Utah Bar Journal

What are trade secrets?
If a business owner has information about the business that the owner keeps from the competition, chances are good the business has trade secrets. A “trade secret” is information, including 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. See Utah Code Ann. § 13-24-2 (1989).

Consider Fresh-Mex café, ABC Insurance, and XYZ Technology. Fresh‑Mex has developed a tasty slate of recipes, entrees, and methods that have generated a tremendous following, including a slew of knockoff competitors. ABC Insurance has policy terms, premiums, renewal dates, and policyholder information that have proven to be very attractive to a competitor. XYZ Technology generates performance and product specifications, technical reports, plans, product designs and problems, and other sensitive information that three departing employees decided should leave with them.

Trade secrets are most at risk when employees leave unhappy or are lured away by a competitor. Sometimes departing employees will stay late to copy documents laden with trade secrets that just might be useful in their next job. A disgruntled manager may leave without taking documents, but still walks out with a wealth of trade secrets knowledge tucked safely away in memory only to be regurgitated later. Indeed, when the manager starts a new job with the old employer’s rival, the disgruntled manager may well use and disclose the former employer’s trade secrets. This concept is aptly labeled the “inevitable disclosure doctrine” and can be a basis for obtaining a temporary restraining order and preliminary injunction against the manager and the new employer.

Suppose a former manager was offended at a measly Christmas bonus and quits. Before long the former manager opens a shop and is blatantly misappropriating the former employer’s trade secrets that took years and oodles of money to develop and perfect. And then, without explanation, the former manager suddenly shuts down the new business. The old employer breathes a huge sigh of relief, grateful not to have to hire a lawyer to stop the misappropriation. No harm, no foul. Right? The new competitor didn’t stay open long enough to do any real damage. The trade secrets owner has learned that the former manager cannot be trusted. But at least the old employer doesn’t need to spend the children’s college fund on a lawyer.

If the trade secrets owner thought these things, the owner would be in good company; but just might be wrong. The owner may have lost the ability to protect and preserve vital keys to the business’s success – trade secrets, especially if the disgruntled ex-manager waits three years and a day before renewing any plans to use the owner’s genius to enrich a new business. The statute of limitations for misappropriation of trade secrets in Utah is three years. See Utah Code Ann. § 13-24-7.

There are two competing theories about the nature of trade secrets.
There is a split among the states in how to characterize the fundamental nature of a trade secret. This distinction has the potential of affecting both substantive rights of the owner in the trade secrets and when a trade secrets owner must act.

One theory treats trade secrets as a form of property. Under this theory, a trade secret has intrinsic value and can be damaged, sometimes repeatedly. Under this theory, each misappropriation of a trade secret gives rise to a new claim and, thus, a new limitations period. A 27‑year‑old Utah Supreme Court decision Microbiological Research Corp. v. Muna (Muna), 625 P.2d 690 (Utah 1981), held that trade secrets are a form of property. See id. at 696.

The competing theory characterizes trade secrets as the product of a confidential relationship. Trade secrets, under this theory, have no intrinsic value. They exist only because the trade secrets owner and his or her employees jointly agree to keep them confidential. These trade secrets then are protected only as long as the owner vigilantly protects – and enforces – the sanctity of the confidential relationship. Once the confidential relationship is breached, the trade secrets owner must act within the applicable limitations period to enforce the owner’s rights against the misappropriator. If the owner fails to demand and timely secure legal protection of the confidential relationship once the owner learns that the former employee cannot be trusted, the owner risks losing the ability to control the owner’s trade secrets.

Despite Muna’s conclusion that trade secrets are a form of property, ambiguities and questions remain about the fundamental nature of trade secrets and when one must act to preserve them. Muna predated by eight years Utah’s adoption of the Uniform Trade Secrets Act (UTSA) and was not a statute‑of‑limitations case. See Utah Code Ann. § 13-24-1 (2005). No subsequent Utah appellate decision has addressed limitations in the context of the Utah UTSA.1 The UTSA advocates the “confidential relationship” theory and, to confuse things even more, the supreme court in Muna went out of its way to highlight the fact that the trade secrets at issue there arose out of a confidential relationship. Indeed, the notion of confidential relationship permeates the Muna opinion.

Should a Utah court consider the issue of limitations in the trade secrets context, it seems hardly a stretch to suggest that the reviewing court would necessarily have to consider the issue in light of “property” considerations but also in light of the confidential relationship between the parties. It is settled that the limitations period in Utah for the misappropriation of trade secrets is three years. But if a Utah court is presented a limitations issue in the context of trade secrets limitations, the court will have to consider whether the limitation period begins anew with each misappropriation, i.e., the property theory or whether the limitations period is defined by a single point in time when the confidential relationship is violated – regardless of how many times a person later misappropriates the trade secrets. Either way, Utah practitioners must be on their toes because they don’t want to guess wrong.

The issues become even more uncertain when there are “continuing misappropriations” or multiple misappropriators. Limitations may vary depending on the number of misappropriating parties involved. California’s courts have dealt with these questions in recent years and offer insight. In Cadence Design Systems, Inc.v. Avant! Corporation, 57 P.3d 647 (Cal. 2002), the California Supreme Court took the remarkable step of rendering a moot decision after the parties had settled because of heavy public interest in the issue. See id.

The issue in Cadence was, when does a claim for trade secrets infringement arise – only once, when the initial misappropriation occurs, or with each subsequent use of the trade secret? The California Supreme Court held that in a single plaintiff’s action against the same defendant, the continued improper use or disclosure of a trade secret after defendant’s initial misappropriation is viewed under the UTSA as part of a single claim of continuing misappropriation accruing at the time of the initial misappropriation.

The UTSA does not define “continuing misappropriation.” But the Cadence court observed that “[i]t is the continuing use or disclosure of a trade secret after that secret was acquired by improper means or as otherwise specified in [the statute].” Id. at 651. Thus, for statute‑of‑limitations purposes, California considers a continuing misappropriation as a single claim, not multiple claims, each time the trade secret is misused or improperly disclosed. See id.

The Cadence court also distinguished “misappropriation” of trade secrets from a “claim” for misappropriation.

A misappropriation…occurs not only at the time of the initial acquisition of the trade secret by wrongful means, but also with each misuse or wrongful disclosure of the secret. But a claim for misappropriation…arises for a given plaintiff against a given defendant only once, at the time of the initial misappropriation.

Id. (emphasis added). If there are multiple misappropriators, however, the court observed that a continuing misappropriation may constitute more than one claim, each having its own limitations period when multiple defendants/misappropriators are involved. See id. at 652. See also PMC, Inc. v. Kadisha, 78 Cal.App. 4th 1368 (Cal. App. 2000); Global Compliance, Inc. v. Am. Labor Law Co., 2006 WL 1314171, *12-13 (Cal. Ct. App. 2nd, May 15, 2006) (Unpublished); HiRel Connectors, Inc. v. United States, 2005 WL 4942595, *3, (C.D. Cal., Jan 4, 2005)( “[T]here may be separate claims of continuing misappropriation among different defendants, with differing dates of accrual and types of tortuous conduct – some defendants liable for initial misappropriation of the trade secret, others only for later continuing use.”).

Because Utah law in this area is uncertain and ambiguous, business people, and the professionals who advise them, must be vigilant. Here are four important considerations when dealing with the present and future protection of trade secrets:

Aggressively Prosecute Trade Secret Misappropriation.
You snooze, you lose. If Utah’s courts in the future apply the “property” theory of trade secrets and hold that each successive misappropriation is a discrete, self‑contained wrong against the trade secrets owner, then the owner may get a second bite at a misappropriating former employee or other misappropriator. But if Utah’s courts were to adopt the California approach – whereby a claim for misappropriation against a given person arises only once – then reliance on the so‑called property theory would be misplaced. To ignore the first misappropriation because of its apparent insignificance may doom future efforts to protect valuable trade secrets. Second bites may be few at best. If the misappropriator waits out the limitations period, then the trade secrets owner may be powerless to stop a later theft, disclosure or use of the misappropriated information. Cease‑and‑desist letters, alone, may demonstrate the owner’s intention to protect trade secrets and may get the desired results. But if the misappropriating conduct continues, it must be stopped with timely legal action.

Boomerang Settlement Releases are a Potentially Serious Problem for a Trade Secrets Owner – and Lawyer.
Be careful in settlement agreements. Driven by a conscientious desire to be thorough and to protect their clients, good lawyers often draw settlement agreements to forever release and discharge the wrongdoer for, among other things, known and unsuspected damages, claims, demands, losses, and causes of action, past, present, and future, without limitation – or some variant thereof. Be alert. Such promises by the trade secrets owner arguably – and almost surely – release the misappropriators from claims of future misappropriations of the same trade secrets. Such a settlement agreement, like a boomerang, may come back and hit you where it hurts.

Identify and Mark Your Trade Secrets.
Trade secrets are the business owner’s treasures. Client, customer, and supplier lists, recipes, renewal dates, salaries, pricing, and a host of other things are or can be trade secrets. Even compilations of publicly available information gathered for a proprietary purpose can and should be protected as trade secrets. Employees must understand the collections of information that the business owner considers to be trade secrets. Once the trade secrets are identified, they should be marked with labels, headers, and footers, such as:

XYZ COMPANY CONFIDENTIAL TRADE SECRETS DO NOT DISCLOSE OR MISAPPROPRIATE

Leave no room for doubt or argument. Business owners should remind employees frequently and regularly of the information that constitutes trade secrets of the business.

Guard Your Trade Secrets.
Once the trade secrets are identified, build walls and motes around them. Lock them up – literally. They are the business’s life blood. If the trade secrets must be used by employees to do their jobs, make sure the employees know that they are secrets and that when they are finished to lock them up, literally and figuratively. Although employees have a common law duty not to disclose trade secrets, many may not know that they have such a duty or even that they are privy to trade secrets of their employer, and will not hesitate to walk out the door with them. Some employees will not hesitate to open a competing enterprise with a business’s hard earned secrets. Guard proprietary trade secrets with appropriate non‑disclosure and properly tailored non‑competition agreements. These are relatively simple documents that can be the first defense against trade secret theft.

Conclusion – Guard the Castle
A business’s success sometimes breeds jealousy, justification, and rationalization among its employees. The temptation for some employees to steal trade secrets for personal gain is great. In some cases employees will not even recognize the value to the business or the confidential nature of the information they learn and work with in their jobs, much less their duties with respect to that information. Trade secret thieves will use a business owner’s trade secrets again and again unless they are stopped. Business owners must be vigilant. If they are not, their trade secrets, earned with time, sweat, and money, may end up lining someone else’s pockets.

Like sandcastles on the beach facing a rising tide, the stakes in today’s economy for business owners are high. With modest planning, documentation, and a willingness to act promptly, legal practitioners can strengthen the positions of their clients and prevent the liquidation of their most valuable business assets.

Got trade secrets?

1. One Utah trade secrets case from the Utah Court of Appeals addressed limitations. Consistent with Muna, Envirotech Corp. v. Callahan, 872 P.2d 487,492-93 (Utah Ct. App. 1994), likewise predates Utah’s adoption of the UTSA and relied on Utah Code Section 78-12-26(2), which states that a plaintiff must bring an action within three years of the “taking, detaining, or injuring personal property, including actions for specific recovery thereof.” Utah Code Ann. § 78-12-26(2). Although this case pre-dates the UTSA, it is important because it involves tolling of the statute of limitations under the discovery rule and in light of fraudulent (though the case does not use that term) conduct involving the defendants “concealment” that they were using plaintiff’s confidential and proprietary information. The Utah Court of Appeals stated: “The trial court’s conclusion was legally correct under the concealment theory. Callahan and G&G Steel concealed their activity by covertly misappropriating EIMCO trade secrets and other confidential information and then copying such information. As a result, EIMCO was not able to discover the misappropriation until late 1987.” Callahan, 872 P.2d at 493.