Federal Court Warns Companies – If You Don’t Protect Your Trade Secrets, Neither Will We
In 2016 Congress passed the Defend Trade Secrets Act, creating a federal cause of action for the theft of trade secrets. For a plaintiff attempting to prove that the information at issue is a trade secret, there is a tendency to focus only on the information itself, rather than the manner in which the plaintiff maintained such information. However, as explained by the federal court for the Eastern District of New York, in an Order dated October 3, 2017 in the matter of Art and Cook, Inc. v. Haber, No. 17-cv-1634, the courts will not protect proprietary information whose confidentiality the plaintiff failed to take reasonable steps to preserve.
On January 13, 2017, Art and Cook, Inc. (“A&C”) terminated Abraham Haber, an employee of nearly five years, after allegedly making a startling discovery. While conducting an audit of Haber’s work computer, the company claimed it discovered that Haber transferred valuable proprietary information to his personal email account. The material transferred included logos, banding/marketing strategies, and sales projections for two product lines that were set for launch, as well as the contact information of 72 retailers to whom the company hoped to sell its products. Moreover, shortly after A&C terminated Haber, a supplier of some of the company’s products reported that Haber was seeking to establish his own supply line for products similar to those supplied to A&C.
Recognizing the significant damage that Haber would cause to its business if his alleged efforts were successful, A&C quickly filed suit under the federal Defend Trade Secrets Act (“DTSA”), moving for an emergency temporary restraining order and preliminary injunction. Although a TRO issued, the court subsequently determined that the retailer lists were composed entirely of information “generally known in [A&C’s] industry.” In ruling on A&C’s preliminary injunction request, the court noted that the product designs and branding/marketing strategies “are the sort of business information that the DTSA was designed to protect: they derive independent economic value from not being generally known.” There was one catch, however; A&C did not do enough to keep that information a secret.
Under the DTSA, it is unlawful to misappropriate a “trade secret” that is related to a product or service used in, or intended for use in, interstate or foreign commerce. Not surprisingly, whether a company’s business information qualifies as a protected “trade secret” depends largely on the nature of the information; as the DTSA explains, the information at issue must “derive independent economic value … from not being generally known … [or] readily ascertainable … [to] another person who can obtain economic value from the disclosure or use of the information[.]” However, equally important is how the owner of the information treats it. Simply put, “the owner [must have] taken reasonable measures to keep such information secret.”
In the instant case, A&C demonstrated that it took certain steps to protect its business information, including by password-protecting its server and folders, and contracting a third-party security company to protect its servers from outside hacking. Additionally, the company’s President testified that he spoke to Haber on many occasions about confidentiality. However, A&C ultimately could not overcome the consequences of the steps it failed to take. Specifically, the company did not require Haber to sign a non-compete. Further, the company did not even ask him to sign a non-disclosure agreement until approximately three years after he was hired. Even after Haber refused A&C’s request that he sign the non-disclosure agreement, the company continued to employ him for two more years and took no steps during that time to limit his access to its sensitive proprietary information. While the court conceded that A&C had a potentially winnable argument that the measures it took were sufficient to confer DTSA protection, it could not conclude that he was likely to succeed on the argument, as required for the issuance of an injunction.
One would be hard-pressed to argue that Haber would not have realized the information he allegedly took was proprietary and highly valuable, and that the taking was unauthorized. Indeed, the court expressly agreed that A&C’s product designs and branding/marketing strategies bore all of the hallmarks of protectable trade secret information. The problem, at least from the court’s perspective, was that A&C did not treat them accordingly.
This ruling represents a stark warning to companies: if you do not protect your trade secrets, neither will the courts.