Court of Appeals Provides Guidance on Protecting Company Trade Secret/Confidential Information

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March 21, 2005

In Burbank Grease Services, LLC v. Larry Sokolowski, the Defendant, Larry Sokolowski, was a former sales executive of Plaintiff Burbank Grease Services, LLC. Burbank is in the business of collecting and processing used restaurant fry grease, trap grease, and industrial grease. Sokolowski quit his job and kept various pieces of customer information, including customer lists, pricing information, contract information, and route maps. Sokolowski then established a competing company named United Liquid Waste Recycling, Inc. United Liquid Waste competed directly with Burbank for accounts collecting and processing grease from restaurants. Burbank sued Sokolowski and United Liquid, alleging theft of “trade secret” information and breach of fiduciary duty. Sokolowski and United Liquid prevailed at the District Court level, and Burbank appealed.
 
The first issue before the Court of Appeals was whether the information taken by Sokolowski was a “trade secret” as defined by the Uniform Trade Secret Act (Wis. Stat. 134.90). In order to have information protected as a “trade secret” under the statute, a party must show that (1) the information in question derives independent economic value from not being not generally known or readily accessible, and (2) the company took reasonable steps to maintain the secrecy of the information.
 
The Court of Appeals acknowledged that customer lists may, depending on the circumstances, meet the statutory definition of a trade secret. However, in this case, the Court found that the customer list was not a trade secret, as the names, addresses, and contact persons of Burbank s customers are readily ascertainable by proper means. The Court found that anyone can identify the businesses that likely have a need for the services Burbank provides from such common sources as the telephone book, the internet, and trade associations. The Court was not persuaded by the argument that the list contained over 14,000 customer names, contact information, and pricing guides, and would have taken Sokolowski and his start-up company considerable time to recreate the list “by proper means.”
 
In determining whether the customer and pricing lists derived independent economic value from not being known, the Court of Appeals determined that information is not a “trade secret” when there is no unique or complicated information behind pricing techniques, and can be obtained directly from customers. The Court did not offer guidance as to what steps an employer must take to maintain the secrecy of the “trade secret” information.
 
At the District Court level, the Court found that Burbank’s claims that Sokolowski breached his fiduciary duty was barred by a preemption provision contained in the Uniform Trade Secret Act. Burbank appealed this ruling, but the Court of Appeals found that, absent a contractual provision that showed Sokolowski agreed to keep the information confidential, that Burbank’s sole cause of action was to prove that the information was a trade secret as defined by the statute.
 
Therefore, in order to properly protect sensitive information, it is imperative that an employer require each and every employee to sign a confidentiality agreement when they are first employed. This Court’s ruling establishes that an employer’s sensitive information may not be protected as a “trade secret” in the event an employer is unable to meet the relatively subjective tests under the statute showing that information derives economic value from not being known, or that the employer took reasonable efforts to maintain the secrecy of the information. In order to ensure that the employer can successfully bring a cause of action against a former employee for stealing the employer’s confidential information, the employer must regularly require employees to sign confidentiality agreements. The agreement must provide that the employee agrees not to use the information for any reason, and that they will return all confidential information in their possession once their employment is terminated for any reason. Moreover, in order to be valid, the confidentiality agreement must be drafted with the same technical requirements as that of a non-compete agreement, in that it must contain narrowly tailored restrictions in terms of territory and for a specified time. It is also important to include a clear statement of the damages an employer is allowed to recover in the event the employee breaches the agreement. Absent such a confidentiality agreement, an employer faces the greater possibility that their own information may be used against them by former employees that leave employment and engage in direct competition with the former employer.
If you have questions regarding the above, please contact any of the attorneys in the Employment, Benefits & Labor Relations Practice Group of Ruder Ware.

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