Trade secrets and intellectual property

Warren R. Frank

The following article explores the murky world of trade secrets and intellectual property. Because of technological developments, these issues increasingly arise in the context of contract negotiation and administration. This article discusses some general principles applicable to the subject of trade secrets and intellectual property. The author also suggests certain considerations in the drafting and formulation of confidentiality agreements.

As with all articles in this column, this article is designed to provide its readers with news on topics of interest to contract administrators. Because frequent changes occur in the law and legal advice often turns on the base of particular facts, this article is not intended to substitute for legal advice on specific matters.

Owen J. Shean, Feature Editor

Is there a level playing field for contract engineering management professionals concerning the definition of intellectual property or a trade secret? When a confidentiality agreement exists between a contract professional and client and the contractor leaves, what information is truly confidential and what information is a result of personal development? The ownership of information is critical in a global market that depends on people who can quickly turn information into marketable products. This controversial issue confronts many professionals as they fall victim to corporate “right-sizing” and are then rehired as consultants.

Trade secret law turns upon an uncertain distinction between trade secrets, which are protectable, and an employee's own knowledge and skill, which the employee may take to a new job [1]. This uncertainty frustrates the competing goals of employers promoting innovation through protection of legitimate trade secrets and those allowing employees mobility in their chosen field [2]. A precise delineation of intellectual property ownership is not provided by legislation or the courts. An insight into the ethical arguments of this issue is presented in an article by Don Wiesner and Anita Cava. They challenge the reader by posing the following question: If I take something tangible that you own, I am clearly a thief [3]. And many would agree that depriving you of the benefits of ownership—stealing—is immoral in most instances [4]. But if I take your ideas, knowledge, or information, you still have use of them [5]. Society may actually benefit if we share knowledge. So in the realm of ideas, am I so clearly a thief and is my taking so clearly wrong and unfair? [6]

During my employment with a southern grey-iron foundry, I was intrigued to find that the industry freely cooperated internally, helping each other with problems associated with core making, sand chemistry, and metallurgy. This exchange of information occurred during trade seminars and telephone conversations between individual engineers and specialists, with the apparent blessing of management. When asked about this practice, senior managers indicated that the exchange of information helped to constantly improve the technology of cast products, protected the industry from competing alternate metalworking technology, and thus ensured the longevity of the industry. This industry believes that sharing information helps everyone. The competition between foundries was waged in the areas of pricing, quality and delivery, not monopolistic trade secrets.

In contrast with the foundry industry, other industries have difficulty sharing in the rapid development of new ideas crucial to developing an efficient marketplace. Millions of dollars are spent in legal fees and security programs to insure that information is not exchanged. Yet know-how trading appears to exist even with the express disapproval of management. This trading is linked to informal networks among engineers who have common interests [7]. Such networks are formed at conferences and other occasions where engineers have a chance to meet, judge one another's abilities and areas of expertise, and develop contacts [8]. When those engineers later encounter technical difficulties, they may call an appropriate contact, possibly one who works for a direct competitor [9].

Currently, we are experiencing a national growth in the ranks of independent contractors. It is becoming commonplace for a professional to work for a multitude of companies during the course of a career. Many of these professionals are engineers and scientists who must publish their results to achieve the professional review necessary to prove an idea. Typically, this acceptance comes in the form of replicated results by others in the field. This extension of the scientific method is completely at odds with companies seeking to achieve profits for their shareholders. For the courts, the argument is between the company's property rights and the tort of the employee's misconduct.

While the Restatement (First) of Torts [10] is probably still the most influential guide to trade secret definition, its general nature has allowed uneven development in case law regarding the parameters of protectable trade secrets and the remedies for their misappropriation. In 1968, the American Bar Association established a committee to develop a uniform act and in 1979 the Uniform Trade Secrets Act (UTSA) [11] was approved by the American Bar Association [12]. To date, 36 states and the District of Columbia have adopted the UTSA with different variations [13]. The Restatement (First) of Torts defines a trade secret as “any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it” [14]. The information must be secret: “Matters of public knowledge or of general knowledge in an industry cannot be appropriated by one as his secret” [15]. The UTSA defines a trade secret as:

Information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy [16].

Unlike the Restatement (First) definition, which emphasizes the use of information, the UTSA focuses on the information and expands the definition of a trade secret to include programs, methods, techniques and processes [17]. The UTSA also protects information that has either potential or actual value, and eliminates the requirement that a trade secret be used continuously in the holder's business [18]. Therefore, the UTSA has expanded the definition of what constitutes an actual trade secret.

Since the UTSA is not a result of national legislation, it is not yet possible for employees and employers to feel comfortable that trade secret laws are uniform across the United States. This may become reality if the 14 remaining states enact the necessary legislation. But even if this final step is taken, additional clarity is necessary. What information comprises an employer's protectable trade secret or an employee's general skill, knowledge, training, and experience? Several factors outlined in the recently drafted Restatement of Torts discuss the factors to be considered when determining employer/employee interests but it falls short of addressing the problem of identifying these interests.

The following comments by Miles J. Feldman gives some understanding of how the courts might test for the presence of “general knowledge and skill” and “know how” in the future. Under this test, a court should determine whether information is a protectable trade secret or part of the employee's general knowledge and skill by weighing the following factors [19]:

1. Did the employee develop the disputed information? This factor incorporates the Wexler line of cases, which recognize an employee's interest in information or a process which he or she originated. If, however, the employee signed an agreement assigning all rights in any inventions to the employer, the fact that the employee developed the information will not support a finding that the information is part of the employee's own general skill and knowledge.

2. Is the information unique to the employer's business? This factor helps to determine whether the information is part of the collective knowledge of individuals employed in the industry.

3. Have competitors been unsuccessful in independent attempts to develop the disputed information? This factor helps to clarify the second factor because a competitor's failure to develop or produce the information indicates that it is particular to the employer and may thus qualify as a trade secret.

4. Has the employee, upon termination of the employment, appropriated some physical embodiment of the information, such as a written formula, blueprint, plan, or list? If so, this points toward a finding that the information is a trade secret. When, to the contrary, an employee draws on information in his memory, the information is more likely part of the employee's general knowledge and experience [20]. A defendant's reliance on memory should not, however, preclude trade secret protection in every case [21]. A protectable trade secret is not always written down or otherwise recorded. In contrast to copyright law, the distinction between knowledge and a concept or idea and a fixed expression of information is unimportant because trade secret law expressly protects intangible information such as methods, techniques, and processes that an employee may have memorized [22].

5. Is the information so closely integrated with the employee's overall experience that granting trade secret protection would deny the employee the ability to obtain employment commensurate with his or her general qualifications? This last factor addresses the public interest in employee mobility.

There is a great deal of clarification yet to be done to identify confidentiality. Just how far we go to define employer and employee rights requires serious consideration. Companies do need to protect the secrets that form the foundation of their core business, but we cannot allow the creators of new technology to be shackled by fear of prosecution.

Work for Hire versus Hired to Invent

The answer to who owns the knowledge gained while an employee is employed seems to be based on two specific points. First, a company can claim ownership of intellectual property that is clearly not readily available to the general public if the information is uniquely different than that normally used to execute general business and if the development of that knowledge has been funded by the company. Federal laws pertaining to intellectual property generally protect employers by turning over the rights to all “work for hire” to the company that is paying for the work [23]. “Work for hire” refers to any work generated as a normal part of an employee's job, but the protection extends to independent contractors, too [24]. To oversimplify things a bit, any work a company commissions and pays for, it owns [25].

Second, when an independent contractor is hired to develop a manufacturing process, establish operational work systems or troubleshoot a problem and the client is providing resources and the opportunity for the contractor to be creative, the contractor was “hired to invent” [26]. Since the client is paying for this service, it would be expected that the client would own all work done. This principle is well accepted not only in the United States and the United Kingdom but in most countries of the world, even those having legal systems that otherwise depart radically from ours [27].

Unfortunately, all things in life are not simple. The general guideline “hired to invent” does provide a sensible and conservative way to look at potential trade secret information acquired or developed while in the employ of a client, but this policy may not be applicable in all situations. The invention of the computer and supporting software has had an impact on all contracted professionals. The courts are now placed in a position to determine the ownership of an employee's general knowledge and the definition of the specific product provided to the client for monetary compensation. The following examples help to provide some insight into current judicial thinking.

Rose Sullivan, an attorney with the Washington, D.C.-based law firm Shaw, Pittman, Potts, Trowbridge, gives this example: Suppose a company hires an outside contractor to write some specialized computer software to isolate different groups on your customer list [28]. What the client owns is the copy of the software the programmer writes [29]. Nothing, except specific wording on the contract, stops the contractor from selling similar software to other companies [30]. In other words, the client has the right to use the software, but not to monopolize the ideas the contractor used to create it [31]. This example does not provide the end-all answer but it does show that the court's concept of what is owned is being modified.

In the mid-1960s, a doctor discovered that a certain liquid, of his design, would enter the body's bloodstream 12 times faster than water. This discovery had obvious commercial possibilities and everyone wanted to enjoy the benefits, including the U.S. Government and the University of Florida. Both groups claimed ownership since Dr. J. Robert Cade was employed at the time as a professor of renal physiology by the university and concurrently conducted research funded by the National Institutes of Health. The doctor maintained that all his research was privately funded and completely independent of his contracted employment. Unfortunately, this case was settled out of the court, but it would appear that the ownership of the discovery resides with the doctor and he should have been able to enjoy the fruits of his labor. The product he developed is called Gatorade.

Defining the Professional Contractor's General Knowledge and Skill

Unlike technical and scientific ideas that manifest a more recognizable mass of information, general business information and company techniques become subtly interwoven into the personality and practices of the individuals exposed to the specific company environment [32]. This environment includes awareness of certain company-generated material, such as expensively obtained techniques for locating and doing business [33]. The distinction between certain managerial techniques or organizational structures and eligible trade secret ideas is not so easily seen in many cases [34].

The court does give some insight into this problem through the decision rendered in Amex Distributing Co. v. Mascari. It distinguished between business information such as a customer list and employee rights encompassed by personal knowledge of particular customers. Mascari started working as a produce inspector for Amex at the age of nineteen and thus began to learn the produce business. As the years went by, he assumed greater responsibilities in a highly competitive economic arena, putting together transactions for shippers and buyers [35]. Amex Distributing, and Mascari, both owed their success to an in-depth knowledge of the customers' needs and predilections [36]. When Mascari left Amex to pursue other opportunities, he was sued by Amex for trade secret infringement.

The court found in favor of the defendant Mascari and thus provided further help in defining the trade secret question. In its decision, the court stated that an organization should be protected against the unauthorized use of confidential information by an individual who is no longer an employee. This is especially true when the information enables the company to maintain a competitive advantage or in which the organization has invested significant time and money to develop the information. At the same time, the right of an individual to follow and pursue the particular occupation for which he is best trained is a most fundamental right [37]. Our society is extremely mobile and our free economy is based upon competition [38]. One who has worked in a particular field cannot be compelled to erase from his mind all of the general skills, knowledge and expertise acquired through his experience [39].

In denying the employer's claim for trade secret status to the company's general methods and principles of doing business, the court commented that as “another court has rather memorably put it, absent a special and enforceable duty, an alert [employee] is not required to undergo a prefrontal lobotomy” [40]. Thus, business information cases have not fared well in litigation, as both customer lists and other general business information claims succeeded in only 28 percent of the attempts reviewed [41]. This does not mean that all nontechnical or undocumented knowledge gained at work is free for the taking. A certain amount of professional common sense is in order when dealing with information unique to a company.

Courts have generally used the term know-how when discussing protectable information and general knowledge and skill to mean all information that is not protectable. One commentator defines know-how as referring to information that enables one to accomplish a particular task or to operate a particular device or process [42]. Others define general skill as personal knowledge based on an employee's education, ability and experience, and general to the trade as a whole, as opposed to knowledge peculiar to the employer [43].

The line between an employer's protectable know-how and a contractor's personal knowledge is especially unclear when the contractor has held a technical or management position for a long period of time. This issue was addressed by the Massachusetts Court of Appeals which held that the plaintiff employer was not entitled to restrain the defendant's use of knowledge gained while working on the plaintiff's system, as the plaintiff failed to keep the system sufficiently secret. The employee has usually enhanced his knowledge and skill through exposure to the employer's trade secrets and through his own contribution to its development: “it is just such exposure and activities which are part of the experience that enters into the knowledge and skill which defines a scientist or engineer” [44].

Confidentiality has emerged as one of the core concepts in trade secret law. It is well recognized that an employee in the computer industry is entitled to use experience gained while working for a company in subsequent employment [45]. If, however, an employee possesses confidential information or knowledge gained at the employer's expense, the employee has a duty to maintain its secrecy [46]. On the other hand, the employer has a responsibility to visibly identify what areas are to be protected as trade secrets. This must be done in a routine and consistent manner with all direct and contract employees.

When the employer fails to take reasonable precautions to protect the secrecy of its operations, an employee has no duty to maintain confidentiality [47]. Furthermore, absent reasonable precautions, an employee's knowledge of the company's systems may be considered unprotected general knowledge and experience [48]. In one frequently cited case, the Supreme Court of Minnesota held that the absence of an understanding not to disclose particular information about the employer's computer system rendered that information part of the employee's general skill and experience [49]. The court reasoned that the employer's failure to take reasonable precaution to protect the confidentiality of its alleged trade secret was such that “the defendant employee could not be expected to have known what was confidential and what was not, what was unfair to disclose and what was not” [50]. To assert trade secret rights in information, the firm or individual must maintain the information at some minimal level of confidentiality or secrecy [51].

Confidentiality Agreements

The one document of understanding that is available to both sides of this issue is the confidentiality agreement. This agreement provides a way for reasonable people to define and agree on exactly what the client considers a trade secret or proprietary information. Although this document of understanding helps to protect both the company and the contractor, it does have drawbacks. There is the problem of trying to protect the unknown. It may be impossible to define the trade secret at the outset of the employment relationship, because the underlying work has not been done [52]. This is particularly true when contracts involve technology. Engineers and scientists understand the mercurial nature of the technology industry and are reluctant to sign confidentiality agreements because they do not want to sacrifice their future mobility. Contractors who have signed confidentiality contracts may discover that potential new clients are skittish about hiring them because they fear litigation.

The following recommendations for creating a nondisclosure agreement may help to develop a general understanding of what an employer may expect of a contract professional.

1. All aspects of information not published or generally known in the industry are to be treated as the employer's confidential or proprietary information until they become publicly available [53].

2. [Contractor agrees] that [he] will not discuss confidential information outside of the workplace. All publications or presentations dealing directly or indirectly with the confidential information must be cleared by the employer in advance [54].

3. All documents containing confidential information must be stamped “Proprietary Information” or “Company Confidential,” and may be distributed only to those who have a need for the information in their work. Documents should not be reproduced unnecessarily, and should be disposed of in a manner which ensures that they will not be available to unauthorized persons. [Contractor agrees] to return all tangible forms of confidential information to the firm upon termination or at the firm's request [55].

4. [Contractor agrees] to disclose and assign to the employer all rights in all inventions or ideas relating to their work at the firm or that are aided by the use of the firm's equipment, facilities, or supplies [56].

5. [Contractor agrees] to hold in confidence, and not use or disclose without the firm's written authorization, any information obtained or created during the period of employment, which pertains to any aspect of the firm's business and is unknown to actual or potential customers [or suppliers] [57].

6. [Contractor represents] that they have not brought and will not bring or use in the performance of their duties any proprietary or confidential information, whether or not in writing, of a former [client] without that client's written authorization [58].

7. The agreement survives the [contractor's] employment at the firm [for a reasonable period of time] [59].

The future of many professionals is in the area of providing services to a multitude of clients. This is entirely different than the careers of similar people 40 years ago. How companies and contractors choose to work together will determine how successful our new approach to doing business will ultimately fare.

Most of the material studied for this article seemed to have two common threads. The first centered on employees working for companies that did not nurture an entrepreneurial spirit when it came to new ideas. Corporations need to learn how to partner with their employees and share the fruits of invention. An organization that lives on today's technology may not be competitive in business tomorrow. In our present world, technology has enabled all competitors within an industry to access the same raw material, manufacturing equipment, and capital. The competitive advantage comes only from the human resource. If this resource is allowed to develop, the possibilities are unbounded.

The second theme is less noble. Conflict over trade secrets in the remaining cases dealt with people who chose to steal. Arguments have been made that precautions were not adequately taken by companies to protect sensitive information, but in the final analysis, people know when they are doing something wrong. The typical symptom of an impending breach of ethics is the attempt to rationalize why it is okay to act in a certain manner or execute a dubious action. If there is any question as to the correctness of an action, then simply ask the client or employer. Of course the answer may not be what was desired, but the question of ethical appropriateness has been addressed.

Trade secret law remains uncertain and subject to uneven application. Attempts are being undertaken to help establish predictability in the law, but each case brought before the courts today is decided on its own merits. For now it would seem that the best guideline for the prudent contract professional is: If I use this information, how much money do I want to spend to prove that my actions are right? ∎


1. Miles J. Feldman, Toward a Clearer Standard of Protectable Information: Trade Secrets and the Employment Relationship, High Technology Law Journal, vol. 9:1, 152 (1994).

2. Id.

3. Don Wiesner and Anita Cava, Stealing Trade Secrets Ethically, Maryland Law Review, 47 Md. L. Rev. 1076 (1988).

4. Id. at 1076.

5. Id.

6. Id.

7. Eric Von Hippel, Trading Trade Secrets, Technology Review, Feb/Mar 1988, at 58-64.

8. Id. at 60.

9. Id.

10. Restatement (First) of Torts §757 (1939).

11. Uniform Trade Secret Act §§1-12, 14 U.L.A. 437-467 (1990 & Supp. 1993) [hereinafter UTSA].

12. Kirk Jamieson, Just Deserts: A Model to Harmonize Trade Secret Injunctions, Nebraska Law Review, 72 Neb. L. Rev. 515, 527 (1993).

13. Feldman, supra note 1, at 153.

14. Restatement (First) of Torts, supra note 19, cmt. b.

15. Id.

16. UTSA, supra note 33. §1.

17. Feldman, supra note 1, at 154.

18. Id.

19. Feldman, supra note 1, at 175-6 (refers to the indented text).

20. AMP Inc. v. Fleischhacker, 823 F. 2d 1199, 1204-05 (7th Cir. 1987).

21. Allen v. Johar Inc., 823 SW 2d 824, 827 (Ark. 1992).

22. The Copyright Act of 1976, 17 U.S.C. §102(b) (1988).

23. Bob Filipczak, Intellectual Property, (December 1992), at 71.

24. Id.

25. Id.

26. Stanley H. Lieberstein, Who Owns What Is in Your Head, 9 (1979).

27. Id. at 10.

28. Id.

29. Id.

30. Id.

31. Id. at 72.

32. Wiesner, supra note 3, at 1091.

33. Wiesner, supra note 3, at 1092.

34. Id.

35. Id.

36. Id.

37. Id.

38. Id.

39. Id.

40. Fleming Sales Co. v. Bailey, 611 F. Supp. 507, 514 (N.D. III. 1985).

41. Wiesner, supra note 3, 1093.

42. J. Thomas McCarthy, McCarthy's Desk Encyclopedia of Intellectual Property, 180 (1991).

43. Melvin F. Jager, Trade Secret Law, §8.0i[3] (rev. 1992), at 8-13.

44. Dynamics Research Corp. v. Analytical Sciences Corp., 400 N.E.2d 1274, 1286-87 (Mass. App. 1980).

45. Feldman, supra at 154.

46. Id.

47. Id. at 155.

48. Id.

49. Id.

50. Id.

51. Id.

52. Feldman, supra note 1, at 181.

53. Feldman, supra note 1, at 182.

54. Id.

55. Id.

56. Id.

57. Id.

58. Id.

59. Id.


Warren R. Frank is a contract project manager for the Procter & Gamble synthetic granules sector. He is trained in engineering and construction, project management, systems development and quality control.

PM Network • May 1995



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