Many
businesses are concerned with protecting that information
which they consider proprietary. This information could
include customer lists, pricing structures, technological
or industrial processes, recipes or formulas, plans
for infiltrating certain markets, and many other types
of information developed by businesses for the purpose
of competing in the marketplace. But what steps can
a business take to protect this information, especially
from its dissemination by ex-employees? In order to
answer this question, attorneys need a firm understanding
of the Arkansas Trade Secrets Act, A.C.A. §§
4-75-601, et seq., and the cases construing
and applying the Act. Unfortunately, the case law does
not always seem entirely consistent, which can make
it difficult to provide sure guidance to a client.
The Act
The Arkansas Trade Secrets
Act became effective in 1981 and incorporates many,
but not all, of the provisions of the Uniform Trade
Secrets Act. The heart of the Act is found in the definitions
section, A.C.A. 4-75-601. This section provides that
misappropriation means:
(A) Acquisition
of a trade secret of another by a person who knows or
has reason
to know that the trade secret was acquired by improper
means; or
(B) Disclosure
or use of a trade secret of another without express
or implied consent
by a person who:
(i)
Used improper means to acquire knowledge
of the trade secret; or
(ii)
At the time of disclosure or use, knew or had reason
to know that his knowledge
of the trade secret was:
(a)
Derived from or through a person who had
utilized improper means to
acquire it;
(b)
Acquired under circumstances giving rise
to a duty to maintain its secrecy
or limit its use; or
(c)
Derived from or through a person who owed
a duty to the person seeking
relief to maintain its secrecy or limit its use; or
(iii)
Before a material change of his position, knew
or had reason to know
that it was a trade secret and that knowledge of it
had been acquired
by accident or mistake.
A.C.A. 4-75-601(2). Ex-employees would fall under the
category of those who, without permission, disclose
a trade secret with knowledge that they acquired that
secret under circumstances placing them under a duty
of non disclosure.
The Act defines a trade
secret as "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." A.C.A. 4-75-601(4). Thus, under the
Act, to qualify as a trade secret, the information must
have independent economic value, it must be somewhat
difficult to compile or discover, and its owner must
have taken reasonable measures to maintain its secrecy.
The Act and Case Law
Practitioners cannot,
however, rely on just the Act when counseling clients
on protecting their trade secrets. The Arkansas Supreme
Court has expanded on the requirements that must be
met for information to qualify as a trade secret. For
an excellent and far more in-depth treatment of this
issue, see Brandon B. Cate, Case Note, Saforo &
Associates, Inc. v. Porocel Corp.: The Failure
of the Uniform Trade Secrets Act to Clarify the Doubtful
and Confused Status of Common Law Trade Secret Principles,
53 ARK. L. REV. 687 (2000).
In Saforo & Associates,
Inc. v. Porocel, 337 Ark. 553, 991 S.W.2d 117 (1999)
the Arkansas Supreme Court adopted six factors from
the Restatement (First) of Torts § 757, cmt. b
(1939).1 See also Wal-Mart Stores, Inc.
v. P.O. Market, Inc., 347 Ark. 651, 66 S.W.3d 620,
630 (2002). These factors are as follows:
(1) [T]he
extent to which the information is known outside the
business;
(2) the extent
to which the information is known by employees and others
involved in the business;
(3) the extent
of measures taken . . . to guard the secrecy of the
information;
(4) the value
of the information to [the business] and to its competitors;
(5) the amount
of effort or money expended . . . in developing the
information; and,
(6) the ease
or difficulty with which the information could be properly
acquired or
duplicated by others.
Wal-Mart, 66 S.W.3d at 630. Each one of these
factors, in addition to the statutory requirements,
must be met for information to be protected as a trade
secret. Id. This is important because some of
the six factors adopted by the Saforo Court are
not readily evident by the statutory requirements.2
In particular, the second and fifth factors do not necessarily
follow from the Act.
Regarding the second factor,
while it can certainly be argued that knowledge of certain
information by employees of a business sheds light on
the extent to which the business has gone to protect
its secrets, some information, such as customer lists,
needs to be widely known by the employees so that they
can use the information to successfully conduct business.
This is especially true for small businesses where there
are few employees and for businesses where the employees
themselves are actively involved in gathering the information
or creating the processes that the company wishes to
protect.
Likewise, regarding the
fifth factor, while the effort and money spent by a
company in developing information can evidence the difficulty
facing a competitor in duplicating that information,
it does not necessarily follow that all proprietary
information need be arrived at through such effort and
expense. A secret arrived at by pure accident, without
great effort and expense, can still have value to its
originator and might well not be readily ascertainable
to competitors. Just because Newton was inspired by
the lucky accident of a falling apple does nothing to
diminish the fact that the theory of gravity was his
and that, without that happy accident, it might have
been years before anyone developed the theory. Furthermore,
it has been argued that, since patents can be issued
for chance discoveries, trade secret protection should
also be afforded such discoveries. See Cate,
supra, at 710-11.
Regardless, all six common-law
factors must be met for information to be afforded trade
secret status. Reliance on the statute alone is insufficient.
Inconsistent Case Law?
Meeting both the statutory
and six common-law requirements, though, is by no means
an easy task, and practitioners should warn their clients
that they should never take for granted that their proprietary
information has achieved trade secret status. The seemingly
inconsistent results in two Arkansas cases, Cardinal
Freight Carriers, Inc. v. J.B. Hunt Transport Servs.,
Inc., 336 Ark. 143, 987 S.W.2d 642 (1999) and City
Slickers, Inc. v. Douglas, 73 Ark. App. 64, 40 S.W.3d
805 (2001), highlight the uncertainty in this area.
In Cardinal Freight,
several employees left J.B. Hunt Transport Services
and went to work for a competitor, Cardinal Freight
Carriers. Each employee, upon joining Hunt, had signed
a confidentiality agreement which, among other things,
recognized the confidential status of much of the information
the employees would be privy to and provided that the
signing employee would not divulge such information
during his employment with Hunt and for a year following
the cessation of employment. When the employees left
and went to work for Cardinal, Hunt sued to enjoin the
employees from divulging, and Cardinal from using, several
trade secrets. These alleged trade secrets consisted
of information regarding the profit Hunt made on contracts
with specific customers; Hunt's margin of profitability
used in its pricing model; the long-term buying habits
of Hunt's customers; Hunt's business methods, including
"its processes, operations, marketing programs,
computer programs, and future plans"; and Hunt's
strategies for the future and for penetrating certain
markets with specific customers. Cardinal, 987
S.W.2d at 644-45.
The Cardinal Court
found that this information constituted trade secrets.
The Court noted that trial testimony established that
the information had economic value to Hunt and that
it also would give an edge to Hunt's competition in
the marketplace. The Court also found that the information
was not generally known or readily ascertainable to
those who would find it of interest and that Hunt took
reasonable measures to keep the information secret.
It therefore upheld the injunction issued by the lower
court.
One would expect a similar
result in City Slickers, Inc. v. Douglas, 73
Ark. App. 64, 40 S.W.3d 805 (2001). The information
at issue was similar to that in Cardinal, but
the City Slickers court came to a different conclusion
regarding its status. In City Slickers, the appellant/petitioner,
City Slickers, Inc., provided on-site, oil-changing
services to customers with large fleets of cars, such
as automobile rental companies. City Slickers was a
Tennessee company that intended to expand its business
into Arkansas. To accomplish that end, it hired the
appellee/respondent, Joseph Douglas, as a general manager
and assigned him the job of developing the Arkansas
business. Douglas signed three different non-disclosure/confidentiality
agreements. After approximately six weeks, Douglas resigned
from his position with City Slickers and shortly thereafter
opened his own competing business in the Little Rock
area. City Slickers sued to enjoin Douglas from competing,
but the Pulaski County Chancery Court denied that relief.
The appellate court affirmed.
To aid Douglas in his
job, City Slickers had provided him with company documents,
including copies of its "Executive Summary [and]
Business Plan Overview" and a handbook titled "2000
Little Rock Launch." Douglas was privy to information
such as customer lists, pricing information and advertising
plans. City Slickers had taken two years to develop
its business plan at a cost of $10,000 to $12,000. City
Slickers had presented testimony at trial that the information
provided to Douglas would lose its value if it got into
the hands of a competitor and that the information would
enable a competitor to undermine City Slickers' pricing
structure and anticipate its moves to develop the Little
Rock market. Furthermore, City Slickers had taken steps
to protect this information by requiring employees to
sign confidentiality agreements and by using control
numbers on each copy of its sensitive documents so it
could keep track of which employees had a copy.
Despite all this, the
appellate court found that City Slickers' documents
and information did not rise to the level of protectable
trade secrets. Key to this determination was the court's
belief that much of the information City Slickers desired
to protect was easily ascertainable and the fact that
City Slickers had few Little Rock customers:
Information in the subject
documents can be ascertained without utilizing City
Slickers' documents. City
Slickers has only one actual customer in Little Rock;
the business plan uses statistics from public surveys
and studies; its customer
profile and competition figures are easily ascertainable
from phone books and surveys;
its marketing campaign in the business plan does not
include the Little Rock
market; and the master customer list includes only Memphis
businesses.
Id. at 810. The court also noted that the advertising
plans for the Little Rock market were based on time-slot
demographics that were easily available through various
media outlets, that City Slickers admitted that anyone
with reasonable intelligence could determine which companies
would have automotive fleets in need of servicing, and
that City Slickers had no proof that Douglas had used
any of the allegedly proprietary information in his
possession. In addition, the court distinguished the
case from Cardinal by pointing out that Cardinal
involved employees who had been with the company for
six years, whereas Douglas had worked only six weeks
for City Slickers.
A strong dissent in the
case points out the weaknesses in the majority's reasoning.
While agreeing with the majority that City Slickers'
customer list was not a trade secret, the dissent disagreed
with the majority's position that "the detailed
information specific to City Slickers contained in the
Little Rock Launch 2000 marketing plan and in the business
plan were not trade secrets." Id. at 812.
Regarding the launch handbook,
the dissent pointed out that it involved specific plans
for penetrating the Little Rock market, including a
comprehensive schedule for advertising in various media,
a detailed public relations campaign, and City Slickers'
budget for the Little Rock launch. Only four copies
existed of the launch handbook, and Douglas had one
of those copies, which he never returned.
Regarding the business
plan, the dissent argued that the plan included many
types of information that was entitled to trade secret
protection. Among the information pointed to by the
dissent was City Slickers' detailed discussion of its
operations; a declaration of its intent to expand into
Little Rock within the next 12 months; its long-range
marketing plans, pricing information, details regarding
overhead, operating expenses and corporate expenses;
and explicit corporate financial reports and projections.
Citing Cardinal, the dissent noted that "[Arkansas']
supreme court has held that information such as price
modeling, customer profit margins, logistics, future
plans, and specific marketing strategies are protected
under the Trade Secrets Act." Id. at 813.
The dissent also believed that this information would
pass the six-factor test enunciated in Saforo,
specifically arguing that, while some of the information
was readily accessible, much of it was not, being far
too detailed and being tailored to City Slickers' plans.
Additionally, the dissent pointed out that City Slickers
went to considerable time and expense to acquire the
information, and that City Slickers took proper measures
to keep that information secret.
Furthermore, the dissent
took issue with the majority's emphasis on the short
duration of Doulgas' employment, which the dissent argued
was irrelevant. The dissent also dismissed the fact
that Douglas had not yet used any of the information,
pointing out that the test for determining trade secret
status is not a but-for test but rather an inquiry into
whether or not the ex-employee's new job will inevitably
lead him to rely on the trade secrets. Finally, the
dissent disagreed with the majority's argument that
City Slickers had no legitimate business interest in
the Little Rock market, pointing to the amount of time
and effort expended by City Slickers in preparing to
enter that market. The dissent concluded that the information
contained in the business plan and launch handbook would
likely prove to be trade secrets.
Applying the Law
Given the apparently inconsistent
results in Cardinal and City Slickers,
what should practitioners tell clients to do to protect
confidential information? First of all, the information
must meet the statutory requirements. It must have economic
value to both the business and its competitors. Generally,
the information is going to either be of value or not
- little can be done about that. One thing a business
can do, however, is to articulate the reasons why that
information is valuable and communicate that information
to all its employees and executives. This can be accomplished
through a carefully constructed confidentiality agreement
that explains why the company's secrets are valuable
assets to be protected.
To be protected, the information
must also be such that it is neither generally known
to competitors nor readily ascertainable. Not much can
be done if the information is already known by others,
but if the information contains easily ascertainable
information, it might be protected by infusing it with
information not readily available. For instance, take
a client list, which can easily be duplicated by using
the phone book. Including such information as the names
and numbers of personal contacts within those client
businesses, details of specific and/or special needs
of those clients, e-mail addresses, names of people
who provided referrals that helped gain access to those
clients, references by those clients to other potential
clients, and any other information that can only be
gained through time and effort can help to protect the
list. Of course, there is always the danger that a court
could ignore the confidential aspects of the list and
define all the information as non-proprietary, simply
because the names themselves can be easily garnered
from the phone book. If that occurs, the attorney needs
to argue that the confidential information should be
redacted from the list.
Furthermore, a business
should take as many precautions as possible to keep
its information secret. It should limit the number of
employees, including executives, who have access to
the secrets; place sensitive material in computer files
that are password protected; keep hard copies of information
under lock and key; develop strict guidelines regarding
copying the information and/or removing it from the
premises; code and track sensitive documents; and have
employees and executives sign confidentiality agreements.
In addition, if the information is shared with clients
or potential clients, develop guidelines for them to
follow in guarding the information, and have them sign
confidentiality agreements. It is also a good idea to
have executives sign an additional confidentiality agreement
to the one signed by all employees.
Once the statutory factors
are met, then the common-law factors should be addressed.
If all the statutory requirements have been satisfied,
then factors one, three, four and six have also most
likely been met. Factor two, the extent to which the
information is known by employees and others in the
business, can be satisfied by limiting, as much as possible,
the people who have access to that information. Only
those who absolutely need the information to perform
their tasks should have access to it. Factor five, the
amount of effort or money expended in developing the
information, can more easily be met at trial if the
business has kept records documenting its efforts and
expenditures.
Finally, the business
should definitely have a non-competition agreement with
all of its employees and executives who have access
to its trade secrets. While such an agreement is not
absolutely necessary, see Cardinal, 987 S.W.2d
at 643-44, in City Slickers, the petitioner did
not have a non-competition agreement, and that almost
certainly resulted in closer scrutiny of the trade secrets
by the trial court, which found that the confidentiality
agreements signed by the employee "constituted
an unreasonable and unlawful restraint of trade, and
that it was an overly broad covenant not to compete
masquerading as a confidentiality and nondisclosure
agreement." Also, see ConAgra, Inc. v. Tyson
Foods, Inc., 342 Ark. 672, 30 S.W.3d 725 (2000),
where several executives had not been required to sign
a non-compete.
While the ocean of trade
secret law can sometimes be murky and turbulent for
both businesses and practitioners alike, being mindful
of the statutory and common-law requirements can help
keep a client's confidential, proprietary information
afloat.•
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