Law Tips: Legal Weapons To Combat Improper Competitive Conduct By Former Employees

Many employers have their employees sign covenants not to compete or confidentiality agreements that generally prohibit an employee from working for a competitor or from using the employer’s confidential information. But, what if the employer did not secure such an agreement with its employees? In those cases, there are ways to combat improper competitive conduct by former employees. Scott Morrisson, from Kreig DeVault LLP, Carmel, Indiana, joins us at Law Tips to help identify and respond to that behavior:

Not all is lost if an employer does not have an enforceable agreement with its employees. The Indiana Uniform Trade Secrets Act may provide the employer with a mechanism to curtail a former employee’s wrongful competition. The employer also may be able to avail itself of certain common law claims against former employees to prohibit or recover for activities in derogation of the employee’s common law duties, including breach of fiduciary duty, conversion, tortious interference with contractual or business relationships, and other claims. Statutes addressing improper use of computer systems may also provide the basis for civil claims against a former employee. While these noncontractual claims may be more difficult to establish, they do provide the employer with potential weapons to combat wrongful competition and use of confidential information by an ex-employee.

Indiana Uniform Trade Secrets Act
Indiana is one of the majority of states that have adopted the Uniform Trade Secrets Act (the “Uniform Act”). Uniform Trade Secrets Act, 14 U.L.A. 529 (2005). Indiana’s version of the Uniform Act was adopted in 1982. It is substantially similar to the Uniform Act, and is codified at Indiana Code Sections 24-2-3-1 to 24-2-3-8 (the “Act”). Amoco Production Co. v. Laird, 622 N.E.2d 912, 917 (Ind. 1993). Section 24-2-3-1 makes clear that the Act “displaces all conflicting law of this state pertaining to the misappropriation of trade secrets, except contract law and criminal law.” Ind. Code § 24-2-3-1. (emphasis added) 1 The policies underlying the Act are essentially twofold: “[1] the maintenance of standards of commercial ethics and [2] the encouragement of invention.” Amoco Production Co., 622 N.E.2d at 921 (quoting Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470,481,94 S. Ct. 1879, 1886,40 L. Ed.2d 315,325 (1974)).

The essence of the Act is the following: The Act prohibits the misappropriation of trade secrets and provides civil remedies, including injunctive relief, for violations or threatened violations. The Act’s basic proscriptions are contained in the definitional section of the Act, Section 24-2-3-2. This definitional section is substantive in nature and sets forth the elements of a violation through definitions of “improper use,” “misappropriation,” “person” and “trade secret.” Ind. Code § 24-2-3-2; accord Amoco Production Co., 622 N.E.2d at 915, n.1.

An employee who is privy to his employer’s trade secrets is liable for misappropriation under the Act if he discloses the trade secret information to a third party (i.e., his new employer) in breach of a duty to maintain secrecy. This is true even though the employee did not use “improper means” to acquire the information originally.

What Constitutes A Trade Secret
This is the critical question. Every client will tell you that their information is confidential trade secret information. Sometimes it is, sometimes it is not, and sometimes it is not clear. Whether a client classifies certain information as a trade secret is not controlling. Franke v. Honeywell, Inc., 516 N.E.2d 1090, 1093 (Ind. Ct. App. 1987). It is important for the attorney to “drill down” on this topic and press the client for all information about the alleged trade secret.

As the Supreme Court of Indiana has aptly observed, “‘trade secret’ is ‘one of the most elusive and difficult concepts in the law to define.” Amoco, 622 N.E.2d at 916. Whether the information at issue constitutes a trade secret is often the most critical and hard fought aspect of a misappropriation of trade secrets case. The definition of “trade secret” under the Act is by no means precise: “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(1) 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

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

Ind. Code § 24-2-3-2.

Under this definition, a trade secret has four characteristics: (1) information; (2) which derives independent economic value; (3) is not generally known, or readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and ( 4) is the subject of efforts reasonable under the circumstances to maintain its secrecy. E.g., Bridgestone Americas Holding, Inc. v. Mayberry, 854 N.E. 2d 355, 362 (Ind. Ct. App. 2006); US. Land Services, Inc. v. US. Surveyor, Inc., 826 N.E.2d 49, 63 (Ind. Ct. App. 2005); Hydraulic Exchange and Repair, Inc. v. KM Specialty Pumps, Inc., 690 N.E.2d 782,785- 86 (Ind. Ct. App. 1998); See also CDW LLC v. NETech Corp., 722 F. Supp. 2d 1052, 1063 (S.D. Ind. 2010).

The specific categories of information referred to in the statutory definition-” formula, pattern, compilation, program, device, method, technique, or process” –are merely examples of the type of information that may comprise a trade secret. They are not an exhaustive list of qualifying categories. Ackerman v. Kimball Int’l., Inc., 634 N.E.2d 778, 783 (Ind. Ct. App. 1994), vacated in part, adopted in part, 652 N.E.2d 507 (Ind. 1995). Whether a particular item of information is a trade secret is very fact-specific. Consequently, the same information may qualify as a trade secret under one particular factual context, but may not qualify for protection under a different set of facts. Amoco, 622 N.E.2d at 916; US. Land Services, Inc., 826 N.E.2d at 63. Yet, “[T]he question of what constitutes proprietary or trade secret information is a determination for the court to make as a matter of law.” Coleman v. Vukovich, 825 N.E. 2d 397,405 (Ind. Ct. App. 2005) (quoting Franke v. Honeywell, Inc., 516 N.E.2d 1090, 1093 (Ind. Ct. App. 1987)). The burden of proof is on the party asserting the trade secret to show that the information at issue qualifies as a trade secret. Amoco, 622 N.E.2d at 920; US. Land Services, Inc., 826 N.E.2d at 63.

1 In a recent case, Indiana held that the Act preempted a company’s claim of idea misappropriation based on Ind. Code §24-2-3-1. HDNET, LLC v. North American Boxing Council, 972 N.E.2d 920 (Ind. Ct. App. 2012). HDNET contains an excellent discussion of the preemption issue. On the other hand, given the “criminal law” exception, Indiana has held that civil RICO claims are not preempted. AGS Capital Corp. v. Prod. Action, Int’l, LLC, 884 N.E.2d 294, 306-8 (Ind. Ct. App. 2008).

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We’ll take a short break now in Scott’s interesting discussion. Be sure to return to Law Tips next week as he completes the picture with his insights into non-compete claims, such as breach of fiduciary duty, computer trespass and other current issues.

Meanwhile for an in-depth discussion of trade secrets, pertinent case law, non-compete agreements, etc. from our expert panel that includes Scott Morrisson, you may register for the Covenants Not To Compete & Trade Secrets seminar. This CLE program is available either through a video replay in your locale or by setting up an On Demand online session at your own computer. Click Here to make your choice of the version you prefer.

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About our Law Tips faculty participant:
Scott S. Morrisson, Partner, Kreig DeVault, LLP, Carmel, IN – Mr. Morrisson’s main area of practice is civil litigation and litigation analysis involving a wide range of civil litigation matters. Particular areas of focus include employment, insurance, business, corporate, construction, trademark, tort, and ESOP litigation. He also focuses on arbitration and mediation. Mr. Morrisson has served as lead counsel on numerous jury trials, bench trials, preliminary injunction hearings, court hearings, and arbitrations in state and federal courts of Indiana and throughout the country. Additionally, he represents individuals and employers in negotiating, drafting, and evaluating Employment, Non-Compete, and related agreements.

About our Law Tips blogger:
Nancy Hurley 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.

Thank you for reading Law Tips. You may subscribe to this weekly blog through the RSS link at the top of this page.  Also, you are encouraged to comment below or email Nancy. She welcomes your input as she continues to sift through the treasure trove of knowledge of our CLE faculty to share with you.

ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN

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