Trade Secrets: the Good, the Bad, and the Ugly bone to SCO


July 26, 2006

Last post re: legal problems of SOIP for a few days. Once the PSJ's are filed, there will be more to discuss.

Trade secret clauses, and non-disclosure agreements, are part of the law of contracts.

Understanding them and their place in contract law and appellate procedure will give some insight into the way that many lawyers see the elements of this conflict.

In many law schools, in the 1L Contracts course, there is a topic that preceeds Trade Secrets: void for public policy. Many kinds of contract clauses are void for public policy reasons, and are therefore unenforceable. Some are pretty obvious, like agreements to commit crimes, or agreements for immoral purposes. In many places where prostitution is not criminalized, it is still considered immoral, and contracts for the performance of sex acts are considered void.

Although no longer a problem, charging interest on a loan was once considered Usury and thus immoral; courts would not enforce interest payment clauses.

As a general class, anti-competitive-conduct clauses are void for public policy reasons. This is the Common Law, so there are exceptions. The two are Trade Secrets/non-disclosure clauses, and non-compete agreements.

By far, the vast majority of non-compete agreements are employer-employee contracts, but all of the logic and all of the analysis apply equally to business-to-business relations.

Because these are narrow exceptions to a general policy of unenforceability, there is a term of art that you will see when lawyers are debating these issues: "not favored under the law". Trial courts and appellate courts scrutinize very carefully any clause regarding trade secrets, or non-compete agreements, and will use any excuse to void them. For the practitioner, the only safe way to draft a non-compete clause is to find a similar situation where an appellate court has approved the terms of the clause. A non-compete clause must be obviously reasonable for the employee, and any over-reaching puts the clause in peril. A Trial Judge I know, and I, used to laugh about the non-compete clauses that he refused to enforce. Non-compete clauses must be reasonable in time, place, and manner. For most employees, there is no reasonable restriction on manner: there is no reasonable non-compete clause. For special groups, like engineers or managers with access to sensitive information, the manner must be narrowly identified to the same industry where the use of the employer's Trade-Secret type information would put the employer at a significant commercial disadvantage. The time period must be reasonable. Six months or a year are almost always acceptable, two years is typical as an upper limit, and five years, except in the most unusual circumstances, is too much. The place must be reasonable. If the employer is limited to a geographic area like one single large metropolitan area, then an area restriction like a fifty-mile radius around the area is probably reasonable. Special circumstances will affect the evaluation, both ways.

Trade Secrets, when considered under the common law and not as a State Statute, have the same issues. They must be information that gains significant value from being known, but secret. There is no such thing as a publicly known Trade Secret. Once the information becomes public knowledge, it loses its protectable status. The employer must treat the information as confidential and make efforts to maintain it in a confidential manner. A good discussion of this is still the Gates Rubber opinion.

This is very clear, very well understood, and very old law. It pre-dates Roscoe Pound and Karl Llewellyn at Harvard, and their revolutionary re-design of the practice of law, trial practice, and appellate practice.

The bad part of this is that the idea that anti-competitive clauses are void as a matter of public policy is so old, so well established, and so indisputable that no one really bothered to discuss it for tens of decades. It wound up being more of a rule of thumb, than anything, because no one, until now, has been foolish enough to actually challenge the assertion in a meaningful way. The case law supporting the general proposition is not even sparse; it is nearly non-existent.

Now for the ugly part. There is a part of appellate review that really offends me. Appellate courts prefer to see recent opinions, not old opinions. Most States have a statute adopting the Common Law of England as of some year in the 1600's. Most appellate courts refuse to honor this statute. They have the notion that if there is not a published opinion on point in the relatively recent past - say five or ten years, then they have complete freedom to rewrite the law any way they please. Depending on the State, some of these judges come up for retention every four or six years. I really wonder how many of the Illinois appellate judges would keep their jobs if the public ever found out how they really feel about dusty old published opinions. My guess is none of them would survive.

The single greatest weakness of this legal principle, a principle that has guided the hand of practitioners for centuries, now that it is so old, so well established, and so indisputable, is that there is little to no current published appellate review of the topic, that is directly on-topic. Its weakness is its own widespread success.

The problem with arguing against it is that there are so many reasons to continue to use it. If the principle were to be abandoned, it would be very hard to anticipate the consequences of anti-competitive clauses.

In addition, though there is no direct on-topic discussion, there is a wealth of collateral references in appellate opinions regarding Trade Secrets and non-compete clauses.

Just exactly how Kimball will handle this is probably a matter of intense interest to a number of law school professors teaching Contract Law.
AllParadox - Retired Attorney, no legal opinions, just my opinion.
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10:13:21 AM

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