AN EMPLOYER’S GUIDE TO PROTECTING TRADE SECRETS AND PROPRIETARY MATERIALS
Many employers view company-owned materials, such as client lists, formulas, accounting and marketing methods and other business documents, as “trade secrets.” Under the law, trade secret protection is afforded but only if the employer takes steps to treat these documents as confidential and provides notice to employees of the status of the materials. Many employers are surprised to discover after an employee has left the company, the employee has relative freedom in the use of materials that the employer perceived as trade secrets, simply due to the employer’s own inaction in creating a policy identifying and protecting proprietary materials.
Further, many small businesses inaccurately believe that the concept of “trade secrets” only applies to big business. In truth, employers of all sizes likely have materials that meet the definition of trade secrets. The term “trade secrets” identifies a class of materials and information which employers typically wish to protect. It is important to not only protect trade secrets from competitors, but also from potential future competitors.
There is a statutory definition for trade secrets, and a Minnesota case law derived process for establishing a right to protect such materials. Courts consistently find that materials which were not treated as trade secrets do not meet the definition of trade secrets, and are not protectable in actions brought by employers against former employees seeking a remedy to prevent the employee from using the materials post-employment.
Minnesota Statute Section 325C.01 defines “trade secrets” as follows: “Trade secret” means information, including a formula, pattern, compilation, program, devices, method, technique, or process that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstance to maintain its secrecy.
Under the statutory definition for trade secret, the material must not only have economic value and a proprietary aspect, but must also be treated as secret by the employer. It is this second step that employers often fail to meet when commencing a post-employment action against an employee using the employer’s materials in post-employment competition. The good news for employers, however, is that creating a process, in-house for the protection of trade secrets so that the second step of the statutory definition of trade secrets is met, has been set out by Minnesota case law in a rather clear fashion. In Electrocraft Corp. v. Controlled Motion, Inc., 332 N.W. 2d 890 (Minn. 1983), the Minnesota Supreme Court stated the statutory definition of a trade secret in a clear cut manner. Electrocraft Corp. defined trade secrets as (1) information that must not be generally known nor readily ascertainable; (2) information that must derive independent economic value for the employer from its secrecy; and (3) information which has been subjected to reasonable efforts to maintain its secrecy by the employer (paraphrased from Electrocraft).
Simply put, an employer cannot seek protection for documents which it has not made reasonable efforts to maintain as secret. Processes or steps by the employer, as simple as purchasing a rubber stamp which can be used on materials or documents to be identified as “trade secret” or “confidential,” help achieve this goal.
In addition to the first and basic step of utilizing a rubber stamp or a computer program which imprints an identifier stating “trade secret,” “proprietary” or “confidential,” all employers must include in their employee manuals a clear statement of the obligation on each employee to maintain secrecy and confidentiality with materials owned by the employer. Many lower courts have concluded that the failure of an employer to inform employees as to the identity of those materials which the employer perceives as trade secrets, confidential or proprietary, creates weaknesses in an employer’s claim that the employee has later misappropriated trade secrets or breached the employee’s duty of loyalty.
There is no completely definitive or all inclusive list which employers can use as a resource for identifying fully a protected confidentiality procedure and/or policy to be distributed to employees, however, basic guidelines do exist. At a minimum, a broad list of the materials which the employer perceives as confidential, proprietary or trade secrets should be included in every employee handbook provided to every employee. A common recommendation when creating this document is to err towards the side of inclusiveness. It is important for all employers to have not only an employee policy handbook but also an employer policy handbook.
Policies and procedures to be followed by an employer are not always exactly the same as requirements on the employee’s part. Often times the employer has more duties and obligations. For example, the employee policy should identify those documents which must be treated as confidential, proprietary, or trade secrets, while the employer’s manual must identify the methodology to be implemented for protecting those documents. The methodology includes such basic steps as (1) providing the employee with a list of protected materials, (2) stamping or otherwise identifying protected materials, and (3) physically locking down or password protecting formulas, processes, methods or techniques within the company, so that it cannot be disclosed to the public or even exchanged between a company’s departments. The purpose of an employee manual is to advise employees of company policies, procedures and employee requirements. The purpose of the employer’s manual is to advise management how to implement those policies and procedures.
A qualified attorney should be consulted when drafting any significant provision of an employer or employee manual. The reason for this is that the subject of employment law is not a fixed topic, but one which is subject to the creation of new statutes and case law. Each employer should act in a dynamic manner interfacing with a qualified attorney to update, revise and supplement their employee and employer manuals as necessary.
The benefit of properly implementing a plan of action by the employer is realized in the unfortunate circumstance whereby a past employee seeks to misappropriate proprietary materials owned by the employer. Under Electrocraft and its progeny, an employer which has taken steps to protect materials which are statutorily defined as trade secrets is often entitled to injunctive relief preventing the employee from continuing such conduct. The employer which has taken no steps to protect the materials likely is not protected.
Under the law of Minnesota, if an employee misappropriates information the employer has treated as secret, the employee has violated the common law duty of confidentiality (see, e.g., Sanitary Farm Dairies, Inc. v. Wolf, 412 N.W. 2d 42 (1961)) but emphasis must be made on the employer’s treatment of the materials as secret. Although Electrocraft was decided in 1983, more recent decisions, both published and unpublished (see, e.g., Alpine Glass v. Adams, not reported, 2002 WL 31819910 (Minn. App.)), have noted that “[A]n employer may not merely intend that materials be kept confidential.” (Citing, Electrocraft.) Rather, the employer must show that efforts were reasonably undertaken to maintain the secrecy of the information. Employers should have strict policies in place preventing the disclosure and exchange of protected materials, such as creating a policy whereby employees may not take home confidential or trade secret materials as part of their jobs.
The materials that the employer is seeking to protect should not be materials that it discloses to the public. The application of the processes described above is not merely pro forma, but has real importance when an employer has discovered employee conduct which may constitute misappropriation of trade secrets. If the policy is not put in place prior to the discovery of such conduct, remedies and protections may not be available from the court. Policies and procedures implemented prior to the disloyal conduct by the employee, however, create great security. One final step to protecting company property is a policy requiring employees to sign for the receipt of their employee manual (handbook) specifically defining confidential, proprietary and trade secret materials.
Further, employers should have their employees sign confidentiality agreements, even if they are seeking to protect materials which would not be subject to patent protection. The creation of policies is the best defense for an employer in reducing the cost of future litigation. Strictly complying with an employer’s own policy is a required step to that process. The law, however, is clear in Minnesota that employers which seek to protect information which is confidential and treated as the same and from which the employer derives economic value is protectable under the law.
Call (952) 746-2153 for your employment law issue.