Your Trade Secrets May Be Vulnerable to “Legal” Theft

As in-house counsel, how would you like to tell your CEO: “While our customer lists, pricing information, and business processes are trade secrets, we can’t sue the independent contractor who stole them because we did not do enough to protect those trade secrets.”  Sound contrived?  Well, that is exactly the ruling one Massachusetts Superior Court judge recently issued in C.R.T.R., Inc. v. Lao

C.R.T.R. was in the business of recycling e-waste, and Jimmy Lao would purchase such waste from C.R.T.R. and then resell it in Asia.  In 2009, Jimmy’s nephew, Kenneth Lao, began working for C.R.T.R. as an independent contractor to assist in running the company.  Two and one-half years later, the relationship between C.R.T.R. and Jimmy fell apart and, 10 days after that, Kenneth resigned from C.R.T.R.  One week later, C.R.T.R. sued Kenneth, Jimmy and their affiliated company for, among other things, misappropriation of trade secrets.

As an initial matter, and as the Superior Court noted:

In order for a plaintiff to prevail on a count of misappropriation of trade secrets … it must demonstrate 1) that the information is a trade secret, 2) reasonable steps were taken to protect the information, and 3) the defendant used improper means, in breach of a confidential relationship, to misuse such information.

After the Court concluded that a wide assortment of C.R.T.R.’s business information allegedly taken by Kenneth could be deemed trade secrets, it went on to evaluate whether C.R.T.R. took reasonable steps to protect that information.  In that regard, the Court considered the following four factors:

(1)   The existence or absence of an express agreement restricting disclosure;

(2)   The nature and extent of security precautions taken by the possessor to prevent acquisition of the information by unauthorized third parties;

(3)   The circumstance under which the information was disclosed to the extent they give rise to a reasonable inference that further disclosure, without the consent of the possessor, is prohibited; and,

(4)   The degree to which the information has been placed in the public domain or rendered readily ascertainable ….

It was here that C.R.T.R.’s claim began to unravel.  Not only had C.R.T.R. failed to ask Kenneth to sign any sort of confidentiality agreement, but the company did not even have a policy with respect to confidentiality.  In fact, the only evidence C.R.T.R. provided that it took any measures to protect its trade secrets was testimony by one employee that she knew customer lists were confidential (although she could not testify how she knew this), and testimony by another employee who was told not to bring work out of the office.  To make matters even worse, one of those employees also testified that the customer lists were available on the computer and that certain contracts were advertised on the company’s website.  As such, and because C.R.T.R. “provided no evidence that it took measures to protect its other purported trade secrets,” the Court entered summary judgment, dismissing C.R.T.R’s misappropriation claim.

In 1970, the Massachusetts Supreme Judicial Court said that:

One who claims that he has a trade secret must exercise eternal vigilance.  This calls for constant warnings to all persons to whom the trade secret has become known and obtaining from each an agreement, preferably in writing, acknowledging its secrecy and promising to respect it.  J.T. Healy & Sons, Inc. v. James A. Murphy & Son, Inc.

While other cases have softened this extreme admonition somewhat, as C.R.T.R. found out the hard way, if a company does not take some fairly simple and straightforward measures to protect its trade secrets, it may not be able to obtain justice if they are stolen.

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