Trade Secrets and Confidentiality Agreements

The Florida Legislature repealed Section 542.33, Florida Statutes with respect to restrictive covenants entered into or having an effective date on or after July 1, 1996. Although repealed, the law continues to govern enforcement of restrictive covenants entered into before July 1, 1996. The Florida Legislature adopted Section 452.335, Florida Statutes, concerning valid restraints of trade or commerce. Enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area and line of business, is not prohibited. In any action concerning enforcement of a restrictive covenant, a court shall not enforce a restrictive covenant unless it is set forth in a written document signed by the person against whom enforcement is sought. The person seeking enforcement of a restrictive covenant shall plea and prove the existence of one or more legitimate business interests justifying the restrictive covenant. The term “legitimate business interest” includes, but is not limited to:

  1. Trade secrets, as defined in Section 688.002(4), Florida Statutes.

  2. Valuable confidential information or professional information that otherwise does not qualify as trade secrets.

  3. Substantial relationships with specific prospective or existing customers, patients, or clients.

  4. Customer, patient, or client good will associated with
    1. an on-going business or professional practice, by way of trade name, trade mark, service mark, or “trade dress”;
    2. a specific geographic location; or
    3. a specific marketing or trade area.

  5. Extraordinary or specialized training.

Any restrictive covenant not supported by a legitimate business interest or interests is unlawful and is void and unforceable.

A person seeking enforcement of the restrictive covenant also shall plead and prove that a contractually specified restraint is reasonably necessary to protect the legitimate business interest or interests justified with a restriction.


If a person seeking enforcement of the restrictive covenant establishes prima facie that the restraint is reasonably necessary, the person opposing enforcement has the burden of establishing that the contractually specified restraint is over-broad, over-long, or otherwise not reasonably necessary to protect the established legitimate business interest or interests.

If a contractually specified restraint is over-broad, over-long, or otherwise not reasonably necessary to protect the legitimate business interest or interests, the court can modify the restraint and grant only the relief reasonably necessary to protect such interest or interests. The Florida Legislature has deferred to the courts the evaluation of restrictive covenants.

PREVENTATIVE MEASURES

In order to win legal battles to protect its ideas and information, an employer’s approach should have three basic components:

  1. Identify all trade secrets and confidential and proprietary business information.

  2. Create a continuing system for classifying and protecting the information.

  3. Act swiftly and decisively when the integrity of the information is threatened.

A. Policy Statements

  1. The employer should include a section on confidential information in the employee handbook as an additional layer of protection.

  2. Verification pages, demonstrating that an employee has received and reviewed the handbook, should be maintained in the employee’s personnel file.

  3. Employer should also have a policy for document protection, retention, and destruction, including provisions for marking confidential documents.

B. Exit Acknowledgments

  1. Employer should use an exit acknowledgment form with departing employees.

  2. The departing employee should complete this form, providing the following information:

    a) The identity of the new employer (if known);

    b) An acknowledgment or reaffirmation by the departing employee of his or her obligations regarding confidential information and trade secrets (as well as the obligations imposed by any other restrictive covenants); and

    c) An acknowledgment by the departing employee that he or she has returned to the company all copies of all confidential documents and information.

  3. For employees with the most sensitive information, the employer may also want to expressly identify on the exit acknowledgment form that all specific trade secrets and confidential information to which the employee had access.

  4. This exit procedure will help establish that the employer has taken reasonable steps to protect the confidentiality of its information.

  5. A departing employee who refuses to sign an acknowledgment form leaves the impression that he or she intends to disregard the previously-executed agreement. This provides an early warning that the former employee’s activities should be closely monitored. This also will help to convince a court that a threat of misappropriation exists.

C. Disclosure Agreement

Where a newly-hired employee was formerly employed by a competitor, an employer should also consider requiring the employee to sign a trade secret disclosure agreement. This agreement requires the new employee to declare, under penalty of perjury, that he or she does not have in his or her possession any trade secrets or confidential information of the previous employer and that the new employee’s employment is premised upon that fact. In addition, the agreement provides that, if it is determined that the new employee was not completely truthful in making this disclosure, his or her employment will be subject to immediate termination and he or she will be liable for any expenses or damages incurred by the new employer.

Employer Steps To Protect Confidential Information

D. Recommended Steps

  1. Employers should use both internal and external security procedures to protect confidential information.

  2. External security procedures assure that trade secret status will not be lost by carelessly disclosing confidential information and trade secrets to third parties that do not have a confidential relationship with the company, such as customers and joint venturers.

  3. Examples of a reasonable internal security procedure include:
    1. Storing confidential information in locked files and locked rooms;
    2. Limiting access to confidential information to employees on a need-to-know basis;
    3. Using pass codes for computer access which are changed on a periodic basis;
    4. Limiting computer access for certain types of information;
    5. Restricting access to visitors by requiring visitors to sign in at a receptionist desk and to be escorted by an employee;
    6. Using magnetic card entrance restrictions;
    7. Placing labels or legends on all confidential information and materials to inform employees that the company considers them confidential;
    8. Implementing an employee awareness program with periodic reminders regarding the handling of confidential and company information; and
    9. Conducting periodic security audits to determine whether confidential procedures are being followed.

Insufficient internal security procedures jeopardize the employer’s ability to enforce confidentiality agreements.

PRE-LITIGATION CONSIDERATION

A. Investigation

  1. Rarely does a former employee get caught in the act of walking out the door with confidential information. Rather, an employer must typically prove its case with circumstantial evidence. This places a premium on pre-litigation investigation.

  2. The employer usually has the advantage of advance notice of potential litigation and has an opportunity to investigate before formal discovery begins.

  3. The employer should use this advantage. A thorough investigation is essential and where possible, it should include the taking of sworn statements and the use of private investigators.

B. Cease and Desist Letters

Counsel for the employer must consider sending a cease and desist letter to the former employee. This may cripple any informal investigation because the former employee may become even more discrete and clandestine. It also may eliminate the element of surprise. The former employee will often retain counsel to begin preparing a defense. Sometimes, however, a cease and desist letter works and the violation stops. If the violations do not stop, the letter may serve as evidence during an injunction proceeding.


C. Other Initial Tactical Decisions

  1. Consider initiating criminal proceedings against a former employee. The Economic Espionage Act of 1996, 18 U.S.C. Section 1831, et seq. (“EEA”), signed into law on October 11, 1996, establishes a federal law for the protection of trade secrets and imposes severe criminal penalties for trade secret theft. With respect to the theft of trade secrets, the EEA provides:
    "Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of any one other than the owner thereof, and intending or knowing that the offense will injure any owner or that trade secret,”
    knowingly steals or without authorization appropriates such information, shall be subject to fine or imprisonment for up to ten years, or both. If the offense is committed by an "organization," the organization may be fined up to $5,000,000. 18 U.S.C. Section 1832.

The EEA authorizes the Attorney General to commence a civil action to obtain injunctive relief against any violation. 18 U.S.C. Section 1836(A). The EEA also included a criminal forfeiture provision, which requires a court to order the forfeiture of any property constituting or derived from proceeds obtained as a result of a violation of the statute. 18 U.S.C. Section 1834.

Alternatively, an employer could pursue a criminal action under the Florida state criminal statute. Reasons for pursuing criminal action include:

  1. Defendants are often judgment-proof;

  2. Civil action can be extremely expensive and there is no guarantee of success;

  3. Private individuals and companies often lack the investigative expertise and resources necessary to prove that a defendant has misappropriated a trade secret; and

  4. Criminal cases can reach trial faster, reflecting the requirements of the Speedy Trial Act.

A criminal conviction may operate to collaterally estop the criminal defendant in a subsequent civil suit from requiring the employer to re-litigate the facts resolved in the earlier criminal action.

There are other facts which may militate against the initiation of criminal proceedings, including a possible delay in enforcement; a lack of control over the process; and the availability of the Fifth Amendment. A former employee may move to stay the civil action until the criminal action has been resolved. However, the defendant’s entitlement to invoke the Fifth Amendment’s protection against self-incrimination, may effectively stay a civil suit as a result of a criminal filing.

The Florida Uniform Trade Secrets Act displaces or preempts common law causes of action for misappropriation of trade secrets. Under the Florida Uniform Trade Secrets Act, actual injury need not have occurred already in order for an injunction to be issued. Instead, threatened misappropriation of trade secrets may be enjoined.

The Florida Uniform Trade Secrets Act adopts a theory that an injunction may be granted for the duration of time it would have taken the defendant to discover the trade secret through any other lawful means. Under the Act, in “exceptional circumstances,” an injunction may condition future use upon payment of a reasonable royalty. “Exceptional circumstances include, but are not limited to” a material and prejudicial change of position prior to acquiring knowledge of or reason to know of misappropriation that renders a prohibitive injunction inequitable.

In cases brought under the Florida Uniform Trade Secrets Act, in measuring compensatory damages, the court may consider the trade secret owner’s loss, the defendant’s gain, or both. Punitive damages are available under the Florida Uniform Trade Secrets Act if the defendant acted “wantonly, willfully, or in reckless disregard of the plaintiff’s rights,” or if the defendant’s conduct was flagrant or malicious. However, punitive damages cannot exceed twice the amount of the initial recovery.

Attorney’s fees are permitted to deter willful and malicious misappropriation, specious claims of misappropriation, and frivolous litigation.

Provided as an educational service by John Raymond Dunham, III, Esq..

This publication is intended to serve you. If you would like certain topics covered, or have any questions or comments, you are invited to contact Mr. Dunham at: 941.951.1800, Ext. 250, Facsimile: 941.366.1603, E-Mail: jrd@jrdlaw.com, Web site: www.jrdlaw.com or write him at LUTZ, BOBO, TELFAIR, DUNHAM & GABEL, Two North Tamiami Trail, SARASOTA, FLORIDA 34236.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and report on issues and developments in the law. It is not intended as legal advice, and should not be relied upon without consulting an attorney.