Trade Secret Restrictions in Employment Agreements:  Why they may not be enough

While trade secrets are protected under Arizona’s trade secret law, employers can also use confidentiality clauses in employment agreements to make it clear that employees are not permitted to share trade secrets. These restrictions may be part of an employment agreement, a separate non-disclosure agreement, and sometimes in employee manuals.

Requirements to be a Trade Secret

A.R.S. §44-401 defines a trade secret as something that derives independent economic value from not being generally known, and is also subject to reasonable efforts to maintain its secrecy.

The economic value requirement can be established by showing that information is selectively accumulated and detailed, beyond what a person could easily find using publicly available information. Both the effort required to compile information and the competitive advantage it gives to a business will be considered when determine if it has independent economic value.

The efforts taken to protect a trade secret will be analyzed based on who has access to the information, and how difficult it would be for someone to get the information through proper means. Requiring employees sign a non-disclosure agreement may seem sufficient for a “reasonable effort” to maintain secrecy, but that is really only a starting point. A business should have comprehensive systems in place to control access to trade secrets and ensure employees understand their duty to protect secrecy.

Non-Disclosure Agreements May Not Be Enough

In Calisi v. United Financial Services, a former employee allegedly misappropriated trade secrets by contacting the company’s customers to benefit his new employer. The original employer claimed that the customer information was trade secret and unlawfully used.  In effort to show it had taken steps to protect their valuable trade secrets, United Financial noted that it had confidentiality clauses in its employment agreements.

However, the court was unconvinced by this argument for several reasons. The court noted that while there is considerable overlap between trade secrets and confidential information, confidentiality alone does not create a trade secret.

Special measures must be taken to protect a trade secret, so a mere confidentiality agreement or non-disclosure agreement is not sufficient. The trade secrets must be disseminated to only employees on a “need to know” basis, and employers should make their employees aware of any restrictions or conditions on use of this information.  An agreement that an employee maintain confidential information needs to be supplemented with procedures for safeguarding that information, such as access restrictions, and training on what is confidential and how to protect it.

Furthermore, the information will only be considered a trade secret if the employer actually derives independent economic value from its secrecy, and expended material resources in gathering and maintaining the secrecy of the information. In the case of Calisi, the employer failed to provide information showing that considerable effort had been expended to generate the customer lists. If someone can duplicate a customer list through public information, it will not be considered a trade secret.

Something more than just contact information is more likely to derive independent economic value. Adding information about a customer’s preferences, communications, and purchase history would make it more economically valuable, and something that cannot be assembled from public information.

Employers should use confidentiality and non-disclosure agreements to protect their trade secrets, but they should also have systems in place to designate information as trade secret, and to control how that information is divulged. They should be aware that simple lists without more might be capable of assembly from public information and entitled to no protection.  Without procedures in place, and data that truly has unique value from its secrecy, confidentiality clauses in employment agreements are vulnerable to attack.

Chernoff Law handles employment disputes and trade secret misappropriation cases throughout Maricopa County. Contact us today to discuss your case with one of our experienced business attorneys.