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Trade Secrecy and Highly Skilled Employees – The Employer’s Dilemma

by
Lee T. Gesmer

Because employee mobility is so pervasive in the software industry, many software companies rightly fear losing the ideas underlying their products to a competitor or an entrepreneurial employee. These companies often treat their products as trade secrets, with the expectation that they will be able to stop any unauthorized use or disclosure in court. The following case study illustrates the problems that can arise when a software company tries to enforce its trade secret rights against a former employee.

BACKGROUND

Paul, the president of Sci-Logic, Inc., has led his company in the development of several successful software application programs in the scientific-engineering market. With the introduction of the IBM PC AT and the Zenix operating system, Paul sees the possibility of developing a low-cost, multi-user engineering work station unmatched in price and performance by the current market. Paul obtains authorization from the Board of Directors of his company to put together a development team of crack “C” programmers to develop this product in what, he assures the Board, will be record time.

Paul knows that Steve has just completed programming Borland International’s TURBO-C compiler and he recruits him as a member of the new software team. Steve signs a non-disclosure agreement without protest, but he balks at a non-competition contract that would prevent him from competing with Sci-Logic for one year after his employment is terminated for any reason. Steve says that he can get an equally attractive job from several companies interested in his services without the potential hassle of a non-compete agreement and Paul, eager to have Steve on his team, doesn’t press the point.

Twelve months of intensive development efforts pass quickly. During this time, Paul learns that one other company, Micro-Engineer, Inc., is developing a competitive product, but he assures all concerned that Micro-Engineer can’t possibly come up with a product of equal quality within Sci- Logic’s time frame given what he knows of Micro-Engineer’s staff. Paul also boasts of the amazing productivity of his top programmer, Steve. Steve has taken responsibility for the central piece of code and developed it single-handedly. In fact, Steve’s efforts have been so productive that after the first year Paul feels certain that Sci-Logic will have the product to market in another six months, a target that he believes will give him a six month to one year lead over Micro-Engineer.

Suddenly and unexpectedly, Steve quits his job with Sci-Logic and goes to work for Micro-Engineer. Paul rushes to his lawyers with Steve’s non-disclosure agreement and asks them to stop Steve from disclosing Sci-Logic’s trade secrets to Micro-Engineer. Paul tells his lawyers that the product has been kept highly secretive; no one has seen it without first signing a non-disclosure or confidentiality agreement. Paul’s lawyers listen to the history of Steve’s employment by Sci-Logic and ask Paul whether he believes that Steve has stolen source or object code, documentation or any tangible materials relating to the project. Paul says no, he has no evidence of that, but he has no doubt that given what Steve has learned about engineering software and his abilities as a programmer, Micro- Engineer may now be able to come up with a product of equal quality and match or beat Sci-Logic’s product completion date. When pressed further, Paul states that even if Micro-Engineer has developed its program in a different language or with a different conceptual approach, Steve’s knowledge of the underlying design features of Sci-Logic’s program will be of great value to Micro- Engineer.

Paul asks his lawyers if they can obtain a preliminary injunction preventing Steve from disclosing Sci- Logic’s trade secrets to Micro-Engineer. Paul explains that his company is looking for financing from venture capitalists and hoping to go public. The fact that Sci-Logic may be able to recover damages from Steve or Micro-Engineer after a trial several years down the road is of relatively little importance to the company – what matters is its short term performance in the marketplace.

ANALYSIS

Any attempt by Sci-Logic to prevent Steve from helping Micro-Engineer to develop a competing product will be a steep uphill fight. Although trade secret law gives employers such as Sci-Logic the right to protect designs and ideas which provide them with a competitive advantage, the courts also actively protect the right of employees to use general skills or knowledge brought by them to a job or acquired during the course of employment. The policy favoring employee mobility is particularly difficult for an employer to overcome when, as in Steve’s case, the employee brings a high level of skill to his job. Under Massachusetts law, in a suit against a skilled employee such as Steve to enforce Sci-Logic’s trade secrets, Sci-Logic bears a “heavy burden of isolating the secret” which it seeks to protect. Moreover, Sci-Logic must convince the court that if Steve is enjoined from disclosing specific information to Micro-Engineer, Steve will still be left free in his new job to use the knowledge and skill he initially brought to Sci-Logic as well as everything he learned during the employment that does not constitute a trade secret.

In order for Sci-Logic to obtain the preliminary injunction that Paul considers critical it must show, among other things, that there is a “reasonable certainty” that it will prevail when a full trial ultimately takes place. As a practical matter, employer-plaintiffs in trade secret cases are rarely able to make this showing unless they can allege that their former employee has stolen physical documents containing secret data. Since Sci-Logic cannot make this claim, it is unlikely that it will be successful in obtaining a preliminary injunction against Steve.

Even at a full trial on the merits, which may not be reached for two or three years, Sci-Logic must anticipate difficulty proving that Steve misappropriated information that is protectible as a trade secret. Sci-Logic cannot expect to argue that the detailed knowledge of software applications for the engineering profession which Steve learned during his employment constitutes a trade secret – this is general information which Steve cannot be prohibited from using to develop a competing system, despite the fact that Sci-Logic may have dedicated substantial amounts of time and incurred great costs in learning the automation needs of the engineering profession. The distinction between general information relating to a particular application or market and specific information relating to a single employer’s product is often very difficult to determine, a fact which frequently favors former employees in trade secret misappropriation cases.

Sci-Logic also faces a problem arising from the fact that Steve developed a large segment of the program working alone. Where an employee has developed a process which his former employer wants to prevent him from disclosing–rather than had that secret disclosed to him by the employer– the courts have held that the employee-developer has a privilege to use and disclose the secret. This principle may also be an important point in Steve’s favor should Sci-Logic claim that the part of the program which Steve developed is a trade secret which Steve misappropriated.

Lastly, Sci-Logic will face a problem present in every trade secret case of any complexity: the lack of technical knowledge common to most judges and juries. in evaluating a claim by Sc-Logic that Micro-Engineer’s program contains trade secrets misappropriated by Steve, few non-experts can be expected to possess the technical understanding necessary to determine whether Steve has relied on generic knowledge and skills that he brought to his job or novel combinations of generally known concepts. The latter may qualify for trade secret protection, while the former would not. In the courtroom this practical obstacle generally disfavors the plaintiff-employer, which bears the burden of proof of isolating the trade secret and proving that it has been misappropriated by the former employee.

CONCLUSION

The difficulties of enforcing trade secret rights against former employees illustrated above raises troubling problems for the computer industry. The established legal doctrines of trade secret protection, which were developed long before the introduction of computer technology, are not easily applied to employer-employee relationships in the software industry. The rapidly increasing number of knowledge workers in the American workforce together with the changing role of these employees may force the courts or legislatures to strike a new balance between the conflicting policies of trade secrecy and employee freedom. For the foreseeable future, however, software and other high technology companies will be forced to live with a relatively high degree of uncertainty in this area of the law.