Trade Secret / Noncompete : Business, Employment, Intellectual Property, and Litigation Attorneys Focused on Trade Secret/Noncompete Issues

By Russell Beck and Stephen Riden

The Computer Fraud and Abuse Act (the "CFAA"), 18 U.S.C. § 1030, has recently come into vogue as the tool of choice among trade secret (and noncompete) litigators. Why? Because it provides a relatively easy to prove claim. In very (and I do mean very) simplistic terms, the statute (which is, in reality, a criminal statute, although it gives private individuals and companies the right to sue too) requires a showing of only: intentional access to a protected computer without authorization or beyond authorization causing damage. If you can prove those five elements, you have made out your case. The significance? No need to prove that a trade secret was taken.

So, what do those words mean? Well, the statute provides some guidance, but leaves many issues unanswered - and the courts are now starting to fill in the balance, as these cases become more prevalent. Suffice it to say, if you login to a computer, you have probably just satisfied the first two elements (intentional and access). If the computer is used in interstate commerce, you have satisfied the second element (a protected computer). What is interstate commerce? Well, in today's world, it's almost a theoretical question, as any computer connected to the internet will likely qualify.

That leaves two issues (authorization and damages). First the hard one: authorization. The statute applies equally to someone who never had authorization and to someone who had authorization, but exceeded the scope of that authorization. The issue making headlines (well, legal headlines anyway) is whether the following qualifies: an employee who obtains access within the bounds of what he is permitted to do, but accesses the computer for his own gain - not for the benefit of the employer. In some federal circuits (think states), the answer is that it does qualify. In others, it does not.

So, all of that must cause damage, right? Seems easy enough. Well, the question is what qualifies under the CFAA? The value of any misappropriated property - perhaps surprisingly - does not qualify. But, the cost of the forensic investigation to assess the harm, probably does. Go figure.

That's it, in a nutshell. Like everything else, however, a little knowledge can be dangerous - so, be careful. The CFAA is far more complicated than this post makes it seem - and it should be carefully evaluated before its power is indiscriminately wielded, lest, for example, you find yourself in federal court, when you wanted to remain in state court.

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While state laws vary with regard to what will constitute a trade secret, most states have adopted the Uniform Trade Secret Act (UTSA), which provides the following definition:

"'Trade secret' means information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

Those states that have not adopted the UTSA generally apply a similar concept. In sum, a trade secret has three essential components: (1) information; (2) value; and (3) secrecy.

While this sounds simple enough, the difficulty arises when trying to apply the definition. Let's take an example. Is a customer list a trade secret? Some say yes. Some say no. Both may be right.

Certainly, a customer list is information. Indeed, it fits squarely within one of the enumerated types: a compilation.

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Sometimes as a discussion progresses, the details become obscured or lost altogether.  The discussions about noncompete agreements are no exception.  So, below are some definitions with which people should be familiar:

Common Types of Agreements:

• Restrictive covenant:  An agreement that limits a party's ability to perform similar work.  Generally, people think of the limits as applying after the parties' relationship ends, but typically the restrictions apply during the term of the contract as well.  (The reason for the post-contract focus is that the parties' interests are more likely to diverge at that point.)
• Noncompete agreement (also known as "noncompetition agreements"):  A type of restrictive covenant in which the applicable limitation precludes a party from providing services to a competitor of the other party.  These agreements can arise in many contexts (sale of a business, independent contractor agreements, partnerships, etc.), but most often arise in the employment context.  (Those that arise in the employment context are commonly referred to as "employee noncompete agreements.")
• Garden leave clause:  a type of employee noncompete agreement for which the employer compensates the employee while the employee is restricted from competitive activities.  There are two types: one in which employment continues during the restricted period (essentially the employee is required to provide a minimum amount of notice of resignation); one in which the employment terminates and the restrictive period begins.  For more on the garden leave clause, see Christi Adams' post, Garden Leaves.
• Forfeiture-for-competition agreement:  a form of employee noncompete agreement by which an employee forfeits certain benefits if he engages in activities that are competitive with his former employer.
• Compensation-for-competition agreement:  a form of employee noncompete agreement by which an employee pays his former employer (sometimes a percentage of the revenues from the competitive activities) if he engages in activities that are competitive with his former employer.  (This agreement can be viewed as a form of forfeiture-for-competition agreement, insofar as the employee forfeits some of the compensation for competitive activities.)
• Forfeiture agreement:  an agreement by which an employee forfeits benefits when his employment terminates - regardless of whether he engages in competitive activities.
• Nondisclosure/confidentiality agreement:  an agreement by which an employee agrees not to use or disclose an employer's confidential information.
• Nonsolicitation agreement:  an greement by which an employee agrees not to solicit - and, if well drafted, not to accept - business from the employer's customers.
• Antipiracy agreement:  an agreement by which an employee agrees not to solicit - and, if well drafted, not to hire - the employer's employees.
• No-hire agreement:  a type of antipiracy agreement by which a party agrees not to hire the other party's employees.
• Invention assignment agreement:  an agreement by which an employee assigns to the employer any potential inventions conceived of during employment.  (Typically, the inventions are only those that somehow relate to the work of the employer.)

For more information on these agreements, see, Beyond the noncompete. 

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