Employers provide employees with ongoing in-house and outside training and education at the Company’s expense. Employees are encouraged as part of a long-term strategy to build valuable and lasting relationships with the Company’s customers. Naturally, the employee gains access to confidential book and records, including a list of all clients, client contacts, and other confidential information.
Whether former employees’ use of the confidential information on the master list constitute an unlawful misappropriation of trade secrets under Hawaii law, HRS §482B-1 and HRS §480-2 is an issue that is often raised in Hawaii. In Hawaii, trade secrets are defined by HRS §482B as “information” including, formulas, patterns, techniques, processes, etc. that derive independent economic value from not being generally known and are the subject of reasonable efforts to maintain their secrecy. HRS §482B-2. The law in this area is vague at best and it is difficult to determine with any certainty how a court confronted with the issue will rule—as the determination is quite dependent on the facts presented.
In these misappropriation cases, the immediate goal of an employer would likely be to prevent the departed employee from using the information on the client list. An injunction issued by a court is the best way to do that. Prevailing at the injunction stage is critical. In employment non-competition cases the grant or denial of an injunction has the same effect as the final determination on the merits and the losing party will likely be inclined to settle rather than proceed to trial.
In determining whether an injunction should be enforced, the presiding Court will likely consider primarily the following: (1) whether the former employee physically removed copies of customer, pricing, or other lists; (2) whether the former employer took reasonable steps to protect such information; (3) whether such information gives the former employer a competitive edge in the industry; and (4) whether the former employee is using that information to solicit the Company’s clients.
As to the first factor, the employer must demonstrate that the former employee misappropriated the master list. Demonstrating that the former employee misappropriated the master list would undercut any argument that the master list derives no independent economic value or that it does not give the Company a competitive edge in the industry.
As to the second factor, the Company must demonstrate that it used reasonable means to maintain secrecy over the master list. Indicators that the Company used reasonable means to maintain secrecy include: Advising employees of the existence of a trade secret; limiting access to the trade secret; promulgation and circulation of a confidentiality policy, usually signed by the employee.
Evidence of the Company’s failure to use reasonable means to maintain the master list’s secrecy would be fatal to those related claims. Thus, critical to the issue of whether there exists a trade secret is whether employees had executed confidentiality agreements.
As to the third factor, it will be difficult to prove that the Company derived independent economic value from the information if it did not use reasonable means to protect the master list.
As to the fourth factor, the law cannot prevent former employees from using the information and skills he learned and memorized while employed by the Company. If the Company cannot demonstrate that the former employee physically took a list, whether on a hard copy or digital drive, a court will not likely issue an injunction, even if the Company can convince the Court that it used reasonable means to maintain its secrecy, the information gives the Company a competitive advantage and, that the former employee is using the information.
In such a case, generally only an enforceable non-competition agreement will protect the Company from the use of the information to its detriment. While the employee would not be enjoined necessarily from using information learned during the course of employment, s/he would at least be prohibited from competing against the Company for a reasonable period of time. In Hawaii, generally a non-competition period of up to three years (depending on the circumstances) would likely be considered “reasonable.”
There are risks to the Company litigating trade secret cases. Under Hawaii’s Trade Secrets Act, HRS §482B-1, Hawaii’s Unfair Competition Statute HRS §480-2, and HRS §607-14, the former employee may be entitled to recover his reasonable attorneys’ fees and costs from the Company if s/he prevails.