What Is a Trade Secret, and How Can I Protect It?
Employers have a legitimate business interest in preventing employees from disclosing trade secrets to third parties. At the same time, employees have an interest in seeking out new and better job opportunities, and the public has an interest in ensuring open competition in the marketplace. These competing interests are reflected in Wisconsin’s laws governing the restrictive covenants. This article provides a summary of the law governing restrictive covenants, specifically in regard to covenants that address trade secrets.
Trade Secrets Defined
Trade secrets represent a highly specialized class of confidential business information. They differ from ordinary confidential information because they typically represent either a method, formula, or process that has continuous use in a business. The value in a trade secret is inherently tied down to the fact that the trade secret isn’t readily known or ascertainable to competitors within an industry. Familiar examples of trade secrets include the formula for Coke or the programming language for Google’s search algorithm. Clearly, these trade secrets have enormous value, and they are inseparable from the institutions with which they are linked.
Of course, as its name suggests, a trade secret must also be secret. To ensure the law treats proprietary business information as a trade secret, an employer must demonstrate that it took active steps to maintain the information’s secrecy. In the case of computer code, for example, adequate protective measures could include restricting access via password to only a select group of high-level employees. Or in the case of tangible trade secrets, necessary protective measures could include locking the trade secret in a safe. The law views only the most closely guarded business information as a trade secret. If trade secrets are openly distributed to large numbers of employees, they typically lose their trade secret status.
Trade Secrets and Restrictive Covenants
Important limitations apply when an employer seeks to prevent its employees from disclosing trade secrets by contract. Section 103.465 of the Wisconsin Statutes, which governs restrictive employment covenants, is central to this issue. Under the statute, a restrictive employment covenant is valid only if it provides a reasonable time restriction and a reasonable territorial limitation. Wisconsin courts have made clear that a restrictive covenant that contains no time or territorial limitation whatsoever is an unenforceable restraint on trade.
While many employers are aware that Section 103.465 applies to noncompetition agreements, fewer may be aware that the statute applies equally to nondisclosure agreements. Thus, a court will only enforce a nondisclosure agreement that is reasonable with respect to both time and territory. And to take things a step further, if a single nondisclosure provision restricts disclosure of both trade secret information and non-trade secret information, the provision can’t be enforced unless it meets the time and territory requirements. As a result, a provision that prohibits employees from disclosing both trade secrets and generalized confidential information for an unlimited amount of time or within an unlimited geographic range is unenforceable.
On the opposite side of the coin, employers face potential problems even when they seek to restrict the disclosure of trade secrets for a limited period of time. Under Wisconsin’s Uniform Trade Secrets Act, an employer may file a claim against an employee suspected of misappropriating trade secrets. To prevail on such a claim, the employer must prove that it took adequate steps to safeguard the confidentiality of the alleged trade secrets. If an employment agreement limits an employee’s obligation not to reveal alleged trade secrets for a limited period of time—for instance, one year—a court may conclude that the information at issue isn’t a trade secret because a mere one-year limitation shows both that (1) the information has limited value and (2) the employer has taken inadequate steps to protect it. A carefully drafted employment contract can avoid these pitfalls.
Safeguarding the confidentiality of trade secrets is tricky business. Whether information is truly a trade secret depends on how you conduct yourself in relation to the alleged trade secret. You must ensure that adequate protective measures are in place to ensure trade secret status. You must also proceed carefully in your efforts to safeguard trade secrets through employment agreements. Consult with qualified counsel for further guidance regarding these issues.
This article was featured in the November 2013 issue of the Wisconsin Employment Law Letter, which is edited by Axley Brynelson Attorney Daniel McAlvanah and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.
To subscribe to email alerts from Axley Law Firm, click here.