June 26, 2014 Manufacturing a Trade Secret

Volume 17 | Issue 4

Too many manufacturers erroneously conclude that they do not have enforceable trade secrets in their manufacturing equipment, processes, or

You know that you have created something worthwhile when someone tries to steal it. Unfortunately, when it comes to protecting a trade secret manufacturing process, a manufacturer must take steps to protect its trade secrets before the theft occurs if there is any hope to protect them.

Imagine that you own a plastics manufacturing company that has been making plastic containers for the food industry for over 30 years. During that time, a number of your engineers developed a unique way of processing a compound that is otherwise difficult to handle, which allowed you to manufacture plastic containers that are more durable and cheaper to manufacture than all other containers on the market. Over time, your customers realize that your products are more durable than your competitors’ products, and you are able to sell them at a lower price as well. Your company’s brand comes to dominate the market, and profits are at an all-time high.

Now imagine that one of your longest tenured process engineers leaves the company and turns up with a job at one of your smallest competitors. In the absence of a valid non-competition agreement, that engineer is entitled to take a job with your competitor. Fortunately, however, the company is not much of a threat.

One year later, you call a meeting to discuss the sudden and troubling loss of six major accounts. During that meeting, you discover that all six of the accounts went to the same small competitor that had hired your engineer a year ago. To make matters worse, you hear rumors during this meeting that this competitor has opened a brand new manufacturing facility that dramatically expands its production capacity. After investigating further, you discover that the former employee may have duplicated the innovative process your engineers developed and you hire a lawyer to pursue it.

Welcome to bet-the-company litigation. Even as you initiate the legal process, your competitor is undercutting your prices on virtually every account and your customers are leaving in droves. Your company did not historically have a robust intellectual property portfolio. In retrospect, however, a few manufacturing process improvements by your engineers led to an unprecedented competitive advantage, and the company’s crown jewels are now on the line.

For most companies, litigation over theft of trade secrets is something that occurs only once (if at all). Unfortunately, if someone does eventually steal your company’s trade secrets, you do not get to choose when that happens. In the moment of truth, the future of your business may well depend on what steps you took to protect your trade secrets and prepare for possible litigation beforehand.

If you go back to my hypothetical, imagine now that you learn the following troubling facts from your lawyer:

(1) your employment agreements contain poorly drafted language that arguably limits the protection of your trade secrets to one-year after employment is terminated;

(2) third-party vendors were frequently allowed to inspect your manufacturing process without non-disclosure agreements;

(3) your employees received no training on the protection of trade secrets or confidential information;

(4) there is little or no security at your manufacturing facility and people come and go as they please;

(5) the only internal document that references trade secrets refers to some antiquated paint formula; and

(6) there is a picture of sensitive manufacturing equipment on the company’s website.

By law, a company must take “reasonable measures” to protect its trade secrets from disclosure. A jury may hear these facts and conclude that your company has no trade secret in the manufacturing process at issue.

Now, do not get me wrong. Trade secret law in most states is plaintiff friendly. With the right legal counsel, you may be able to successfully navigate all of these obstacles during the litigation and protect your trade secrets. However, this is not garden variety litigation. The future of your business may be at stake, and most of these problems could have been avoided with a little bit of planning and advice.

The starting point for protecting any trade secret is recognizing that your company has actually developed protectable trade secrets. Many manufacturing companies do not know that they have protectable trade secrets in their manufacturing equipment and processes, or they fail to properly identify them and therefore do not tailor their policies and procedures to protecting them. Some manufacturers will identify their trade secrets, but they do not implement the protections necessary to prevail in the event of litigation. Successfully running this gauntlet of properly identifying and protecting manufacturing trade secrets is essential to maintaining a competitive advantage.

To constitute a trade secret, the information that you are seeking to protect must satisfy three criteria:
(1) it must not be commonly known or available to the public;

(2) it must provide economic value, actual or potential, from not being generally known to or readily ascertainable by competitors in the industry; and

(3) it must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

First, a protectable trade secret must not be commonly known by or available to the public. As such, manufacturing equipment and processes that are well known by multiple competitors in the industry or that are the subject of existing or expired patents do not constitute a trade secret. In other words, manufacturing methods and know-how that can be obtained in the general public are not secret by definition, and they are therefore not protectable.

Combination Trade Secrets
In my experience, this requirement leads many manufacturers to erroneously conclude that they do not have protectable trade secrets in their manufacturing equipment or processes. When you walk into almost any manufacturing facility, the vast majority of the manufacturing processes that you find will involve an arrangement or compilation of equipment, the components of which can be bought off-the-shelf from third-party vendors. If you ask the plant manager whether the process constitutes a trade secret, they will commonly laugh and say that all of the equipment was purchased from a catalogue through a variety of third-party vendors. This is a critical mistake.

Admittedly, an off-the-shelf piece of equipment from a third-party vendor does not constitute a trade secret. However, under the Uniform Trade Secrets Act adopted in at least forty-eight states, a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but where the unified design, process, and operation of that equipment or process in a unique combination affords a competitive advantage. This is known as a combination trade secret.

In evaluating the existence of a manufacturing trade secret, the question is often not whether a given component of the manufacturing process was designed in secret and is therefore unavailable to the public. For a combination trade secret, the question is whether the combination of equipment and/or process steps that constitute the manufacturing process (or a portion thereof) is secret or conversely whether it is generally known in the industry. In my experience, many manufacturers configure their equipment or manufacturing process in a unique way that is unknown to their competitors, and it is therefore potentially protectable as a trade secret. The law on combination trade secrets is sweeping and provides broad and favorable protections for manufacturers.

Economic Value
In addition to creating something that is not generally known, a trade secret owner must also demonstrate that the company derives economic value, actual or potential, from the trade secret not being generally known to or readily ascertainable by its competitors. Admittedly, the law does not require that the economic value of a given trade secret be ascertainable with certainty. In fact, mere “potential” economic value is sufficient. However, efforts to track profit margins, market share, manufacturing costs, improved product performance, and research and development costs on a product and/or process specific basis will go a long way toward proving the requisite economic value at trial. Finally, the economic value of a given trade secret can be further demonstrated by showing that lost sales went directly to a competitor that is accused of misappropriating trade secrets. If your manufacturing company has potential trade secrets, you should audit the systems in place for tracking economic data to ensure that your trade secrets will be protectable in the event of litigation.

Finally, as noted above, a protectable trade secret must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy. The starting place for any trade secret protection regime is the drafting of appropriate provisions in employment contracts for any employees with access to the trade secrets.

Drafting employment contracts to prohibit the use of confidential information and trade secrets can present pitfalls for the unwary. Under most state laws, confidential information is a form of business information that can be protected from disclosure in an employment agreement even though it does not rise to the level of constituting a trade secret. Because the type of information that can be protected as “confidential information” is broader than what can be protected as trade secrets, most state laws require an employer to limit the duration (among other things) of any provision prohibiting the use of confidential information after employment. If language protecting trade secrets is rolled into this same provision, it can have the inadvertent effect of limiting the time during which your trade secrets will be protectable.

By contrast, in virtually all states, a properly drafted and independent provision in an employment contract prohibiting the employee’s use of trade secrets can have an unlimited duration as long as the trade secret remains a secret. This distinction is significant for two reasons. First, the unlimited duration for protection of trade secrets makes those protections far more valuable than prohibitions on the use of confidential information. Second, if trade secret protections were limited in duration (intentionally or inadvertently), a thief could argue that the mere failure to prohibit the use of trade secrets for a longer period constitutes a failure to take “reasonable measures” to protect the trade secret.

This discussion illustrates only one of many potential pitfalls in the drafting of employment contracts designed to protect trade secrets from misappropriation. Surprisingly, many manufacturers give little attention to the drafting of these provisions in their employment contracts. When probed on the subject, they believe that lifetime process engineers or other blue collar employees will not leave the company and/or would not take the risk of starting their own business. This is a mistake. Many cases involving theft of trade secrets actually implicate competitors or business partners that hire critical employees from another company for the not-so-subtle purpose of obtaining their process and engineering expertise.

Although the law does not impose strict requirements for what constitutes “reasonable measures” to protect trade secrets, it is certainly prudent and generally necessary to go beyond implementing the protections available in employment contracts. Any review of trade secret protection protocols must look at a number of additional factors, such as (1) physical and data security, and (2) employee policies, procedures, and training.

Physical and Data Security
To protect trade secrets, it is critical that manufacturers take steps to insist on physical security for their operations and virtual security for their computer systems and electronic data. Manufacturers should not allow customers, vendors, former employees, or even the general public to access sensitive portions of their manufacturing plant or operations without requiring non-disclosure agreements, the screening of high-risk visitors, visitor confidentiality agreements, restricted access policies, and written policies and procedures for implementing and managing these systems consistently.

Manufacturing and sensitive data facilities should have perimeter fencing, security cameras, key card access, security patrols, and other physical security measures in place. Computer systems should incorporate robust security systems, including password protections, restricted access features, data theft monitoring, etc. With the increasing use of mobile computer technologies, wireless devices, and cloud computing, companies should have appropriate mobile computing policies in place to protect company data and control its use and access by employees from high-risk mobile platforms. Many of these measures can prevent the loss of sensitive trade secret information before it happens. However, even if it does not stop the initial theft, these systems will be powerful evidence in a trial for misappropriation of trade secrets.

Employee Policies and Procedures
In many cases involving theft of trade secrets, the company did not stress confidentiality, protections for trade secrets, or otherwise train employees regarding the handling of intellectual property. In the absence of training and vigilant security measures, many employees feel like it is okay for them to re-create their former employer’s technology in their own business. In the information age, the next generation of workers has been trained since birth to believe that it is okay to share anything on the internet, regardless of who created it or where it came from. This culture also necessarily influences workers’ views of intellectual property and any “restrictions” on their use of information once they leave their place of employment. To effectively limit trade secret theft or to enforce trade secrets in litigation, it is critical for manufacturers to routinely train their employees and have policies and procedures in place governing their use or disclosure of confidential and trade secret information during their employment.

In the end, no one security measure will uniformly prevent theft of trade secrets or ensure that the information will be protectable as a trade secret in litigation. However, the more effort that is exerted in this area, the more likely your company is to either avoid or successfully navigate bet-the-company litigation over theft of trade secrets. If litigation does become necessary, skilled counsel is required to avoid a number of landmines that could put your company’s crown jewels at risk in front of a jury. Choose wisely.

Daniel C. Norris is a Partner in Alston & Bird LLP’s Litigation and Trial Practice Group. Mr. Norris is a trial lawyer representing plaintiffs and defendants in complex commercial litigation, including litigation arising from intellectual property rights, products liability claims, and commercial contractual disputes. For more information on protecting trade secrets or litigation involving trade secrets, the author can be contacted at daniel.norris@alston.com or 404-881-7826. Mr. Norris can also conduct a proprietary information audit for your company.
http://www.alston.com/files/docs/Proprietary-Info-Audits.PDF

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