King in the future. Certainly, a person learns some generalized skills at a fast food restaurant that would reduce training time if the person accepted employment at another fast food establishment. But the employee’s understanding of how to cook a hamburger and operate a cash register would not give Burger King an “unfair advantage.” The McDonald’s transferee could not use the secret of the Big Mac to alter the Whopper. Similarly, Ogg learned from Goldfish how to interact with and teach young children. This skill likely made training at Aqua Tots easier. As with any other large chain, however, the Goldfish-institutional knowledge of a single low-level employee could not reform Aqua Tots.
In short, businesses need to recognize that there is a crucial distinction between generalized skills and bona fide trade secrets. An entry-level worker may be given a certain amount of knowledge and training, but such knowledge and training does not always rise to the level of protectable information—even if the worker goes on to use it in service of a competitor. In Judge Gleicher's terms, not every advantage is an unfair advantage. Michigan has no bright-line rule regarding low-wage non-competes (unlike Illinois, which has passed an across-the-board ban on non-competes for low-wage workers). But at a minimum a business seems far less likely to entrust genuine trade secrets to an hourly employee than to a high-level executive or salesperson. And without a protectable interest, a non-compete is invalid.
Non-compete law varies drastically by state. Some states broadly favor non-competes. Other states virtually ban them. Some states impose highly specific limitations across the board. Others take a more flexible, case-by-case approach. Courts in some states will reform or strike out portions of an overly broad agreement to make it enforceable. Others will refuse to enforce an overly broad agreement at all. And this is just the beginning. Each state has distinct rules governing the reasonable scope of a non-compete, the business interests that may be protected by a non-compete, the consideration required to support a non-compete, and the showing needed to obtain an injunction, among other things.
Bottom line: A non-compete agreement that is enforceable under one state's laws may not be enforceable under another's. Consequently, "choice of law"—the rules that determine which state's laws apply in a dispute—is often a crucial consideration in the non-compete context.
A recent case from the Sixth Circuit Court of Appeals drives this point home. In Stone Surgical, LLC v. Stryker Corp., the medical device company Stryker sued a top sales representative for going to work for a competitor in violation of his non-compete agreement. Stryker is headquartered in Michigan. The sales rep lived in Louisiana and received products, delivered products to doctors and hospitals, and conducted sales meetings in Louisiana.
As the court notes, "Michigan law favors non-competes and Louisiana law severely restricts them." The non-compete agreement included a choice-of-law provision calling for the application of Michigan law. However, application of a choice-of-law provision is not automatic, and the sales rep argued that Louisiana's more stringent non-compete laws should govern the dispute. In determining whether to apply a choice-of-law provision in a contract, courts will undertake a multi-step analysis that considers, among other things, which state's law would apply absent a choice-of-law provision and whether that state has a "materially greater interest" in the dispute than the state named in the agreement.
In short, if Louisiana did not have a materially greater interest in the dispute than Michigan, then Michigan law—which is friendlier towards those seeking to enforce a non-compete—would apply. The sales rep argued that his non-compete agreement with Stryker was null and void under Louisiana law.
The Sixth Circuit disagreed and upheld the Michigan choice-of-law provision. Though it remarked that the validity of the provision was a close question, it found that Louisiana did not have a materially greater interest than Michigan. The court reasoned:
Stryker is a Michigan corporation, with its headquarters and management centered there. Michigan has a strong interest in protecting its businesses from unfair competition. Stryker will also suffer economic loss as a result of [the sales representative's] breach of the non-compete agreement—something Michigan surely has an interest in protecting Stryker, a Michigan company, from suffering.
The Sixth Circuit affirmed the judgment of the lower court, in which a jury had returned a verdict in favor of Stryker on its non-compete and other claims under Michigan law and awarded $745,000 in damages. Though it is unknown what the ultimate outcome would have been under Louisiana law, the non-compete would, at a minimum, have been harder to enforce.
The takeaway is that choice of law should be carefully considered before signing a non-compete, and its impact should be evaluated at the outset of any non-compete dispute.
For more on this topic, see my article, "Choice of Law in Noncompetition Law and Litigation."
Law and the Creative Economy is the blog of lawyer Maxwell Goss. This blog is for informational purposes only.