Law Tips: IP Issues for Business Start-Ups Part 2 – Unfair Competition & Trade Secrets

Welcome back to Law Tips for Part 2 of our foray into IP issues involving your business clients. Thanks to the generous contribution of our faculty participant, Matt Lees, we can expand into additional topics, such as, “palming off” and disclosure of confidential information and trade secrets. Let’s dive right into his advice:

Unfair Competition

1. What is unfair competition?
Unfair competition includes a number of different torts such as interference with a contract, interference with a business relationship, predatory price cutting, palming off, or reverse palming off. For purposes of protecting a business’s property, the most prevalent torts are reverse palming off, or palming off. These torts involve the misappropriation of goods and services of a business.

2. What is palming off?
Palming off is when an individual or entity offers its goods or services to the public as though the goods or services are those of its competitor.

3. What is reverse palming off?
Reverse palming off occurs when a competitor misappropriates goods or services of another business by removing the name or trademark on a product or service and selling it under the name of a competitor.

4.  What does a business need to demonstrate in order to maintain an action for palming off or reverse palming off?
Under these theories, a business does not need to show that any individual or member of the public has been deceived by the palming off or reverse palming off conduct. Indeed, the business does not need to show actual deception. However, the business does need to demonstrate that deception of the public is the natural and probable consequence of the unfair competition. Of course, actual deception would certainly be good evidence when bringing an unfair competition action. The fundamental question the court will ask is whether the conduct of the competitor was calculated to deceive an ordinary buyer under ordinary conditions that would be found in that particular trade or line of business.

5. What remedies are available for actions involving unfair competition?
As with most other remedies available to protect property, a business can seek injunctive relief to prohibit palming off or reverse palming off. A business may also be able to recover damages in the event that the competitor’s conduct is found to be deliberate and willful. Of course, as you might imagine, proving with any certainty the amount of damages would be extremely difficult. When proving damages under theories of palming off and reverse palming off, damages can be measured by all of the profits the competitor received on the goods and services it palmed off.

Trade Secrets and Confidential Information

1. What is a trade secret?
The Indiana Uniform Trade Secrets Act defines trade secrets as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that 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 is the subject of efforts that are reasonable under the circumstances to maintain is secrecy.”   I. C. §24-2-3-2. Your client may have other information that does not fall within the definition of a trade secret but may otherwise be confidential information. For example, your client may have personal sensitive information of its own customers or clients.

2. What is not a trade secret or confidential information?
General knowledge, information, or skills an employee may learn over the course of his or her employment are not trade secrets or confidential information. In addition, information that is readily available to the general public from other sources is not a trade secret or confidential information that an employer or business could protect.

3. What can a business do to protect its trade secrets or confidential information?
There are several ways for a business to protect this information. A business can use confidentiality and non-disclosure agreements as well as confidentiality provisions in its operating documents and contracts. For example, a business can protect disclosure this information by its owners and members by including confidentiality provisions in bylaws or operating agreements. Businesses can protect against employee disclosures by including confidentiality provisions in employment contracts and/or employee handbooks. Consultants or other third party persons or entities associated with the business can also be prohibited from disclosure in consultants’ contracts and/or confidentiality and non-disclosure agreements. Businesses can also use confidentiality provisions in severance agreements and/or employee settlements in the event employees are terminated.

While businesses may still be able to protect trade secrets and confidential information, even in the absence of written provisions, it is always best to have the confidentiality language included in, at the very least, an employee handbook.

4.  What does a business do in the event someone discloses confidential information and trade secrets?
The individual who discloses the information may be subject to misappropriation action under I.C. §24-2-3-3.  Misappropriation occurs when there has been “an acquisition of a trade secret of another person by a person who knows or has reason to know that the trade secret was acquired by improper means.”  Misappropriation also includes “disclosure or use of a trade secret of another without express or implied consent by a person who used improper means to acquire knowledge of the trade secret; at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, or derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or before a material change of his position knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.” I.C. §24-2-3-1.

To maintain an action for misappropriation, a business must demonstrate three elements. First, the business must show that a trade secret exists and that they are the owner of that trade secret. Second, the business must show that the individual who disclosed the trade secret required it as a result of a confidential relationship. Finally, the business must demonstrate that the individual who disclosed the information did not have authorization to use the trade secret.

5. What remedies are available in the event of misappropriation?
Under I. C. §24-2-3-3, both actual and threat misappropriation are basis for injunctive relief. A business may also seek to recover damages for any actual loss caused by the misappropriation. In addition to damages for actual loss, the business may also seek unjust enrichment for any damages outside damages for actual loss. The Court can also award reasonable royalties when actual damages and unjust enrichment are not provable. Finally, if a misappropriation was willful and malicious, the court can award damages two times any amount for actual and/or unjust enrichment awards. Attorney’s fees may also be awarded if there is willful and malicious misappropriation.

6. What can be done to protect trade secrets and confidential information during litigation?
During an action involving misappropriation, the court must take steps to maintain the secrecy of a trade secret, which may include protective orders with regard to discovery, utilizing in-camera hearings, sealing the records, and issuing an order prohibiting the disclosure of any trade secret prior to court approval.

7.  What is the statute of limitations for a misappropriation action?
An action for misappropriation has a three year statute of limitations from the date the misappropriation is discovered or should have been discovered.

Hopefully, you gleaned a few helpful practice pointers for assisting your business start-up clients via Matt Lees’ intellectual property overview these past two weeks. If you missed Part 1 of these IP articles, scroll down. Part 1 is below this blog. I appreciate his contributions here on Law Tips.

Need a comprehensive update on “Developing and Representing the Business Entity?”  Take advantage of the upcoming Video Replays or the Online On Demand Video.

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About our Law Tips faculty contributor:
Matthew T. Lees is an associate with Campbell Kyle Proffitt LLP. He was admitted to the bar in Indiana in 2008. A graduate of Butler University he received his law degree in 2008 from Indiana University Michael Maurer School of Law. Prior to joining the firm, Mr. Lees worked for the United States Securities and Exchange Commission’s Division of Enforcement in Washington, D.C.  Mr. Lees focuses his practice in business law and transactions, corporate law, civil litigation, business litigation, family law, divorce, estate planning, and will and trust contests.

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We are utilizing her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook and Twitter pages, and other places her legal experience lends itself.

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