New England Biz Law Update
Trade secret law, which some say harkens back to Roman times, emerged in the United States in its modern form almost 200 years ago. See Vickery v. Welch, 36 Mass. 523 (1837).
On the other hand, LinkedIn, Facebook and Twitter emerged less than 10 years ago, yet all may drastically change how we view trade secrets.
Two recent cases, TEKsystems, Inc. v. Hammernick (D. Minn. 2010) and Sasqua Group, Inc. v. Courtney (E.D.N.Y. 2010), seem to be the harbingers of those changes.
Both cases involve recruiting companies and focus on the protection of customer lists/databases as trade secrets rather than protection of the company’s goodwill associated with the persons on the lists.
It is not an uncommon approach. Customer lists can qualify as trade secrets under both the Uniform Trade Secrets Act — adopted in D.C., the U.S. Virgin Islands, Minnesota and 45 other states, including all of New England except Massachusetts — and the Restatement (First) of Torts, §757, which is followed in the remaining states, including Massachusetts.
To qualify as a trade secret, however, the customer lists must satisfy the usual requirements: the information in the lists must be maintained in confidence, must have commercial value from not being generally known, and must not be readily ascertainable by proper means. UTSA, §1; Restatement (First) of Torts, §757, comment b.
As a general rule, the more detailed and difficult to obtain the information, the more likely that the customer list will be considered a trade secret.
Two cases, two results
In TEKsystems, the plaintiff alleged, among other things, that one of the former employees used LinkedIn to (1) connect with the plaintiff’s customers, something the employee was able to do because of her knowledge of the plaintiff’s customer lists, thereby misappropriating trade secrets; and (2) solicit TEKsystems’ customers in violation of the employee’s non-compete and non-solicitation agreements.
Because of the procedural posture and a recent settlement, the issues never reached the court for determination. Nevertheless, the case is instructive insofar as it is one of the first, if not the first, in the United States to base a claim for misappropriation of trade secrets and breach of restrictive covenants on the use of a social networking site.
In Sasqua Group, the plaintiff claimed that the defendant former employee had misappropriated its database of customer information. Interestingly, however, the use of LinkedIn and other services was the basis for the defendant’s defense, not the plaintiff’s claim.
Unlike TEKsystems, the Sasqua Group case did result in a judicial determination. The court found that the customer database at issue was not a trade secret for the very reason that the clients were readily ascertainable through LinkedIn, Facebook and similar services, sometimes in combination with a simple Google search.
After testimony demonstrating how easily customer information could be obtained, even by someone with no memory of what was in the client list database, the court said:
“The information in Sasqua’s database concerning the needs of its clients, their preferences, hiring practices, and business strategies, as well as Sasqua’s acquaintance with key decision-makers at those firms may well have been a protectable trade secret in the early years of Sasqua’s existence when greater time, energy and resources may have been necessary to acquire the level of detailed information to build and retain the business relationships at issue here. However, for good or bad, the exponential proliferation of information made available through full-blown use of the Internet and the powerful tools it provides to access such information in 2010 is a very different story … .”
The court was influenced by the absence of restrictive covenants such as non-competes, non-solicitation agreements and nondisclosure agreements and implied the result would have been different had Sasqua had restrictive covenants in place.
The glaring problem with such reasoning, however, is that it ignores that for restrictive covenants to be enforceable, they must protect a legitimate business interest or, in this case, the purported trade secrets.
If, as the court determined, the information is not a trade secret because it is readily available, there is no legitimate interest to be served by a restrictive covenant, rendering them unenforceable. One might wonder why the court would place such significance on the absence of an unenforceable agreement.
In fact, the court did not suggest that in all instances customer lists would be rendered nugatory simply because information may be available through LinkedIn or other social networking services.
Rather, it was the nature of the particular customer list that compelled the court’s finding. Specifically, the salient characteristic of the customers was that anyone with a little industry knowledge could easily identify them simply by their job.
The court distinguished that circumstance from one in which a person would have to know more about the specific individuals, such as which “handful of engineers in companies of 100,000 employees … might have a use for” a particular product or service. Thus, the court expressly distinguished easily identifiable classes of customers from the kind that have more of a “needle-in-the-haystack character.”
Determining whether information is more like that in TEKsystems or more like the haystack-needle type presents its own problems for counsel. As has been observed, “[a] situation where certain information could be obtained publicly, but the ex-employee had access to a confidential information superset of that information, poses a complex problem.” Oxford Global Resources, Inc. v. Guerriero, 2003 WL 23112398, at *8-9 (D. Mass. Dec. 3, 2003) (Woodlock, J.).
Specifically, “an unscrupulous ex-employee could ‘launder’ confidential information by working down a memorized list …, methodically performing Internet searches designed to find the exact person they already have in mind, and saving the results of those searches as a defense against any claims of breach of confidentiality.” Id.
Secrets made too accessible
These cases highlight a tension created by the use of social media. TEKsystems focuses on the concern that information may be misappropriated through social networking sites, while Sasqua raises the flip side of the coin: that when a trade secret can be lawfully acquired through social networking sites, the information may lose its trade secret status.
This tension suggests that, as more and more information becomes available in this information age, companies will have a progressively harder time protecting those trade secrets.
Two related problems not reached by either of these cases arise from the use by employees of LinkedIn and similar services to try to develop and maintain connections helpful to their job performance.
It is not at all uncommon for people to “connect” on LinkedIn or “friend” on Facebook or “follow” on Twitter potential or existing customers. While that activity sounds innocuous, the consequences can be significant.
First, if the identity of the employee’s contacts, friends or followers — many of whom are the company’s customers — is not protected from view from others, especially those who might benefit from the information, customer lists suddenly become readily available, threatening their continued viability as trade secrets.
That is a real concern, as the availability of such information is a significant reason why these services exist.
Second, assuming that the information can be and is properly protected, what happens when the employee leaves? In the past, the employee would surrender his Rolodex, Blackberry and other data to the employer, presumably without keeping a copy.
With social media, because the employee typically has exclusive control of the social media account, he or she will invariably take the customer list with him, sometimes leaving the company without its own comprehensive list.
The question, not yet decided in the courts, will be who owns the list.
Preventative measures
Despite the fresh appearance of these issues in the social media realm, they are not new but simply a new twist on old problems. For trade secrets, the new technology simply resets the bar for trade secret protection.
Several preventative measures can, and depending on the corporate culture should, be taken to limit the potential adverse impact of social media’s incorporation into the business world. They include the following:
• Adopt clear social media policies, setting expectations concerning employee use of LinkedIn, Facebook, Twitter, blogs and other social media;
• Require that the company be given rights of control of, or access to, the social networking accounts;
• Update employee handbooks to reflect the realities of social media;
• Consider appropriate restrictive covenants and update old ones to address social media;
• Educate employees concerning the consequences of social media.
While these suggestions will cover many of the potentially negative effects on a company’s trade secrets, others may exist. The use of social media raises many additional legal issues, including harassment, defamation, discrimination, employee privacy, trade secret protection, brand/trademark protection, copyright infringement, e-discovery and spoliation.
