By Marc C. Laredo
Virtually all business entities have information that they consider proprietary and confidential. Whether such information is truly a trade secret whose use by others can be limited or barred depends on a number of factors, including the nature of the information sought to be protected and the measures taken to preserve its confidentiality.
This overview will address Massachusetts state law on the topics of (1) what is a trade secret; (2) how trade secrets can be protected; (3) the balance between preserving trade secrets and allowing for free competition; and (4) damages and other remedies for the misuse of trade secrets.
I. What Is A Trade Secret
- A “trade secret” has been defined by statute as “anything tangible or intangible, or electronically kept or stored, which constitutes, represents, evidences, or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, inventory, or improvement.” G. L. ch. 266, section 30(4).
- The relevant factors in determining whether information is secret are as follows: “(1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and to his competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information can be properly acquired or duplicated by others.” Jet Spray Cooler, Inc. v. Crampton, 361 Mass. 835, 840 (1972); see Restatement of Torts, section 757, comment b.
- “The crucial issue to be determined in cases involving trade secrets, therefore, is whether the information is sought to be protected is, in fact and in law, confidential.” Jet Spray Cooler, 361 Mass. at 840. “[T]he result in each case depends on the conduct of the parties and the nature of the information.” Id.
- A wide array of different types of information can be considered to be a trade secret; the inquiry in each case as to whether information is a trade secret is therefore quite fact specific. While it is probably impossible to draw sharp lines between secret and non-secret types of information, certain general rules do apply. For example, “the duty not to use confidential information is not limited to technical trade secrets.” Jet Spray Cooler, 361 Mass. at 839-840. A trade secret “need not be a patentable invention.” Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159, 167 n. 9 (quoting J. T. Healy & Son v. James A. Murphy & Son, 357 Mass. 728, 738 (1970)). “[M]anufacturing processes are entitled to protection as trade secrets.” Eastern Marble Products Corp. v. Roman Marble, Inc., 372 Mass. 835, 839 (1977). Customer lists and certain financial information, such as accounting procedures, also can be considered to be trade secrets. See Jillian’s Billiard Club v. Beloff Billiards, 35 Mass App. Ct. 372, 375-377 (1993).
- Even something as common as a recipe for chocolate chip cookies may be considered to be a trade secret. While the basic ingredients may be considered common knowledge, “[t]he combination in which those ingredients are used, the diameter and thickness of the cookie, and the degree to which it is baked would, however, constitute a formula which its proprietor could protect from infringement by an employee who either gains access to the formula in confidence or by improper means.” Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937, 939 (1984) (rescript). In the Peggy Lawton case, the addition of a non-common ingredient, “nut dust,” to the recipe, eliminated any question as to whether the recipe could be considered to be a trade secret. Id.
- Recently, the Supreme Judicial Court was faced with the question of “whether a list of employees and associate information is property protectible against misappropriation.” Warner-Lambert Company v. Execuquest Corporation, 427 Mass. 46, 48 (1998). The Court held that it could not decide the question as a matter of law and that a factual inquiry was required. Id.; see Matter of a Civil Investigative Demand Addressed to Yankee Milk, Inc., 372 Mass. 353, 359-360 (1977) (names and address of members of an agricultural cooperative could be considered a trade secret).
- A trade secret must be something that is concrete and identifiable. Mere general possibilities or theories developed while an employee is at a company are not considered trade secrets. As the Appeals Court ruled, “'[w]e know of no authority for the proposition that an ultimate goal or purpose, as distinguished from the means of achieving, can be classified as a trade secret.’” Chomerics, Inc. v. Ehrreich, 12 Mass. App. Ct. 1, 9 (1981) (citation omitted; emphasis omitted). Such information may be appropriately protected, however, through the more comprehensive device of a non-competition agreement. Id. at 11.
- The company must do more than subjectively believe this information is confidential. It must take affirmative steps to disclose this confidentiality to the persons it then seeks to prevent from using the confidential information. Jet Spray Cooler, 361 Mass. at 840. Unless these measures are take, there will be no finding of confidentiality unless the employer took “proper and reasonable steps… to protect the secrecy or knowledge.” Id.
- Information which can be obtained by reading advertisements or other forms of public information or visiting a place of establishment, for example, is not confidential. Jillian’s Billiard Club v. Beloff Billiards, 35 Mass. App. Ct. 372, 375-376 (1993).
- It is important to remember that what is being protected is the information itself; “the fact that no list or paper was taken does not prevent the former employee from being enjoined if the information which he gained through his employment and retained in his memory is confidential in nature.” Jet Spray Cooler, 361 Mass. at 840. Obviously, however, it is much easier to prove a misuse of a trade secret when the misuse involves written materials.
- Some forms of information or ideas are protected by patents, trademarks or copyrights. Issues concerning those forms of protection for intellectual property as well as the laws of other jurisdictions and federal law are outside the scope of this presentation.
II. Preserving Trade Secrets
- While an employee can be barred from using a trade secret even in the absence of an express contract, the existence of such an agreement will aid the employer in showing that it has made the requisite effort to preserve the confidentiality of its information. See Jet Spray Cooler, 361 Mass. at 839 (citations omitted). Written confidentiality, non-solicitation and non-competition agreements are all quite useful in this regard. These agreements should be quite specific as to the type of information that is being protected or competition that is prohibited, the length of the period in which competition or solicitation are limited, and the geographic scope of any limitations. The agreement should contain a provision allowing for injunctive relief in case the agreement is violated. Generally, the more narrowly drawn the agreement is, the more likely it is that it will be enforced. It is important to note that whether and how such agreements will be enforced varies from state to state.
- In regard to a nondisclosure agreement, for example, the Supreme Judicial Court has held that “[s]uch an agreement cannot be disregarded as an empty formality. At the very least it put the employees on notice that secrets were involved.” Eastern Marble Product Corp., 372 Mass. at 840. A non-disclosure agreement, however, “cannot make secret that which is not secret, and it remains for the court to determine whether an alleged trade secret is in fact such. Dynamics Research Corp. v. Analytic Sciences, 9 Mass. App. Ct. 254, 277 (1980). “Indeed, a nondisclosure agreement which seeks to restrict the employee’s right to use an alleged trade secret which is not such in fact or in law is unenforceable as against public policy.” Id. at 278.
- It is imperative that a company seeking to prevent the use of what it considers to be confidential information “take all proper and reasonable steps to keep it secret.” Commonwealth v. Robinson, 7 Mass. App. Ct. 470, 474 (1979). In Robinson, a criminal was overturned and a judgment of acquittal was entered for the defendant because of the lack of evidence showing that precautions were taken to preserve the secrecy of the information in question.
- The reasonableness of the protection of the trade secret will vary from case to case. “[W]here a plaintiff has actively sought to protect its trade secret, the question then becomes whether the protection measures are reasonable. ‘Reasonable precautions against predatory eyes we may require, but an impenetrable fortress is an unreasonable requirement, we are not disposed to burden industrial inventors to such a duty in order to protect the fruits of their efforts.’” USM Corp. v. Marson Fastener Corp., 379 Mass. 90, 97 (1979) (citation omitted).
- There is no need for a holder of “a trade secret to take heroic measures to preserve its secrecy. Rather, ‘if the person entitled to a trade secret wishes to have its exclusive use in his own business, he must not fail to take all proper and reasonable steps to keep it secret. He cannot lie back and do nothing to preserve its essential secret quality.” USM, 379 Mass. at 101 (citation omitted; footnote omitted).
- Obviously, there is some difficulty in proving a defendant’s knowledge of whether information is confidential. Therefore, “[k]nowledge or the likelihood that a defendant knew of the wrongful character of the disclosure can and often must be proved by the weight of credible circumstantial evidence.” Curtiss- Wright Corp. v. Edel-Brown Tool & Die Co., Inc., 381 Mass. 1, 6 (1980).
III. The Balance Between Legitimate Competition and The Improper Use of Trade Secrets
- There is a tension in Massachusetts law between the right to use ones skills when starting new employment and the rights of a company to preserve its confidential information. The case law reflects these competing interests. Compare Augat, Inc. v. Aegis, Inc., 409 Mass. 165, 172 (1991) (“competition should be encouraged” in our economic system) and USM, 379 Mass. at 104 (“A plaintiff who may not claim trade secret protection either because it failed to take reasonable steps to preserve its secrecy or because the information, while confidential, is only ‘business information,’ may still be entitled to some relief against one who improperly procures such information. The law puts its imprimatur on fair dealing, good faith, and fundamental honesty. Courts condemn conduct which fails to reflect these minimum accepted moral values by penalizing such conduct whenever it occurs.”)
- Generally, each individual is permitted to move freely from job to job and to take with him the general information that he has gained during the course of his employment in order to promote labor mobility, uphold individual freedom to practice a profession, mitigate monopolistic practices, and maximize the national store of skill and knowledge. Dynamics Research Corp. v. Analytic Sciences Corp., 9 Mass. App. Ct. 254, 267 (1980).
- As long as the employee has not signed a non-competition or non-solicitation agreement, an employee: (1) may plan to go into competition with his employer and may take active steps to do so while still employed; (2) has no general duty to disclose his plans to compete with his current employer and has no duty not to mislead his employer concerning those plans; and (3) may secretly join other employees in the plans to compete, all without violating any duties owed to the current employer. Augat, 409 Mass. at 172-177.
- The only three limits to the principle that a former employee can freely compete with a former employer derive from a (1) a valid non-competition agreement; (2) a breach of the duty of loyalty owed by certain key employees while employed at the old firm; or (3) the taking and use of confidential trade secrets. Id.
- These principles are balanced by the courts recognition of the need to protect information that is truly confidential. “It is the policy of the law, for the advantage of the public, to encourage and protect invention and commercial enterprise. This encourages and protection is afforded trade secrets because the public has a manifest interest not only in commercial renovation and development, but also in [t]he maintenance of standards of commercial ethics.” Jet Spray Cooler, Inc. v. Crampton, 377 Mass. 159, 166 (1979). “The essence of an action for the wrongful use of trade secrets is the breach of the duty not to disclose or to use without permission confidential information acquired from another.” Id. at 165.
- In regard to the former, the courts have noted the public policy of promoting “the public interest in labor mobility and the employees freedom to practice profession and mitigating monopoly. The law thus maximizes the benefit of the national store of skill and knowledge.” Dynamics Research Corp. v. Analytic Sciences, 9 Mass. App. Ct. 254, 266 (1980).
- Particularly where an employee knows much of the information in question prior to his employment “the employer has a heavy burden of isolating the secret for which he claims to protect and demonstrating that the employee is left free – questions of good faith and reasonable contracts apart – choose the knowledge and skill he brought to the job, as well as “what he has learned during the employment.” Id. at 268.
- On the other hand, the courts have not hesitated to provide protection for legitimate trade secrets.
IV. Damages And Other Remedies For The Theft Or Misuse Of Trade Secrets
- Criminal penalties
- General Laws chapter 266, section 30(4) provides that “[w]hoever steals, or with intent to defraud obtains by a false pretense, or whoever unlawfully, and with intent to steal or embezzle, converts, secretes, unlawfully takes, carries away, conceals or copies with intent to convert any trade secret of another, regardless of value, whether such trade secret is or is not in his possession at the time of such conversion or secreting, shall be guilty of larceny….”
- A person convicted of violating this statute can be punished by imprisonment for not more than five years or a fine of not more than twenty-five thousand dollars and imprisonment for not more than two years.
- Although this statute provides for severe penalties for the theft of trade secrets, it does not appear to be widely used in comparison to the number of civil case involving allegations concerning misuse of trade secrets. The reasons for the relative lack of use of this statue may include: the higher standards required to obtain a criminal conviction as opposed to a civil judgment; the length of time involved in the criminal process; and the reluctance of businesses and prosecutors to utilize the criminal system for what appear to be civil business disputes.
- The criminal process may be a useful route in situations where there is a theft or embezzlement in the traditional sense, such as when a third person literally steals or obtains by false pretence secret information of a company and the civil process may not provide a sufficient deterrent or remedy.
- A corporation that decides to seek criminal redress should be careful to ensure that it has a solid case. Furthermore, counsel for the corporation in such a situation must take particular care not to violate Disciplinary Rule 3.4(h), which states that a lawyer shall not “present, participate in presenting, or threaten to present criminal or disciplinary charges solely to obtain an advantage in a private civil matter….”
- Statutory civil penalties
- General Laws chapter 93, section 42 creates a statutory tort for the theft of trade secrets and allows a judge to impose up to double damages for a violation of the statute.
- Although the statutory protections for trade secrets (particularly the double damages provision) are useful, the Appeals Court has held that “we do not in any way intimate that these statutes change the ambit of trade secret protection in a civil action.” Chomerics, Inc. v. Ehrreich, 12 Mass App. Ct. 1, 8 n. 14. The court added that “[w]e find it difficult to believe that these statutes, read together with the definition of trade secrets in G.L. c. 266, d 30 (4) were meant to change the common law of trade secrets to permit damages where nothing of value has been taken or an injunction protected valueless information contrary to traditional and long-settled equity principles.” Id.
- Common law damages
- “The measure of damages in cases involving business torts such as the misappropriation of trade secrets entitled a plaintiff to recover full compensation for his lost profits and requires a defendant to surrender the profits which he realized from his tortious conduct.” Jet Spray Cooler, 377 Mass at 169.
- Individuals who actively participate in the misappropriation of trade secrets may be liable in their individual capacity for their acts and “may not insulate themselves from the consequences of their actions by choosing the corporate form by which to market their products.” Id. at 181.
- “Once a plaintiff demonstrates that a defendant made a profit from the sale of products produced by improper use of a trade secret, the burden shifts to the defendant to demonstrate those costs probably to be offset against its profit and the portion of its profit attributable to factors other than the trade secret.” USM Corp. v. Marson Fastener Corp., 392 Mass. 334, 338 (1984).
- There are “three acceptable methods of measuring damages in cases involving business torts such as the misappropriation of trade secrets: the defendant’s profits realized from his tortious conduct, the plaintiff’s lost profits, or a reasonable royalty. Curtis-Wright Corp., 381 Mass. at 11. A liability for the misuse of trade secrets may be imposed even though there is no legal relationship between the parties. Id. at 3 n. 2. A defendant who is not a corporate insider and has not been personally unjustly enriched by the use of a trade secret, however, does not have any liability for damages. Id. at 340.
- Punitive damages are not permissible absent a statutory allowance of them under chapter 93, section 42. Id. at 352-354. However, double or even treble damages may be awarded in cases where chapter 93A is applicable (see discussion below).
- Injunctive relief
- Injunctions are often sought in cases involving trade secrets and as, a practical matter, cases involving trade secrets are often effectively won or lost at the initial injunction hearing.
- The test for determining whether injunctive is warranted was set forth in Packaging Industries Group, Inc. v. Cheney, 380 Mass. 609, 616-617 (1980) (injunctive relief denied because the former employer had not met its burden of proof on its claims of misappropriation of goodwill, trade secrets and breach of fiduciary duties). In order to grant injunctive relief, the court must find first that “the failure to issue the injunction would subject the moving party to a substantial risk of irreparable harm” and that this wrong “cannot be vindicated should it prevail after a full hearing on the merits.” Id. at 616, 617. Second, the court must consider the harm that an injunction would cause to the party opposing it. Finally, the court must balance these harms “in light of the party’s chance of success on the merits.” Id. at 617. “Only where the balance between these risks cuts in favor of the moving party may a preliminary injunction properly issue.” Id.
- A person whose trade secret has been stolen or used may file a petition seeking injunctive relief to restrain or enjoin the use of the trade secret. G.L. ch. 93, section 42A.
- If an employer has a written employment agreement with a former employee and, in violation of that agreement, the employee both directly competes with and converts a trade secret of the former employer, then a court, in an action brought under section 42A, shall grant a preliminary injunction against the former employee. As noted above, all non-competition, confidentiality and non-solicitation agreements should have a provision allowing for injunctive relief in the case of a breach.
- Generally, injunctions granted to prevent trade secret violations must be reasonable as to time.” Analogic Corp. v. Data Translation, Inc., 371 Mass. 343, 347 (1976). However, “there is no bar, constitutional or otherwise, to the issuance of a permanent injunction against the unauthorized use of confidential business information.” Id. at 345. The amount of time necessary to “engineer in reverse the plaintiff’s device without improper use of trade secrets” is an appropriate factor in considering the length of an injunction. Analogic, 371 Mass. at 347.
- An injunction prohibiting the use of a trade secret must be well-drafted and specific because in order to find civil contempt of an injunction “there must be a clear and undoubted disobedience to a clear and unequivocal command.” Peggy Lawton Kitchens, Inc. v. Hogan, 403 Mass. 732, 734 (1989) (citations omitted). Thus, a party seeking injunctive relief will be well-advised to carefully craft the injunctive language.
- Relief under chapter 93A
- General Laws chapter 93A, section 11, prohibits unfair competition and unfair or deceptive acts or practices between businesses. Chapter 93A claims are commonly made in trade secret cases and, with the provisions for orders of injunctive relief and awards of multiple damages and attorneys’ fees, is a potent weapon.
- Even in the absence of any damage, injunctive relief can be appropriate under chapter 93A, section 11. Warner-Lambert, 427 Mass. at 50.
- It is unclear, however, whether chapter 93A is an available remedy in cases involving former employees. Compare Informix, Inc. v. Rennell, 41 Mass. App. Ct. 161, 162 (1996) (chapter 93A not an available remedy in the “postemployment breach of a noncompetition agreement arising out of an employer-employee relationship.”) and Peggy Lawton Kitchens, Inc. v. Hogan, 18 Mass. App. Ct. 937 (1984) (chapter 93A applicable to a dispute between an employer and its former employee concerning the theft of trade secrets). The Informix court distinguished the Peggy Lawton decision by noting that (a) there were no written confidentiality or noncompetition agreements in Peggy Lawton, and (b) that case involved trade secrets. See Augat, 409 Mass. at 172 (company could maintain a chapter 93A claim against competing company and its president even though it could not maintain a chapter 93A claim against its own employee for breach of loyalty).
Please Note: The purpose of this article is to provide general information about legal developments and should not be used as a substitute for professional advice on your particular legal situation.