Trade Secrets in Missouri

At last count forty-three states and the District of Columbia had adopted trade secret legislation based on the Uniform Trade Secrets Act. Missouri is among those states. The Missouri Uniform Trade Secrets Act (the “Act”) establishes both injunctive relief and actual (and in cases of “outrageous” conduct punitive) damages for misappropriation of a “trade secret.” The Act defines a trade secret as:

information, including but not limited to, technical or nontechnical data, a formula, pattern, compilation, program, device, method, technique, or process,
that:

(a) 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 (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Most misappropriation of trade secret cases hinge on whether particular information alleged to have been misappropriated is, in fact, a “trade secret.” For purposes of analysis the courts generally break the definition down into six components: (1) information, including technical or non-technical; (2) that has actual or potential economic value; (3) as a result of not being generally known; (4) and not being readily ascertainable by proper means; (5) by other persons who can obtain economic value from its disclosure or use; and (6) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Proving the Existence of a Trade Secret

A plaintiff alleging a misappropriation of its trade secrets has the burden of proving each of these elements with specificity. The usual areas of contention in proving a trade secret are whether (1) the information has economic value to the owner and to others, (2) it is information that isgenerally known or readily ascertainable by proper means and (3) the owner has used reasonable efforts to keep the information a secret.

Does the Information Have Economic Value?

In determining whether particular information has economic value the courts have distinguished confidential information that may have transitory value, such as a pricing structure that may change from week to week or month to month, from information that has lasting value, such as a chemical formula. This distinction was best drawn by one court as follows:

[A trade secret] differs from other secret information in a business . . . in that it is not simply information as to single or ephemeral events in the conduct of the business, as, for example, the amount or other terms of a secret bid for a contract or the salary of certain employees, or the security investments made or contemplated, or the date fixed for the announcement of a new policy or for bringing out a new model or the like. A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. It may, however, relate to the sale of goods or to other operations in the business, such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers, or a method of bookkeeping or other office management.

The courts have reasoned that confidential, but short-lived, information is not a trade secret because once it expires, it has no value to a competitor.

Courts have also indicated that another element that should be considered in determining the value of information is the amount of effort and cost expended by the owner in developing it. The longer the period of time in development and the greater the cost, the more likely it is that the court will find that the information in question has value.

Is the Information Generally Known or Readily Ascertainable Through Proper Means?

In deciding whether information is generally known, the courts will look at the extent to which the information is known within the relevant industry. To be “generally known,” the information need not be known by the general public. An example of the application of this principle can be found in a recent case in which the plaintiff claimed that its fabrication procedures for prosthetic devices were a trade secret that had been misappropriated by a former employee. The court found that the techniques utilized by the employer appeared to be the same as those used by any prosthetic business. The court further determined from the trial record that there is a standardized system regarding the fabrication of prosthetic appliances used by the industry and that the numbering system used by the plaintiff was universally used an accepted by Medicare, Medicaid and the health insurance companies. The Court concluded on this basis that plaintiff’s fabrication procedures were not a trade secret.

In determining whether information at issue is readily ascertainable the courts will look to the sources of the information available within the industry and the amount of work necessary to derive the particular information from those sources. In a recent case brought by a freight broker against a former employee, the court applied this inquiry to the alleged misappropriation of a trade secret in the form of a customer list. The court determined that the customer list was not a trade secret because the information in employers’ customer list could be compiled from other, generally available sources, such as an industry-specific Web site that offered an online database listing a number of potential loads that needed to be hauled at any given time, and other similar Web sites and telephone directories.

Has the Owner taken Reasonable Steps to Maintain the Secrecy of the Information

Too often businesses that own and rely on trade secrets to generate revenue fail to take adequate precautions to protect those trade secrets, providing those who misappropriate those trade secrets with an opportunity to present an effective defense. This failure often stems from a lack of understanding as to what information may constitute a trade secret and the steps that can and should be taken to maintain its secrecy. Businesses may want to retain the services of a law firm to perform a “trade secret audit” which will alert them as to what information they may own that qualifies as a trade secret and the measures they should take to protect that information against misappropriation. Such measures will also support a claim in court if a misappropriation claim occurs notwithstanding the adoption of such measures.

Among trade secret protection measures courts have considered in deciding whether the plaintiff business has taken reasonable steps to protect its trade secrets are whether: 1) all information which the business considers to be a trade secret has been labeled with a legend designating the information as “Trade Secret” or “Confidential and Proprietary”; 2) access to the information within the business has been limited to those employees who have a need to know it; 3) those employees and third parties, such as vendors and consultants, who have knowledge of the information have been required to sign confidentiality agreements; 4) if the information resides on a computer system, access to the information is limited by password, user code, PIN or other protection; 5) if the information is stored at the business in hard copy, access to the file cabinet, storage room or other repository is limited by key, badge or some other adequate means; 6) the employees of the business have been provided training in how to identify and protect trade secrets; and 7) management conducts exit interviews with departing employees to assure that they understand the information that the business considers a trade secret and to advise them of their continuing obligations to the ex-employer to maintain the secrecy of this information.

Proving Misappropriation

If the plaintiff can establish that the information at issue is a trade secret, then it must establish that a misappropriation has occurred. Under the Act both the acquisition and the disclosure or use of a trade secret can constitute misappropriation if other requirements of the Act are met. Acquisition of a trade secret by one who knows or has reason to know that the trade secret was acquired by “improper means” is misappropriation. The Act states that improper means “include theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy, or espionage through electronic or other means.” The application of these provisions is illustrated in the following facts. Jones, an employee of Acme, Inc., discloses to the management of Acme, Inc. information that is a trade secret of Jones’s former employer, Widget Company, and Acme uses the information in its business operations. Jones is subject to the terms of a confidentiality provision that was part of his employment agreement with Widget Company. The confidentiality provision is still in effect at the time of the disclosure and Widget has not consented to the disclosure. The management of Acme, Inc is aware that Jones is subject to the terms of the confidentiality provision and solicits disclosure of the information. Clearly, Jones has breached a contractual duty to maintain the secrecy of the information he has disclosed to Acme, and Acme has induced that breach, so Acme has “acquired” the trade secret by “improper means” and has consequently misappropriated the trade secret of Widget in violation of the Act.

The circumstances under which the “disclosure” or “use” of a trade secret constitute misappropriation are more complicated. The Act states that such disclosure or use must be without the express or implied consent of the owner. Further, it must be shown that the one who uses or discloses (a) used improper means to acquire the trade secret; or (b) before a material change in position, knew or had reason to know that it was a trade secret and that knowledge of it was acquired by mistake; or (c) at the time the trade secret was disclosed knew or had reason to know that knowledge of the trade secret was (i) acquired from or through a person who had utilized improper means to acquire it; or (ii) acquired under circumstances giving rise to a duty to maintain its secrecy; or (iii) acquired from or through a person who owed a duty to the owner of the information to maintain its secrecy. If we apply these provisions to the example in the paragraph above, we see that both Jones and Acme, if it uses the trade secret, are liable for misappropriation, Jones as a discloser, and Acme as a user. Jones, who disclosed the trade secret to Acme, used improper means to acquire it and therefore falls under clause (a) above. Acme, who used the trade secret, employed improper means to get it by inducing Jones to breach his obligation to Widget, and is also liable under clause (a). Both Jones and Acme may be liable under other provisions above. For example, Acme and Jones may both be liable under clause (c)(ii) because both were aware at the time Jones made the disclosure to Acme, Jones had acquired the information under circumstances giving rise to a duty to maintain its secrecy. If a party can show both that it is the owner of a trade secret and that misappropriation of the trade secret has occurred, the Act affords the injured party equitable relief and damages. The Act provides that an actual or threatened misappropriation can be enjoined. The injunction may condition future use upon the payment of a reasonable royalty and may be mandatory, in that it can compel affirmative acts by the defendant. Depending on the circumstances of the case, the measure of damages available to the injured party under the Act may be the amount of reasonable royalties for use of the trade secret, the amount of actual loss incurred by the injured party, or the amount of unjust enrichment to the misappropriating party. And if the misappropriation is “outrageous” evidenced by the misappropriating party’s “evil motive” or “reckless indifference to the rights of others,” the injured party may be entitled to punitive damages.

Conclusion

It is crucial for the management of every business to determine whether that business owns and relies on the use of trade secrets in its operations. If it does, then management must identify those trade secrets and take all reasonable steps under the circumstances to protect them. If management meets this responsibility, then the Missouri Uniform Trade Secrets Act provides and effective means to enforce the business’s rights in those trade secrets and to compensate the business if they are misappropriated.

© Bernard W. Gerdelman 2009

By: Bernard W. Gerdelman