Basic Information For Ohio Employers About Protecting Confidential Information And Trade Secrets
To stay competitive, employers need to keep certain information confidential. Depending on the business, confidential information typically can include customer contacts, marketing and business strategies and plans, technology, techniques and knowhow, pricing and costs, materials and sources, product design, specifications and drawings, vendor information and employee information. However, as a practical matter, employees must be able to access the confidential information, which increases the risk of unauthorized disclosure.
One of the primary means available to employers to protect against unauthorized disclosure of business trade secrets is the Uniform Trade Secrets Act, which has been adopted in Ohio. R.C. §§ 1333.61, et seq (the “UTSA”). In conjunction with the UTSA, R.C. § 1333.81 generally prohibits employees from disclosing employer confidential information. The newly enacted federal Defend Trade Secrets Act of 2016 (the “DTSA”) is an additional source of trade secret protection. Employers can also protect trade secrets by using confidentiality agreements, which can be extended to protect confidential information that may be valuable but does not qualify for statutory trade secret protection.
STATUTORY TRADE SECRET PROTECTION
The UTSA and DTSA create a private civil cause of action for the misappropriation of business trade secrets and for the recovery of damages and equitable relief, including injunctive relief, and payment of attorney fees. R.C. §§ 1333.61, et seq.; 18 U.S.C. § 1836(b). Additionally, the UTSA and R.C. § 1333.81 also include criminal penalties, without precluding employers from bringing any additional, independent civil lawsuit or criminal charges for the misappropriation. R.C. § 1333.99. The DTSA does not include criminal sanctions, but does not preempt other laws that provide criminal or civil liability.
While the UTSA and DTSA define trade secrets broadly, both statutes impose requirements that must be met before confidential information will qualify for protection as a trade secret. To meet the statutory definition of a trade secret entitled to UTSA and DTSA protection, the confidential information must have independent economic value, and the owner of the confidential information must demonstrate that reasonable measures are taken to keep the information secret. R.C. § 1331.61(D); 18 U.S.C. § 1839(3).
Ohio courts have established a six-factor test to determine whether confidential information constitutes a trade secret as defined by R.C. § 1333.61 (D): “(1) the extent to which the information is known outside the business; (2) the extent to which it is known to those inside the business, i.e., by the employees; (3) the precautions taken by the holder of the trade secret to guard the secrecy of the information; (4) the savings effected and the value to the holder in having the information as against competitors; (5) the amount of effort or money expended in obtaining and developing the information; and (6) the amount of time and expense it would take for others to acquire and duplicate the information.” Al Minor & Assoc, Inc. v. Martin, 117 Ohio St. 3d 58, 2008-Ohio-292, at ¶ 16 (citing Pyromatics, Inc. v. Petruziello (1983), 7 Ohio App.3d 131,134-135).
Subsequent court decisions have added the requirement that the trade secret must be continually used in the business. State ex rel. Plain Dealer v. Ohio Dep’t. of Ins., 80 Ohio St. 3d 513, 526 (Ohio 1997); but see, State ex rel. Besser v. Ohio State Univ. (2000), 89 Ohio St. 3d 396, 400 (asserting that a draft asset purchase agreement relating to a single event does not preclude it from being a trade secret). Information that is memorized can qualify as a trade secret. 18 U.S.C. § 1839(3); Al Minor & Assocs. v. Martin (2008), 117 Ohio St. 3d 58, 64 (“Information that constitutes a trade secret pursuant to R.C. 1333.61(D) does not lose its character as a trade secret if it has been memorized.”).
Information that is generally known to the public or in the industry is not a trade secret. R & R Plastics v. F.E. Myers Co., 92 Ohio App. 3d 789, 801-02 (6th Dist. 1993). Moreover, information will not qualify as a trade secret unless the owner takes active measures to protect and ensure the secrecy of the information. Valco Cincinnati, Inc. v. N & D Machining Service, Inc. (1986), 24 Ohio St. 3d 41, 46-47. The owner’s disclosure of a trade secret, absent an understanding or agreement of confidentiality, “will destroy any protection of that information as a trade secret.” R & R Plastics, supra at 802.
However, the disclosure of confidential information to an employee is protected in circumstances where the employee would reasonably understand that the information is confidential, and a written confidentiality agreement is not essential to the creation of the duty not to disclose. Valco Cincinnati, Inc. v. N&D Machining Serv., 1984 Ohio App. LEXIS 11913 (1st Dist. 1984). Nonetheless, the failure of an employer to require a written confidentiality agreement is a factor courts consider in deciding whether the employer took reasonable steps to protect the information so as to permit the information to qualify as a trade secret. J. J. Orr & Assocs. v. Weinschenk, 2004-Ohio-7188, *P15 (9th Dist. 2004).
PROTECTION USING CONFIDENTIALITY AGREEMENTS
Confidentiality agreements are an important tool employers can use to protect trade secrets. As indicated above, an employer’s use of confidentiality agreements is a factor the courts consider when evaluating whether the employer took reasonable steps to protect the confidential information, so that the information meets the definitional requirements to qualify as a statutorily protected trade secret. Chemclear, Inc. v. Ameriwaste Environment Services, Inc., 1992 Ohio App. LEXIS 3747, *17 (8th Dist. 1992) (finding that the employer’s failure to require confidentiality agreements demonstrated that the employer took insufficient precautions to prevent disclosure of customer information).
Confidentiality agreements can also be used to protect confidential information that is highly valuable but does not qualify as a trade secret. For example, some courts have held that employee personnel information generally does not qualify as a trade secret under UTSA statutory definitions, but can be contractually protected from disclosure by using confidentiality agreements. Svoboda v. Clear Channel Communs., Inc., 2003-Ohio-6201, P22 (Ohio Ct. App., Lucas County Nov. 14, 2003) (Employee salary and income information is not a statutorily protected trade secret.); compare, Besser, supra (List of top producing doctors qualifies as a statutorily protected trade secret.).
Aside from the usefulness of confidentiality agreements as evidence of employer precautions taken to protect trade secrets, confidentiality agreements are independently enforceable as contracts. Hinsch v. Root Learning, Inc., 2013-Ohio-3371 (6th Dist. 2013) (upholding forfeiture of stock options for breach of confidentiality provision); Litig. Mgmt. v. Bourgeois, 2011-Ohio-2794, PP 25, 26 (8th Dist. 2011) (granting injunctive relief and awarding damages for breach of confidentiality and non-compete agreement obligations in accordance with the terms of the agreement and in addition to finding trade secrets act violations).
Even if the confidential information does not qualify as a trade secret entitled to statutory protection, an employee subject to a confidentiality agreement can still be held liable for misappropriation based upon breach of contract. Hinsch, supra. In addition to providing for the protection of confidential information per se, confidentiality agreements have been used to prohibit employees from working for competitors, even in absence of a non-compete agreement, based on the doctrine of inevitable disclosure. Dayton Superior Corp. v. Yan, 2012 U.S. Dist. LEXIS 162041, *18 (S.D. Ohio 2012).
A company’s trade secrets are protected by state and federal statutes. However, for valuable confidential information to qualify as a trade secret, the employer must take reasonable precautions to protect the confidential information from unauthorized disclosure. One accepted precaution used to protect confidential information from unauthorized disclosure is to use confidentiality agreements. In addition to protecting trade secrets, confidentiality agreements can also be used to protect confidential information that may be valuable but does not qualify as a statutorily defined trade secret.
Frequently, employers will combine into a confidentiality agreement other contractual prohibitions to prevent current and former employees from working for competitors (i.e., non-compete agreements) and from recruiting current employees to work for competitors (i.e., non-solicitation agreements), and to provide for the assignment of inventions and copyrights (i.e., proprietary rights agreements) to obtain maximum protection and benefit.
3 The “inevitable disclosure rule” is a basis for courts to award injunctive relief when “an employee with detailed and comprehensive knowledge of an employer’s trade secrets and confidential information has begun employment with a competitor of the former employer in a position that is substantially similar to the position held during the former employment,” on the basis that the employee’s use of protected information in the new position cannot be avoided. &G v. Stoneham, 140 Ohio App. 3d 260, 274, 270 (1st Dist. 2000).
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