Last week, in a diversity jurisdiction case, the Sixth Circuit analyzed Texas law to identify the relationship among three separate categories of business information: (1) trade secrets, (2) contractually protected confidential information, and (3) general skills and knowledge. The Sixth Circuit reversed the district court’s ruling, which failed to distinguish between trade secrets and confidential information. Instead, the Sixth Circuit held that parties can define confidential information through contract, and it can exist independently of trade secrets, so long as it does not encompass publicly available information or an employee’s general knowledge or skills.
Case Background: In Orthofix, Inc. v. Hunter, No. 15-3216 (Nov. 17, 2015), Orthofix, Inc., a medical device company, brought suit against Eric Hunter, a former sales representative, for misappropriation of trade secrets and use and disclosure of confidential information after he left Orthofix for a competitor. Hunter’s employment agreement with Orthofix contained non-compete and non-disclosure provisions. During the 12 years he worked for Orthofix as a medical device salesman, Hunter acquired detailed information relating to the practices of the local doctors, including prescribing habits, preferred brands, and schedules. In 2012, Hunter quit Orthofix without notice to join DonJoy Orthopedics, a direct competitor in the area. In an attempt to avoid conflict with his non-compete provision, Hunter introduced his former customers to other DonJoy sales representatives; however, as a part of these introductions, Hunter disclosed the doctors’ detailed buying and use habits. Orthofix filed a claim against Hunter for misappropriation of trade secrets and breach of contract for violating his employment agreement’s non-compete and non-disclosure provisions. The District Court for the Northern District of Ohio found for Hunter on both issues.
The Sixth Circuit held that the district court erred in finding Hunter did not breach the non-disclosure provision. The non-disclosure provision provided that Hunter would never use or disclose any confidential information that he acquired during his employment with Orthofix; “confidential information” was defined to include customer lists or identification, business and trade practices, business strategies, and other confidential information pertaining to Orthofix’s business or financial affairs. The district court improperly limited this provision to cover only information defined as trade secrets. In other words, the district court ruled that in order to be protectable, the business information must meet the definition of a trade secret.
Case Holding: In contrast, the Sixth Circuit held that the “confidential information” in the non-disclosure provision covered more than trade secrets. Both Texas courts and federal courts applying Texas law have given effect to non-disclosure provisions, although the information protected in the provisions did not rise to the level of trade-secret status. Texas courts have even found that non-disclosure provisions protected information maintained in an employee’s memory. The Sixth Circuit noted that non-disclosure provisions “can clarify and extend the scope of an employer’s rights’ beyond the protections afforded by trade secret statutes,” as long as they do not encompass publicly available information or an employee’s general knowledge or skills. Using this legal support, the Sixth Circuit found that Hunter disclosed confidential information to other DonJoy representatives, as defined in the non-disclosure provision. The Sixth Circuit then reversed the district court’s ruling and remanded the case for an assessment of damages.
Employer Takeaway: Under the Uniform Trade Secrets Act (adopted by 48 states), in order to be categorized as a trade secret, business information generally must (1) derive independent economic value from not being generally known or readily ascertainable by other people who can obtain economic value from its disclosure or use, and (2) be the subject of efforts that are reasonable under the circumstances to maintain its secrecy. But, in most jurisdictions, employers can protect other valuable business information that may not rise to the level of a trade secret through non-disclosure agreements with their employees, prohibiting the disclosure or use of business information as long as the information does not encompass publicly available information or an employee’s general knowledge or skills. This case reiterates the importance of having carefully crafted non-disclosure agreements with employees to provide your company the maximum protection.