AL — Trade Secrets | Employment Lawyer Maryland
Introduction Employers in Maryland and Washington, D.C. face complex legal challenges. This guide explains key employment law concepts and how businesses can protect themselves. Protecting Your Company’s Competitive Edge: Trade Secrets, Confidentiality, and Employment Restrictive Covenants By: Ari Lichterman, Esq. We live in a data-driven and informational world. It is no surprise, then, that for many companies, the most valuable asset is information. Think customer lists, pricing strategies, internal business processes, and proprietary technology. This information is often what defines a company and affords it a competitive advantage. Employees frequently have access to this information and rely on it in performing their work for the company. But when an employee leaves for a competitor—or starts a competing business—the risk that the employee will take that information with them is significant. For employers, well-drafted restrictive covenants that ensure confidentiality and protect trade secrets play a critical role in protecting an employer’s competitive edge. Understanding how trade secrets are defined and what steps businesses can take to safeguard them is essential for employers seeking to protect their valuable information. What Is a Trade Secret? All companies have confidential business, financial, or technical information which can be protected through confidentiality or non-disclosure agreements. If this information can be classified as a trade secret, however, it will be entitled to heightened statutory protection in addition to any contractual protections. The question is: what is a trade secret? In simple terms, a trade secret is confidential business information that provides a competitive advantage specifically because others do not know it and cannot easily discover it. To be considered a trade secret, though, a company must do more than simply call it so; businesses must treat this information differently from other information. Under Maryland law, the Maryland Uniform Trade Secrets Act (commonly referred to as “MUTSA”) defines a trade secret as business information—such as a formula, process, program, method, or compilation of data—that has independent economic value because it is not generally known or readily discoverable by competitors. Md. Code Ann., Com. Law § 11-1201(e). The information must also be retained with reasonable efforts to maintain its secrecy. Id. Federal law provides a similar definition of a trade secret under the Defend Trade Secrets Act (“DTSA”). 18 U.S.C. § 1839(3). Under DTSA, trade secrets include financial, business, scientific, technical, or engineering information that: The owner has taken reasonable measures to keep secret; and That derives independent economic value from being secret. Although DTSA’s definition is broader than that of MUTSA, offering additional examples of the types of information that qualify as trade secrets (such as patterns, plans, designs, prototypes, techniques, procedures, or codes), the definitions remain substantially the same and courts typically treat them as such. In practice, these definitions can include information such as: Customer and prospect lists Pricing strategies and discount structures Software algorithms and source code Product designs and technical specifications Business methods and production processes Marketing strategies and business plans Recipes and chemical formulas However, simply labeling information “confidential” does not make it a trade secret. Employers must demonstrate that the information has independent economic value and that they took reasonable steps to protect it and keep it private. Courts will consider factors such as whether the information is generally known in the industry, the cost and effort invested to develop the information, the level of difficulty required for others to duplicate it, the extent of the measures to maintain its secrecy, and the value it has to competitors. Misappropriation: When Confidential Information Is Taken or Used Under both federal and Maryland law, misappropriation of trade secrets is prohibited. The respective statutes define the specific conduct that is prohibited, but generally, misappropriation occurs when a person: Acquires a trade secret through improper means, or Uses or discloses a trade secret knowing it was done so improperly. Importantly, misappropriation may occur even if the trade secret has not yet been used, so long as it was obtained through improper means. A company can seek court intervention through an injunction for actual and threatened misappropriation, and damages for any harm therefrom. For employers, this means that suspicious data downloads, copying of files before resignation, or sharing confidential information with competitors may all support a claim, even before the information is fully exploited. One important caveat, however, is that DTSA contains an immunity provision which permits the disclosure of a trade secret to a government official or attorney “solely for the purpose of reporting or investigating a suspected violation of law,” or for use in a lawsuit. 18 U.S.C.A. § 1833. If this immunity provision applies, there can be no liability under either DTSA or MUTSA. Why Restrictive Covenants Still Matter Employers are not left without options in situations where DTSA or MUTSA do not apply, or where information does not fall clearly within the definition of a trade secret. In those circumstances, a well-drafted restrictive covenant agreement that defines what information is confidential or proprietary and lays out steps employees must take to safeguard it plays a critical role in protecting employers’ vital competitive information. Confidentiality and non-disclosure provisions in such an agreement accomplish numerous goals. For instance, they: Clearly define what information is confidential or proprietary Require employees to return or destroy such information upon departure Prohibit employees from using such information after employment ends Provide a contractual basis for injunctive and other relief if misuse occurs Because these agreements impose obligations during employment, they provide some level of protection on the front end, preventing misuse before it occurs. If a suspected violation of these contractual provisions occurs, employers can then seek court intervention for the employees’ breach of contractual requirements. Importantly, these provisions also help employers satisfy a critical element of trade secret protection—demonstrating that the company took reasonable measures to protect its information. Without such measures, a company may struggle to convince a court that its information truly qualifies as a trade secret. Protecting Your Business Before Problems Arise The misuse of trade secrets and confidential information can cause significant,