Prior Disclosure Kills Trade Secrets Claim

• 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.

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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.

The case provides a good framework to analyze a claim alleging misappropriation of a trade secret under New Jersey law.  It is also a cautionary tale to a company that relies on the secrecy of its proprietary information.  The value of that information can be easily lost if the steps to keep it secret are not in place.

Plaintiff claimed that the manufacturer had signed a confidentiality agreement in September 2021 before it began to produce the adhesive hairspray.  The Court dismissed the trade secrets claims at the pleading stage because of the failure to establish the existence of a protective trade secret under New Jersey law.

New Jersey Common Law Trade Secret Protections

In New Jersey, as in many states, misappropriation of trade secret claims may be pursued under either the common law or under the Uniform Trade Secrets Act.

For a claim of misappropriation of a trade secret to succeed under the common laew, the trade secret owner must establish that:

1. a trade secret exists;
2. the information comprising the trade secret was communicated in confidence by plaintiff to the employee;
3. the secret information was disclosed by that concern/employee and “in  breach  of  that  confidence;
4. the  secret  information  was  acquired  by  a  competitor  with knowledge of the employee’s breach of confidence;
5. the secret information was used by the competitor  to  the  detriment  of  plaintiff;  and
6. The  plaintiff  took  precautions  to  maintain  the secrecy of the trade secret.

New Jersey courts determine whether the information is actually a trade secret by considering six factors:

1. the extent to which the information is known outside of the business;
2. the extent to which it is known by employees and others involved in the business;
3. he extent of measures taken by the owner to guard the secrecy of the information;
4. the value of the information to the business and to its competitors;
5. the amount of effort or money expended in developing the information; and
6. the ease or difficulty with which the information could be properly acquired or duplicated by others.

New Jersey Statutory Trade Secret Protections

There is also statutory protection under the New Jersey Trade Secrets Act, N.J.S.A. 56:15-1, a version of the Uniform Trade Secrets Act that was adopted by the legislature in 2012.  The test for the existence of a trade secret is embodied in a relatively simple definition.

[I]nformation, held by one or more people, without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other person who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.   N.J.S.A. 56:15-2.

Public Disclosure Thwarts Trade Secret Claims

First, the court rejected the claim that the identify of the supplier was a trade secret.  Prior courts had ruled that supplier identities were not in themselves a trade secret, at least when there were alternative suppliers readily identifiable and available.  In this case, the supplier was identified in its complaint and there was no evidence that it was not actively promoting itself as a supplier to the industry.

In a similar manner, the court rejected the claim that the formula for the product was a trade secret because it was known to others.  Plaintiff developed the formula and the disclosed it to other manufacturers before choosing the defendant manufacturer.

The court also rejected the claim that the plaintiff had taken reasonable steps to protect the confidentiality of the information.  It relied on a manufacturing agreement, but that agreement had been implemented shortly before the dispute at the heart of the case had developed and did not cure disclosures that were made earlier.

Trade Secrets must be Protect to Avoid Loss

The lessons here are pretty straightforward.  Confidential information must be protected.  Anytime it is disclosed outside the company, there must be an agreement in place that maintains the secrecy of the information.  This includes discussions with vendors and also includes documents filed in court.

A company’s failure to keep its information secret cannot be cured by non-disclosure agreements. If the information is in the public domain, the prohibition will not be enforceable.

Here, the fact that former employees were bound by prior agreements meant nothing, even when they predated the disclsoiure, because the company had since permitted the information to become public.

Feel free to contact us is you have any questions on a trade secret dispute or need guidance on protecting your company’s trade secrets against misappropriation.

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