Here's a scenario that could ring true for many Idaho employers: You have a thriving business that has a sterling reputation in the community. A large majority of your customers are regulars and have been returning to you for years. You have obtained confidential business information and secrets concerning your customers during the years you've been in business and believe that you have taken the steps necessary to protect that information. But have you? Are your information and secrets always and/or adequately protected?
Suddenly, and without warning, half of your employees walk into work one morning and turn in letters of resignation. You quickly learn that those employees opened a new business that will compete with you and, guess what? It's right around the corner from the location of your business. Very shortly thereafter it becomes painfully obvious to your business's bottom line that some of your once-regular customers have disappeared. What happened? Did someone take your confidential and secret information? Was it one of your employees? A recent Idaho Supreme Court case signals the importance of not only protecting your confidential information, but being vigilant in doing so at all times. Let's see what happened and what we can learn.
Background.
La Bella Vita is a spa and salon located in Pocatello, Idaho, that is owned by Candy Barnard-Davidson. As a condition of employment with La Bella Vita, employees were required to sign confidentiality agreements that required them to keep certain information confidential. In particular, the agreements defined "confidential information" as follows:
[La Bella Vita's] trade secrets and confidential or proprietary information, such as client lists, client prospect material, price lists, rate structures, client service records, salon appointment books, payroll information, sales and profit data, marketing strategies and information, chemical information and formulas and any other information of a technical, financial or business nature that is unique to [La Bella Vita] and/or provides [La Bella Vita] with competitive advantage in the market place. Confidential information does not include any information or material that is generally known by the public.
Amanda Shuler, who signed a confidentiality agreement, worked at La Bella Vita and held such titles as Hair Stylist, Salon Manager, Co-Manager, and Trainer. In mid-February 2011, half of La Bella Vita's employees (we'll refer to them as "the employees" to avoid confusion) abruptly quit and went to work for a new spa and salon called Eikova, which, coincidentally, was founded by Shuler. Eikova was located right around the corner from La Bella Vita and opened for business six short days after the en masse employee departure. And some of La Bella Vita's regular clients immediately began going to Eikova.
In January 2013, La Bella Vita filed suit alleging, in part, that Shuler wrongfully took and used La Bella Vita's confidential and protected client lists, calendars, scheduling lists, client contact information, and other information to create and market Eikova. In particular, La Bella Vita alleged that there were violations of the Idaho Trade Secrets Act (ITSA) and an alleged breach of the confidentiality agreement signed by Shuler. The district court dismissed La Bella Vita's claims finding, in part, that La Bella Vita had failed to show the existence of a "trade secret" under the ITSA, and, without a trade secret, the district court reasoned that there couldn't be a violation of the confidentiality agreement. La Bella Vita wisely appealed the district court's decision, as will be discussed further below. Read on to find out what happened; but first what is a trade secret?
So What Information Qualifies as a Trade Secret Under Idaho Law?
It is important for Idaho employers to recognize that they have a right to protect their "trade secrets" under the ITSA - even without confidentiality agreements. We, however, would not encourage this practice as an employer may believe that they have a trade secret, but it would be up to a court to determine whether a trade secret actually exists. In other words, confidentiality agreements add another layer of protection for employers.
Trade secrets are defined by Idaho Code § 48-801(5) as information, including a formula, pattern, compilation, program, computer program, device, method, technique, or process that derives independent economic value from not being generally known or readily ascertainable by other persons who can obtain economic value from the disclosure or use of the information. Employers are also required to take reasonable efforts to maintain the secrecy of the information in order to potentially qualify it as a trade secret. As you will see below, this last requirement is key.
To address the issue of whether the claimed trade secret "is generally known or readily ascertainable," Idaho courts look at the following six factors: (1) the extent to which the information is known outside the employer's business, (2) the extent to which the information is known by employees and others involved in the employer's business, (3) the extent of the measures taken by the employer to guard the secrecy of the information, (4) the value of the information to the employer and its competitors, (5) the amount of effort or money expended by the employer in developing the information, and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.
It is worth noting that merely hiring a competitor's employee does not, in and of itself, constitute acquiring a trade secret. This is because an employee will naturally take with him or her to a new company the skills, training, and knowledge that have been acquired from their experience with a previous employer. This basic transfer of information cannot be stopped. Stated differently, an employee's experience, education, and knowledge that is acquired on the job likely cannot constitute a trade secret that can subject a new employer to liability under the ITSA.
The Idaho Supreme Court Reverses.
As alluded to above, one of the primary issues in the case was whether La Bella Vita's official client list and other related information qualified as a confidential trade secret, and, specifically, whether La Bella Vita took the necessary steps to protect it. The Supreme Court found that there was conflicting testimony on this issue, which, fortunately for the employer, required reversal of the district court's decision.
In particular, Davidson testified that La Bella Vita gathered information about specific customers, which included not only contact and other personal information, but also services and product profiles for those customers. This information was used by La Bella Vita for customer retention and customer relations purposes, which are important aspects of any business model. Employees were also trained to know that the customers of La Bella Vita were customers of the business and were not the customers of individual employees. Davidson testified that Shuler was in charge of training employees to know that La Bella Vita's official client list was confidential and that the information was to be carefully guarded so that disclosure was not made to anyone outside the business. On the other hand, Shuler and other former employees testified that La Bella Vita's client list and other related information was not carefully guarded but rather was left out in the open in the salon where customers and anyone else could see it. They also testified that Davidson saw this going on and did nothing to correct it.
Based, in part, upon this conflicting testimony, the Supreme Court held that summary judgment was not appropriate and remanded the case to the district court for further proceedings, and, potentially, a trial. What can we learn from this case?
Practice Pointers and Concluding Thoughts.
It is important for you to recognize in advance that you may have confidential information that may qualify for trade secret protection under ITSA and that you must take action in order to protect the information not only at the outset, but continuously. For example, you could make sure your employee handbook advises employees that you have a company policy regarding confidential information and that information should not be disclosed in any manner or at any time unless authorized by the employer in writing. It may be wise to set forth the specific statutory language defining a "trade secret" as identified in ITSA above. You could also set forth actions that an employee must take if they become aware that confidential/trade secret information is being improperly disclosed. Regarding protection, you should limit the employees that need to know the information, and make sure that the information is inaccessible to anyone who does not need to know - e.g., safe, computer files under password protection, etc. All of these options, should be considered in relation to the specific needs of an employer - in other words, one size does not fit all and you would be best served by consulting an attorney.
