A dilemma employers often face when key employees leave and join a competitor is how to stop the employee from taking and misusing the employer’s confidential business information. In Tennessee, such questions are answered, primarily, by the Tennessee Uniform Trade Secrets Act (TUTSA), T.C.A. § 47-25-1701, et seq.. Currently, 47 states have adopted a form of the uniform act (Massachusetts, New York and North Carolina are the holdouts; Texas adopted the act effective on September 1, 2013). The act is designed to bring some semblance of order to the myriad approaches states have taken to protecting trade secrets and defining claims for misappropriation of trade secrets.
This post address two related questions in light of recent developments in Tennessee: 1) What is the status of confidential information that does not meet the threshold of a “trade secret?” 2) What is the impact of TUTSA on other claims related to unfair competition?
Employers often adopt policies that prohibit employees from disclosing or misusing “confidential information.” In such policies, employers have a tendency to cast a wide net; with the concept of confidential information often defined to include virtually all information about customers, vendors, sales, marketing, finances, and proprietary and secret processes.
Employers also often require employees to sign agreements restricting what the employees can do once they leave employment, such as agreements not to compete, not to solicit certain customers or employees, and/or not to disclose confidential information. Before they will enforce such agreements, Tennessee courts require employers to prove that they have some special interest over and above ordinary competition in which—without the protection sought in these contractual restrictions—the employee would gain an unfair advantage in competition with the employer. The protectable interests most often used to justify these types of restrictive covenants are specialized training, the need to protect trade secrets, and circumstances in which the employee has become the “face” of the employer to its customers.
Tennessee courts define “confidential information” more narrowly than many employers’ policies do. In Tennessee, according to a 1990 Tennessee Court of Appeals case, “confidential business information is akin to trade secrets.” Heyer-Jordan & Assocs., Inc. v. Jordan. As defined by TUTSA:
Trade Secret means information, without regard to form, including, but not limited to, technical, nontechnical or financial data, a formula, pattern, compilation, program, device, method, technique, process or plan that: (A) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and (B) Is the subject of efforts that are reasonable under the circumstances to maintain secrecy.
T.C.A. § 47-25-1702(4)
TUTSA also has the effect of occupying almost the entire field of legal claims for unfair competition that are related in any way to an employee’s misuse of confidential information. According to the express language of the statute, TUTSA “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” TUTSA “does not affect contractual remedies.” T.C.A. § 47-25-1708.
Tennessee appellate courts have not yet had the opportunity to address TUTSA preemption. Nevertheless, one of the most influential opinions in the country, Hauck Manufacturing Co. v. ASTEC Industries, Inc., was authored by federal District Judge Collier in the Eastern District of Tennessee in Chattanooga. In this case involving TUTSA, Judge Collier took the opportunity to review cases from a variety of states interpreting their versions of the Uniform Trade Secrets Act.
Judge Collier found that TUTSA has a broad sweep. If the information at issue is a trade secret, then any other claim based on the information is preempted. If the information is not a trade secret, then a party has no legal interest upon which to base a claim. Thus, under Hauck, save for claims based upon a contract, no claim that is based on misuse of confidential information exists in Tennessee outside of TUTSA. Indeed, this is true regardless of whether the claim is based “in whole or in part” on the misuse of confidential information.
Since Judge Collier’s decision, courts in Tennessee have found a variety of claims in the unfair competition context to be preempted. Most recently, Judge Binkley in the Fifth Circuit Court in Davidson County, in Ram Tool & Supply Co., Inc. v. HD Supply Construction Supply, Ltd., adopted Judge Collier’s reasoning to dismiss state court claims of breach of fiduciary duty, intentional interference with business relations, and civil conspiracy.
As mentioned above, TUTSA expressly exempts contract claims from their preemptive reach. This exemption, combined with the principle that an employer may assert a protectable interest in trade secret information to justify a restrictive covenant, may give rise to somewhat strange results. To justify a non-disclosure provision in a contract based upon the protectable interest of confidential business information, that information must be the equivalent of a trade secret. But, once that threshold is met, the employer can use the contract to restrict the employee from disclosing confidential information that is not a trade secret.
The upshot of these cases decided under TUTSA is that most non-contract claims that employers traditionally have made in unfair competition cases will no longer be viable if the employee, as part of his alleged wrongdoing, misused confidential information. Against this backdrop, there are some steps employers can take to protect business information from misuse.
Because TUTSA exempts contracts from their preemptive reach, if an employer has a special interest that is worthy of protection (including a trade secret) sufficient to justify a restriction on competition, solicitation, and/or disclosure, the employer can require an employee to sign an agreement that the employee will not disclose any “confidential” information, even if not all of the information would qualify as a trade secret.
Even without an agreement, if the employee misuses confidential information (i.e. misappropriates trade secrets), the employer can sue the employee for a violation of TUTSA. The key limitation on such an action is that the employer will have to prove that the information involved meets the statutory definition of a trade secret.
To ensure that confidential information meets the definition of a trade secret, employers must take reasonable steps to protect the confidentiality of the information. In this electronic age, that includes such steps as computer and Internet use policies that instruct employees on the use of such information, including narrowly drawn definitions of what constitutes confidential information; password protection of company laptops and mobile devices; email and database encryption; and the ability to wipe devices that are lost or stolen.