THE BLOG
07/16/2014 10:38 am ET Updated Sep 15, 2014

Is Your Business' Confidential Information Legally Protected?

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Consider a spectrum of business information from the most specific and publicly disclosed to the most abstract and undisclosed. Traditional registration of copyrights and patents requires the public disclosure of an idea that has been reduced to expression in words or in a device. Trade secrets, in contrast, are unregistered and not publicly disclosed ideas, devices, or processes not otherwise known to the public that provide an economic competitive advantage. A trade secret might not meet the statutory requirements to be patented but is still protected. General and undeveloped ideas, such as recognizing the importance of anticipating what a consumer will need five years in the future, are not recognized as property. Confidential information, such as ideas for expanding a specific business, falls between general unprotected ideas and protected trade secrets. While copyrights, patents, and trade secrets are broadly legally protected from third-party appropriation and use, confidential information may not be legally protected in the absence of an agreement between the parties in question. Entrepreneurs, inventors, and small businesses must not overlook this important issue.

Confidential business information held by certain individuals, such as the directors and officers of a corporation, may be protected from disclosure by fiduciary obligations. Fiduciary obligations require the utmost loyalty, honesty, and fair dealing. However, many non-fiduciary individuals may have access to confidential information. While a very few courts have recognized a tort of breach of confidential information in a business setting, many do not. The court decisions that recognize this tort tend to involve special relationships in a professional-client setting. The tort is related to protected personal privacy. Carefully written contracts prepared by an experienced attorney are necessary to protect confidential information in a business setting.

In 2010 the Hawaii Supreme Court held that the Hawaii Uniform Trade Secrets Act "displaces non-contract civil claims based upon the alleged acquisition, disclosure, or use of confidential information that does not rise to the level of a statutorily-defined trade secret" (BlueEarth Biofuels, LLC v. Hawaiian Electric Company, Inc.). The Court noted that most states and commentators have concluded that non-trade secret confidential information may only be protected by a contract. A 2013 Texas Court of Appeals decision stated: "If the subject manner appropriated by the defendant is not a trade secret, there is no liability for misappropriation, no matter how reprehensible the defendant's conduct" (Lamont v. Vaquilla Energy Lopeno LTD, LLP). These cases involved a voluntary disclosure of information that allegedly was subsequently misused.

A related situation involves lawsuits against governmental agencies for their disclosure of the confidential information and trade secrets submitted to them. The Freedom of Information Act exempts from disclosure "trade secrets and commercial or financial information obtained from a person and privileged or confidential." Additionally, a variety of agency rules address these disclosures.

If information has been acquired by unlawful hacking or theft, criminal and civil legislation provides protections. However, if a business makes a claim of improper access, courts will examine the business's information protocols. Information acquired "with permission" is not stolen. A confidential information contract with the individual or entity in question that specifically addresses the permissible limited uses of disclosed confidential information may be critical.

Labeling information a "trade secret" does not make it a trade secret. It must meet the statutory definition of trade secret. Confidential information that is voluntarily disclosed to another without an obligation of confidentiality is not a trade secret. Potential business strategies or goals may be confidential information but not trade secrets. At some point these ideals may become sufficiently developed and specifically implemented to be considered a trade secret.

Particularly in the employment context, employees are free to leave an employer and utilize their professional skill and knowledge. Depending upon the jurisdiction, a non-competition and non-disclosure agreement may provide some limitations on a departing employee who has acquired confidential information. It may be important to document the extent of the employee's knowledge prior to beginning employment. An employee may have preexisting knowledge that a current employer considers confidential. Non-disclosure cases frequently hinge upon a factual determination of what is general knowledge or already publically disclosed and what is confidential. Non-competition agreements that are considered reasonable as to duration, geographic area, and scope of business are typically enforced by courts.

A business should review its protocols concerning access to and dissemination of information. It is equally important that informal systems not develop that subvert the formal rules. When developing intellectual property, it is helpful to consider when an idea has been refined to the point that it should be confidentially protected. While brainstorming or informal beta testing with clients and other professionals may surface some excellent ideas, who will own the right to refine and commercially exploit them? Contracts with employees and third parties may be the best method of protecting business confidential information. Courts are reluctant to create implied contracts protecting information. After all, public policy generally favors the discrimination of ideas and information. Unstated assumptions about commercial confidentiality practices in an industry may not be legally enforceable. Consult an experienced attorney to prepare and review appropriate agreements.