Question: Our company utilizes confidentiality agreements to try to protect our confidential and proprietary information. One of our former sales employees recently left us to work for a competing company.  We have evidence that he took with him our confidential information about our clients and is planning to use it to sell products to our clients for his new employer.  When we reminded him that he could not use our confidential information under the agreement, he said we couldn’t stop him because the information does not qualify as a “trade secret” under our state’s trade secrets laws.  We looked into the issue, and he’s probably right that this information is not necessarily a “trade secret” under out state’s Trade Secrets Act.  We’re worried there’s nothing we can do to stop him from using our information to steal our clients.  Help?

Answer: This is a great question, and one we get all the time. Many employers and employees are aware that most states have laws that automatically protect a company’s “trade secrets”  (as defined by state law) from improper disclosure or use.  What many people do not realize is that through the use of well-drafted confidentiality (A.K.A., non-disclosure agreements), employers are able to protect much more of their confidential information than just the information that qualifies as a “trade secret.”

The Sixth Circuit Court of Appeals recently issued a decision, Orthofix, Inc. v. Hunter, 630 Fed. Appx. 566 (6th Cir. 2015), that is particularly relevant to this issue and which reaffirms employers’ ability to protect confidential information, which can be vital to the employer’s success.

Orthofix is a company that sells medical supplies to physicians. Being an alert employer, Orthofix required each of its salespersons to sign a well-drafted confidentiality agreement when the salesperson’s employment began.  The confidentiality agreement prevented the unauthorized use or disclosure of “confidential information,” a term which was explicitly and specifically defined within the agreement.

The defendant in this case was a salesperson who had recently left employment with Orthofix to work for a competitor. During negotiations with his new employer, and while still employed by Orthofix, the salesperson disclosed to his potential new employer portions of confidential information about Orthofix’s clients to persuade the potential employer that he could flip those clients and generate business.  After receiving an offer from the competitor to join its team as a salesperson, the defendant terminated his employment with Orthofix via email, without notice, just after midnight, and went to work for the competitor the following day.  These actions made it impossible for Orthofix to send a replacement to the accounts serviced by the defendant prior to the defendant contacting those clients on behalf of his new employer.

The defendant took with him to his new employment Orthofix’s “playbook.” The “playbook” was a binder that included customer lists, wholesale price information, sales data, staff contacts, physician schedules and preferences, and physicians’ prescribing habits.  Over the next several months, the defendant and his new colleagues used the information from the “playbook” to convince Orthofix’s clients to switch to the competitor.

When Orthofix learned all of this, it sued the former salesperson for, among other things, (1) misappropriation of trade secrets under Ohio’s Trade Secrets Act, and (2) breach of contract for violating the confidentiality agreements.[1]  The district court first held that Orthofix’s misappropriation of trade secrets claims failed because the information in the “playbook” did not rise to the level of a “trade secret” as defined in the Trade Secrets Act.  The district court then rejected Orthofix’s breach of contract claim, holding that the confidentiality agreement protected only trade secrets, which the information in the “playbook” was not.  Orthofix appealed.

On appeal, the Sixth Circuit Court of Appeals reversed the district court and held in favor of Orthofix on the breach of contract claim. In making this decision, the Court agreed that the information did not qualify as a “trade secret” (and thus that the misappropriation claim failed), but noted that there are two distinct types of confidential information that can be protected: (1) “trade secrets,” and (2) information that does not rise to the level of a “trade secret,” but still shares at least some characteristics of trade-secret information.  In regards to what types of non-trade-secret “confidential information” can be protected by confidentiality agreements, the court stated that

“[C]onfidential information” is generally defined by the parties, and not by achieving trade secret status, so long as it does not encompass publicly available information or an employee’s general knowledge and skill.

After noting that “trade secrets” automatically are protected from unauthorized disclosure by Ohio’s Trade Secrets Act, the Court held that an employer may expand the scope of protected information through the use of a well-drafted non-compete agreement to include “confidential information.” In rejecting the defendant’s argument that only “trade secrets” were protectable, the court explained that “[b]oth Texas courts and federal courts applying Texas law have given effect to nondisclosure provisions regardless of whether the information covered by the provisions achieves trade-secret status.”

Rather than remand for further fact-finding, the Court of Appeals determined that the information in the “playbook” fell within the definition of “confidential information” in the confidentiality agreement and that, therefore, the defendant had breached the confidentiality agreement. The court entered judgment in favor of Orthofix and remanded to the district court only for a calculation of damages.

Another interesting issue raised by this case concerns the permissible scope of confidentiality and non-disclosure agreements. Even in those states that enforce non-compete agreements, a non-compete agreement will be enforced only if it contains reasonable limitations as time and geographic scope.  Analogizing to non-competes, the defendant argued that the confidentiality agreement was unenforceable because it did not contain any limitation as to time or geography.  Citing the Restatement (Third) of Unfair Competition and Texas law to distinguish confidentiality/non-disclosure agreements from non-compete agreements, the court quickly rejected this argument:

Under Texas law, non-disclosure covenants are more readily enforced than noncompetition covenants because they are not restraints on trade, do not prevent the employee from making use of the general experience he acquired during his employment, and do not offend public policy. . . . [N]on-disclosure provisions need not contain geographic and durational limits to be enforceable.

(emphasis added).

This case marks a big victory for employers in their ability to protect confidential information. The big thing to take away is that employers who rely solely on statutes or general/template confidentiality agreements to safeguard their confidential information do so at their own peril (if Orthofix did not have a well-drafted confidentiality agreement in place, it would have been forced to rely solely on a claim misappropriation of trade secrets claim–a claim that failed!).  By utilizing clear and specific confidentiality agreements, employers are able to significantly expand their ability to protect the confidential and proprietary information that provides a competitive advantage in a highly-competitive marketplace.

[1] Due to a choice-of-law provision in the employment agreement, the trade secrets claim was governed by Ohio law, while the breach of contract claim was governed by Texas law.  For purposes of our answer herein, which state’s laws applied to each claim is insignificant.