New York Trade Secret Basics for Transitioning Executives

Executives can find themselves ensnared in New York trade secret disputes as they transition between competing companies.   This article can help you make a clean transition.

You need to understand what a trade secret is, what your legal obligations are with respect to an employer’s trade secrets, and what your former employer must prove to bring a case against you for misappropriation (theft) of trade secrets.

What is a trade secret?

A trade secret is information that is not generally known to others and that is used by a business for a commercial advantage.

Trade secrets may consist of things like special formulas, recipes, processes, patterns, or other kinds of valuable information relating to the production, sales or marketing of goods.

In New York, courts will look to the following six factors in when deciding whether or not information constitutes a trade secret:

  • Whether the information is known outside of the business;
  • The extent to which the information is known by employees and others involved in the business;
  • The measures taken by the business to protect the secrecy of the information;
  • The amount of effort or money expended by the business in developing the information;
  • The ease or difficulty with which the information could be properly acquired or duplicated by others; and
  • The value of the information to the business and to its competitors.

Ashland Mgmt. Inc. v. Janien, 624 N.E.2d 1007, 1013 (N.Y. 1993).

While most states have adopted the Uniform Trade Secrets Act, New York has not.  Instead, case law determines what is protected as a trade secret in New York.

The main implication of this difference is that, in New York, a trade secret must also be in “continuous use in the operation of the business” to be recognized as a trade secret.  A trade secret cannot be simply information about a single event in the conduct of the business.  Therefore, trade secrets do not include information like the amount of a secret bid for a contract, the salary of certain employees, or the date fixed for the announcement of a new model or the like.

Of course, in New York, as elsewhere, the element of secrecy must be present for information to count as a trade secret. Information that is known generally within an industry will not be considered a trade secret.  Similarly, information that is published cannot be considered a trade secret.

What are your obligations as an employee with respect to trade secrets?

While a business may communicate trade secrets to employees without automatically jeopardizing the information’s status as a trade secret, this doesn’t mean that all information generated by a business to which its employees have access is necessarily a trade secret.  Indeed, any business making such a claim would likely be deemed as overreaching.

Rather, the requirement that the business must guard and protect the secrecy of trade secret information dictates that the business must obtain reasonable assurances from those given access to trade secrets that they will continue to protect the confidentiality of the information.

This is usually done by requiring employees to enter into a nondisclosure, confidentiality or non-compete agreement.  Sometimes, a nondisclosure clause is included as part of an overall employment agreement. In any event, there should be some sort of agreement in place that creates and communicates your obligation to maintain the secrecy of any trade secrets to which you may have had access.

To be enforceable, any such agreement must also be current.  If it has expired and not been renewed, then the business cannot rely on it in a suit for misappropriation.  Indeed, the fact that the business has allowed such an agreement to expire instead supports an argument that the trade secret status of the information must have ceased to exist at the time of the agreement’s expiration.

If you have not entered into a written agreement with your employer to protect its trade secrets, then your employer would have to show some other manner in which it has clearly communicated to you some obligation to keep certain information confidential.  This might be done through, for instance, a confidentiality policy, an employee handbook or specific required training that clarifies your obligations with respect to trade secrets – as well as what sort of information the business considers to be trade secrets.

Sidebar on the intersection of non-compete agreements and trade secrets

Non-compete and nondisclosure agreements are among the most common methods relied on by companies to protect trade secrets.

In New York, as in many other jurisdictions, courts are highly reluctant to enforce non-compete agreements that are not narrowly tailored.  A non-compete agreement will not be enforced in New York unless the employer can show the agreement meets all of the following pre-requisites:

  • the restrictions are no greater than required to protect the legitimate interests of the employer
  • the restrictions do not impose an undue hardship on the employee
  • the agreement is not injurious to the public

Assuming a non-compete agreement is reasonable in terms of time and geographic scope, the first, “legitimate interest” part of this test generally requires an employer to show that the employee has access to trade secrets.  P.C. v. Skavina, 780 N.Y.S.2d 675 (App. Div. 3d Dept. 2004).

In fact, protection of trade secrets is just about the only reason a New York court will enforce a non-compete agreement.  To fully establish the first pre-requisite, however, the employer also has to show that the former employee is joining a competitor and putting those trade secrets at risk.

Even then, a former employer must also establish, before it can enforce a non-compete agreement against a former employee, that the restrictions are not unfairly harmful to the employee and that the public is not harmed by the restraints on competition such an agreement creates.

For this reason, nondisclosure agreements are often favored over non-compete agreements for the protection of trade secrets.

Under what circumstances might you be sued for misappropriation of trade secrets?

If you do bring any information from a previous employer to a new employer, in order to succeed bringing a case against you for misappropriation of trade secrets, your former employer must be able to show:

  • that you were in possession of a trade secret, and
  • that you used that trade secret in breach of an agreement, confidential relationship, or duty, or that it was used as a result of discovery by improper means.

See North Atlantic Instruments, Inc. v. Haber, 188 F.3d 38, 44 (2d Cir. 1999).

If your former employer cannot demonstrate that the information you took qualified as a trade secret, as discussed above, then it cannot sue you for misappropriation.

Likewise, if there is no current agreement in place setting forth your obligation of nondisclosure, your former employer must instead be able to show that you nevertheless had a duty, of which you were on notice, not to copy, retain, use or otherwise disclose the information at issue.  Without an up-to-date nondisclosure agreement with you, this may be an uphill battle for your former employer.

Avoid downloading information from company systems or emailing information to  yourself before you leave for a new position.   Even downloading your own personal contacts from a company laptop can trigger accusations of trade secret theft.  Keep your personal information on your own personal devices.  Remember, your work devices do not belong to you so only use them for work.