Trade Secrets

September 30, 2024

Protect the Intagible Assets of a Closely Held Business with Bulletproofing

Intangible assets are typically the most valuable possession of a closely held business, but often are poorly protected.
Risk mitigation through a business bulletproofing process can protect those assets from being misappropriated.
Intangible assets include customer relationships and intellectual property.

I sometimes ask closely held business owners if they lock the doors to their business when they leave. The answer is ‘of course.’ I may push further. Do you have an alarm system? What about at home?

No surprises here. Everyone locks the door. Most have alarms. My follow-up question is ‘for what?’ The answer, again, is obvious. We lock doors to prevent thieves from stealing our stuff. Then why do so many of us do nothing to stop thieves from stealing what is commonly the most valuable asset of our businesses? Risk Mitigation through Business Buletproofing

Bulletproofed Businesses are Protected Against Theft of Intangible Assets

So many closely held business owners protect themselves against the theft of office equipment, but leave the doors wide open and invite thieves to help themselves to their most valuable property—those intangible assets that drive sales and efficiency.

The value of these assets is rarely reflected on our company’s balance sheet. Instead, the value is found in the knowledge and skills of our employees, the relationships we have with customers, and the reputation we have built in the market.

I am a lawyer, a certified valuation analyst, and a certified exit and succession planner. I have worked with the owners of closely held businesses throughout my career.

Contact me if you have questions about valuing your business, developing an exit plan, or implementing the legal bulletproofing necessary to protect your investment.

Many closely held business owners have no clear idea of the value of their intangible assets and are badly misinformed about what can be protected and how that is done. I am surprised how often my clients think they there is nothing they can do, and how little importance they give to writing down what they have. Continue reading

August 10, 2024

Arbitration Agreement Rises from Ashes of Broken Deal

by Jay R. McDaniel, Esq.

Arbitration agreements survive the termination of an underlying contract, unless the parties specifically terminate the arbitrate provision.
In disputes involving closely held businesses, the arbitration agreement may be invoked even if the business is no longer in existence.
Unless there is a specific agreement on the question of ‘arbitrability’ of a dispute, it is an issue for a court to decide, not an arbitrator.

We are often asked to prepare an amended and restated operating agreement or contract. Or, more often in my case, we are representing a party in a dispute between two parties over a second or third version of an agreement.

No one says a word about arbitration. Do we need to go back and determine whether any of the old agreements had an

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arbitration provision? Is it enough that the second contract contains a standard integration clause that merges all prior negotiations and agreements into the final document? Probably not.

Survival of Arbitration Agreements in LLC Operating Agreements

Arbitration agreements do not just go away. They survive the termination of an agreement and may even survive when that agreement was terminated because the parties negotiated a new or different deal. If the parties want the agreement to arbitrate to end, they had better agree and put that decision in clear and unequivocal writing. Continue reading

September 18, 2023

When Courts Issue Injunctions in Trade Secret Cases

by Jay R. McDaniel, Esq.

A court may immecdiately grant the plaintiff a restraining order or preliminary injunction when there is a valid trade secret claim and the plaintiff may suffer irreparable harm without it.
Courts make the determination whether an injunction is necessary based on the evidence presented by the plaintiff at an initial application at the start of the case.

In a misappropriation of trade secrets lawsuit, one of the first actions taken by the court is to determine if an injunction will be available to protect the trade secret from use or disclosure pending a final resolution of the case.

Whether an injunction will be granted at the outset of the case pendente lite, or while the lawsuit is pending, is a critical must-win for both plaintiff and defendant. It will not only color the way the matter is handled, but in many cases reflects the ultimate outcome of the case.

July 25, 2023

AI Exec’s ‘Inevitable Disclosure’ Not Actionable Under Defend Trade Secrets Act

by Jay R. McDaniel, Esq.

Statutes that protect the rights of the owners of trade secrets protect against ‘misappropriation’ of confidential information, which requires a defendant to take or use the trade secret without permission.
The inevitable disclosure doctrine can prevent an employee from working for another when the new job would inevitably require the use of the trade secrets of the former employ. Intent to misappropriate the information is not an element.
A party seeking to prevent disclosure of a trade secret under the inevitable disclosure doctrine will probably not be able to pursue the remedies available under the federal Defend Trade Secrets Act or the state Uniform Trade Secrets Act.

When a key executive with access to key data leaves an information-intensive position to start a competing business, does the fact that inevitably the former employee will make use of sensitive state a claim under federal law? Quite possibly not.

The federal Defend Trade Secrets Act (DTSA ) and the uniform state law on which it is modelled turns on the concept of misappropriation and without it, there may be no basis. Inevitable disclosure is a common-law doctrine and in itself may not create a right to sue under the these trade secret statutes. Trade Secret Attorneys | New Jersey | New York

More Questions? Learn More. You can call me at 973-602-3915 or use our Contact form to reach me by email.

The inevitable disclosure doctrine is legal principle in trade secret law that enables a former employer to prevent a former employee from accepting a new position with a rival if the new position’s responsibilities will unavoidably cause the person to divulge the trade secrets of the former employer. The doctrine may apply even if fthe former employer lacks concrete evidence that the employee has actually taken trade secrets or threatened to do so.

The Difference Between the DTSA and the Inevitable Disclosure Doctrine

In a federal court action, Paro Inc., a Delaware corporation, unsuccessfully sought an emergency temporary restraining order against former employee Luke Kohan, a New York resident, and his newly founded company, FirmKey Solutions LLC, claiming Kohan was in breach of a restrictive covenant and had misappropriated trade secrets. Paro, an artificial intelligence-powered marketplace, provides various finance and accounting solutions to businesses through its AI-powered platform. Continue reading

May 18, 2023

Absence of Competitive Advantage – The First Line of Defense to Trade Secret Lawsuits

by Jay R. McDaniel, Esq.

The touchstone of a trade secret is that it provides the owner of the information with a competitive advantage in their market.
Courts look at the cost of development, the difficulty in duplicating and measurable benefits to ascertain whether a bona fide trade secret exists.
The first step in the defense of a trade secret is to examine whether there is real economic value to keeping the information secret.

Trade secret laws, much like other types of intellectual property law, always have the potential to limit competition and restrict employee mobility. The result is that trade secret law can be used as a means to try to carve out a market space. Those cases, however, may involve benign information that is difficult to classify as a trade secret.

The first issue in the defense of any claim for misappropriation of a trade secret is to figure out if there is really a trade secret at issue, whether the claim is brought under the federal Defend Trade Secrets Act (DTSA), a state Uniform Trade Secrets Act (UTSA) (from which the DTSA was derived) or state common law.

The UTSA has now been enacted every state except New York and Virginia, as well as the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Continue reading

January 30, 2023

Prior Disclosure Kills Trade Secrets Claim

by Jay R. McDaniel, Esq.

To enforce a claim for misappropriation of a trade secret, the plaintiff must prove that the information was secret and valuable. Plaintiffs in New Jersey can rely on either the common law or the New Jersey Trade Secrets Act.
Secrets that have been publicly disclosed lose their their protection as trade secrets. Thus, the failure to secure a non-disclosure agreement with vendors or potential vendors could make it impossible to protect sensitive information in the future.
Once a trade secret has been publicly disclosed, even restrictive covenants and non-disclosure agreements executed by employees may lose their effectiveness as a means of protecting sensitive information.

One of the first obstacles that a company will encounter when trying to enforce its rights to protect confidential or proprietary information is whether the information is a trade secret. This is a threshold issue that is determined by the conduct of the party claiming the secret, sometimes as much by the sensitivity of the information.

If the information is in the public domain, or if the owner the information has not taken steps to protect the information from disclosure, under New Jersey law there is no trade secret to protect. That was the result in this case from New Jersey’s Superior Court.

Court Dismisses Trade Secret Misappropriation Claim

In a lawsuit brought against a New Jersey beauty supplier, a trial judge of the Superior Court dismissed claims asserting that a competitor had misappropriated its trade secrets and that its former employees were in breach of the confidentiality and non-solicitation provisions of restrictive covenants that they had executed.

The case, Ebin New York, Inc. v. Beauty Plus Trading Co., Inc., involved the formula for an adhesive hair spray that the plaintiff claimed was a trade secret. The plaintiff sued its manufacturer and Beauty Plus, along with individual defendants that the plaintiff alleged were bound by the agreements they had made as employees.

June 8, 2021

CFAA is Now Less Help in Business Divorce Cases

by Jay R. McDaniel, Esq.

A former employee will violate the computer fraud and abuse act only by having unauthorized access to data, not by using data for an unauthorized purpose.
Former owners or employees that access computer systems after termination may be liable under the Computer Fraud and Abuse Act.
A federal claim based on the unauthorized use of data will likely no longer support a federal claim in a business divorce litigation.

So much impact from such a little word. The U.S. Supreme Court, resolving a split among the circuit courts, imposed significant limits on the reach of the Computer Fraud and Abuse Act (CFAA), severely restricting its usefulness as a tool to pursue unfaithful former employees and owners. cyberspace-2784907_1920-1024x683

The significance of the decision– which as discussed below turned on the construction of the work “so” in the statute’s definitions – in business divorce cases is that it will limit the ability of litigants to employ the statute as redress for some types of conduct and deprive a plaintiff in some cases of access to federal courts. (For the linquists and grammarians, the parsing of “so” is in the opinion, here.) Continue reading

February 12, 2021

District Court Enjoins Former Executive from Competition

by Jay R. McDaniel, Esq.

An executive with national responsibilities may be subjected to a broad geographic restriction in an employment restrictive covenant.
Courts can and will enjoin a former executive from working for a competitor to prevent irreparable harm to the executive’s former employer when the restriction is reasonable.
Misappropriation and use of a company’s trade secrets by a former employee may also prevent an employee who has copied information from working for a competitor

A federal district court judge in New Jersey imposed a preliminary injunction that will prohibit a former executive from working for a competitor for at least a year. The decision was based on both the existence of a restrictive covenant and the departing executive’s having copied data from his prior employer at the time of his departure. sunbelt

Resignation by Executive to Work for Competitor

The case, Sunbelt Rentals, Inc. v. Love (opinion here) is particularly notable as a lesson in how not to resign a high-level position. Because even if the trial judge had not enforced the restrictive covenant in the executive’s employment contract, the fact that he copied proprietary information by emailing customer lists and other data to his brother before his resignation doomed any defense to the preliminary injunction. Continue reading

Intangible assets are typically the most valuable possession of a closely held business, but often are poorly protected.

Risk mitigation through a business bulletproofing process can protect those assets from being misappropriated.

Intangible assets include customer relationships and intellectual property.

Bulletproofed Businesses are Protected Against Theft of Intangible Assets

Arbitration agreements survive the termination of an underlying contract, unless the parties specifically terminate the arbitrate provision.

In disputes involving closely held businesses, the arbitration agreement may be invoked even if the business is no longer in existence.

Unless there is a specific agreement on the question of ‘arbitrability’ of a dispute, it is an issue for a court to decide, not an arbitrator.

Survival of Arbitration Agreements in LLC Operating Agreements

A court may immecdiately grant the plaintiff a restraining order or preliminary injunction when there is a valid trade secret claim and the plaintiff may suffer irreparable harm without it.

Courts make the determination whether an injunction is necessary based on the evidence presented by the plaintiff at an initial application at the start of the case.

Statutes that protect the rights of the owners of trade secrets protect against ‘misappropriation’ of confidential information, which requires a defendant to take or use the trade secret without permission.

The inevitable disclosure doctrine can prevent an employee from working for another when the new job would inevitably require the use of the trade secrets of the former employ. Intent to misappropriate the information is not an element.

A party seeking to prevent disclosure of a trade secret under the inevitable disclosure doctrine will probably not be able to pursue the remedies available under the federal Defend Trade Secrets Act or the state Uniform Trade Secrets Act.

The Difference Between the DTSA and the Inevitable Disclosure Doctrine

The touchstone of a trade secret is that it provides the owner of the information with a competitive advantage in their market.

Courts look at the cost of development, the difficulty in duplicating and measurable benefits to ascertain whether a bona fide trade secret exists.

The first step in the defense of a trade secret is to examine whether there is real economic value to keeping the information secret.

To enforce a claim for misappropriation of a trade secret, the plaintiff must prove that the information was secret and valuable. Plaintiffs in New Jersey can rely on either the common law or the New Jersey Trade Secrets Act.

Secrets that have been publicly disclosed lose their their protection as trade secrets. Thus, the failure to secure a non-disclosure agreement with vendors or potential vendors could make it impossible to protect sensitive information in the future.

Once a trade secret has been publicly disclosed, even restrictive covenants and non-disclosure agreements executed by employees may lose their effectiveness as a means of protecting sensitive information.

Court Dismisses Trade Secret Misappropriation Claim

A former employee will violate the computer fraud and abuse act only by having unauthorized access to data, not by using data for an unauthorized purpose.

Former owners or employees that access computer systems after termination may be liable under the Computer Fraud and Abuse Act.

A federal claim based on the unauthorized use of data will likely no longer support a federal claim in a business divorce litigation.

An executive with national responsibilities may be subjected to a broad geographic restriction in an employment restrictive covenant.

Courts can and will enjoin a former executive from working for a competitor to prevent irreparable harm to the executive’s former employer when the restriction is reasonable.

Misappropriation and use of a company’s trade secrets by a former employee may also prevent an employee who has copied information from working for a competitor

Resignation by Executive to Work for Competitor