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Trade Secret Misappropriation

1. Determining Misappropriation

To determine whether that trade secret has been misappropriated, the following questions are relevant: (1) Was the alleged misappropriator under an express or implied duty of confidentiality to the owner of the trade secret? Was the misappropriator under a fiduciary duty of confidentiality or trust? (2) Did the alleged misappropriator obtain the information through “improper means?” If either of these questions is answered affirmatively, any unauthorized use or disclosure of the information at issue is likely to be considered trade secret misappropriation. In the event of trade secret misappropriation, a court may grant injunctive relief and damages in favour of the trade secret owner. If neither damages nor unjust enrichment from misappropriation is provable, some courts will order payment of reasonable fees for the period that the trade secret was used. Injunctive relief may be particularly important in the emerging technology context. For example, assuming a company's virtual reality modeling and development software is a trade secret, its dissemination into the public domain would allow third parties to copy, duplicate and adapt that software. The trade secret holder would generally be left without recourse against third party users, and with limited recourse against the misappropriator in light of the erosion in the value of the trade secret. It is therefore crucial that the trade secret holder has the ability to seek injunctive relief to prevent the erosion of the value of the trade secret as soon as the misappropriation becomes known.

2. Employee Misappropriation

Perhaps the greatest risk of trade secret misappropriation is presented by the individuals who participated in the development of the trade secret. Trade secret litigation is replete with cases involving the misappropriation of trade secrets by employees, independent contractors, or others with legitimate access to the trade secret. The employer-employee relationship has been recognized as a confidential relationship in which the employee owes the employer a fiduciary duty to preserve the employer's trade secret information. This obligation continues even after the employee is no longer employed by the trade secret owner. An employee who was entrusted with the employer's trade secret information in order to allow the employee to perform the employee's job cannot use or disseminate that information for unauthorized purposes, even after the employment has terminated.

The Doctrine of Inevitable Disclosure

Proof of an actual misappropriation of trade secrets by a former employee is not required for an injunction prohibiting the former employee's employment with a competitor. An employer may prove a claim of trade secret misappropriation by demonstrating that defendant's new employment will inevitably lead him to rely on the plaintiff's trade secrets. In finding a likelihood of disclosure, courts have considered the degree of competition between the former and new employer, the new employer's efforts to safeguard the former employer's trade secrets, and the former employee's "lack of forthrightness both in his activities before accepting his job . . . and in his testimony,“ as well as the degree of similarity between the employee's former and current position.

Covenants Not to Compete

It is particularly important that the employer implement procedures in order to bolster trade secret protection. In addition, and depending on the nature of the information to be protected, employers may seek to enhance such protection by requiring that their employees enter into covenants not to compete. Covenants not to compete restrict the scope of an employee's professional mobility after the termination of employment. Although courts disfavour such covenants as a matter of public policy, the courts of many jurisdictions will enforce them if they can be shown to be reasonable and necessary in duration and geographical scope. For example, they will be enforced if an employee can be shown to have access to confidential information and the employee's services are demonstrably special, unique or necessary. As a general rule, covenants not to compete must be limited regarding duration. The extent of the territory subject to the covenant must also be reasonable. A covenant will not be enforced if it is unreasonable in time, space, scope, or would operate in a harsh or oppressive manner.

3. Third Party Misappropriation

Frequently, a trade secret is obtained by a third party—one to whom the trade secret owner did not directly disclose the information, and with whom the trade secret owner has no express or implied confidential relationship. The trade secret owner may assert a misappropriation claim against a third party if the third party acquires the trade secret with actual or constructive knowledge that (1) the information is considered to be a trade secret, and (2) the third party's access to the trade secret is a result of a breach of duty owed to the trade secret owner arising from a confidential relationship. Actual notice is characterized by the trade secret holder informing the third party that a particular individual has knowledge of certain information, and that disclosure of that information would constitute trade secret misappropriation. Constructive notice is characterized by circumstances where the acquirer knew or should have known that the information was a trade secret and that the individual making the disclosure was breaching a duty of confidentiality owed to the trade secret holder. When circumstances should have put a defendant upon inquiry about the usage of confidential business information, a defendant will be charged “with whatever knowledge such inquiry would have led to.“ If the trade secret was acquired “in good faith”—i.e. without actual or constructive knowledge—and the acquirer made a material change in position in reliance on that trade secret before acquiring actual or constructive notice, the third party will probably not be considered to be a misappropriator.