Protecting Trade Secrets Under the New Jersey Trade Secrets Act

By Stark & Stark on February 20th, 2014

Posted in Employment Law

Ben Franklin wrote that “three may keep a secret, if two of them are dead.” Poor Richard’s Almanack (1735).  Employers eager to protect trade secrets perhaps face their toughest challenge when a key employee having knowledge thereof joins a competitor.  Common sense (if not our criminal code) dictates against killing the former employee, but under what circumstances can the employee be precluded from jumping to the competition?  An employer’s legitimate business interest in protecting its trade secrets cuts across industry lines, from wealth management groups with their books of business, to software development firms with newly created applications, to the local craft brewery with its new recipe for a seasonal IPA.  All employers share the same concern: by what legal means can we prevent these best-kept secrets from getting out?

The New Jersey Trade Secrets Act (“NJTSA”), N.J.S.A. 56:15-1, et seq., signed into law on January 5, 2012, establishes a new statutory framework prohibiting the misappropriation of trade secrets and provides new statutory remedies to employers seeking to protect them.  Prior to the enactment of the NJTSA, trade secret litigation in New Jersey had been governed by common law tracing back to the New Jersey Supreme Court’s holding in Sun Dial Corp. v. Rideout, 16 N.J. 252 (1954).  The passing of the NJTSA has brought greater clarity to what constitutes a “trade secret” under New Jersey law and, importantly, the NJTSA provides a better defined and more comprehensive set of protections and remedies available to proprietors seeking to protect their business interests.

For starters, the NJTSA defines “trade secret” broadly as “information . . . without regard to form, including a formula, pattern, business data compilation, program, device, method, technique, design, diagram, drawing, invention, plan, procedure, prototype or process,” that has economic value, “actual or potential,” as a result of not being known to others who might derive economic value from its use, and that is the subject of reasonable efforts to maintain its secrecy. N.J.S.A. 56:15-2.  This definition, which is broader than the definition given by the Uniform Trade Secrets Act and incorporates elements of New Jersey’s common law, favors employers and, in theory, should make it easier for businesses to protect and enforce their proprietary information.  The definition, however, is not so broad that it is unbridled. A “trade secret” is not a “trade secret” under the NJTSA unless it bestows or provides some demonstrable value or economic advantage upon its owner.  At the analytical core of this concept is competitive advantage.  In other words, a business can make every effort to safeguard its proprietary information, but if the information does not provide a competitive edge in the marketplace by virtue of its secrecy, it will not be afforded protection under the NJTSA.

The NJTSA should further favor employers by prohibiting not only actual misappropriation, but also threatened misappropriation of a trade secret.  Under the Act, “misappropriation” is the “[a]cquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means,” which includes the “breach of an express or implied duty to maintain the secrecy of, or to limit the use or disclosure of, a trade secret,” as well as “any access that is unauthorized or exceeds the scope of authorization.” N.J.S.A. 56:15-2.  Notably, actual or threatened misappropriation may be enjoined. N.J.S.A. 56:15-3(a).  Proof of actual harm is not required.

The NJTSA arms employers with an arsenal of legal and equitable remedies to combat misappropriation.  This obviously begins with injunctive relief.  However, not only does the NJTSA provide that an injunction is the appropriate remedy for a violation, N.J.S.A. 56:15-3(a), but it expands upon this equitable remedy by allowing an injunction to continue for a reasonable period of time to eliminate commercial advantage flowing from the misappropriation.  If exceptional circumstances exist, future use of a trade secret may be conditioned upon payment of a reasonable royalty for the period of time for which use could have been prohibited. N.J.S.A. 56:15-3(b).  Even specific performance may be ordered to protect the compromised information. N.J.S.A. 56:15-3(c).  Legal remedies include damages for both the actual loss suffered by the employer and any unjust enrichment enjoyed by the competitor as a result of the misappropriation.  N.J.S.A. 56:15-4(a).  Giving more teeth to the Act, a court may award counsel fees and punitive damages – in an amount not exceeding twice that awarded for actual damages and unjust enrichment – in cases involving the willful and malicious misappropriation of a trade secret. See N.J.S.A. 56:15-4(b) & N.J.S.A. 56:15-6(a).  These statutory remedies, and specifically the punitive damages and counsel fee provisions, could have a profound impact on trade secret litigation in New Jersey.  Indeed, the imposition of these new remedies could cause  former employees and their new employers to think twice before engaging in tortious misconduct that could expose them to such significant liability.

Because of its novelty, there is very little scholarship or case review of the NJTSA.  In SCS Healthcare Mktg., LLC v. Allergan USA, Inc., 2012 N.J. Super. Unpub. LEXIS 2704 (Ch. Div. Dec. 7, 2012), the Superior Court of New Jersey, Chancery Division, in a case of first impression, held that the rights and remedies afforded under the NJTSA are cumulative, rather than restrictive, of the rights and remedies provided under the common law.  Though common law trade secret misappropriation claims likely are preempted by the Act, common law claims which may overlap with the NJTSA (i.e. conversion, trespass to chattels, tortious interference with contract, and breach of contract claims) should remain viable, alternative legal avenues of recovery available to an employer under appropriate circumstances.  This, too, favors business owners, by allowing businesses to pursue an array of claims and remedies collectively and in the alternative under the common law, rather than limiting businesses only to those rights and remedies afforded by the NJTSA.

Employers should note, however, that the NJTSA does not guarantee protection of an employer’s trade secrets, and a compelling showing nevertheless must be made by an employer seeking to protect its legitimate business interests.  For example, in Strikeforce Technologies, Inc. v. Whitesky, Inc., 2013 U.S. Dist. LEXIS 96832 (D.N.J. July 11, 2013), the United States District Court for the District of New Jersey dismissed without prejudice a claim under the NJTSA brought by the plaintiff seeking to protect against the alleged misappropriation of certain anti-keylogging software.  In dismissing the claim for inadequate pleading, the court held that the plaintiff’s complaint merely parroted the language of a software license and development agreement and asserted that in the course of replacing its software with a competitor’s software, defendant was believed to have granted third parties access to plaintiff’s technology, to reuse, copy, replicate, and/or reverse-engineer the software.  Allegations like this, according to the court, amounted to no more than the kind of “unadorned, the-defendant-unlawfully-harmed-me accusation[s]” that do not meet the pleading requirement of Federal Rule of Civil Procedure 8(a) to withstand a motion to dismiss.  The lesson learned is simple: a plaintiff seeking to protect its interests under the NJTSA best have the facts and support to satisfy the elements of the misappropriation claim, or the trade secrets will not be subject to protection under New Jersey law.

Ultimately, while the NJTSA is a boon to employers seeking to protect their trade secrets in court, employers should not rest on the NJTSA alone to protect their interests.  Legal counsel should be consulted to assist in these efforts, which should include restricting employee access to sensitive information, marking confidential and proprietary information as such, requiring employees (especially key employees) to agree to confidentiality and post-employment non-compete agreements, prohibiting the removal of proprietary information from the workplace, and otherwise exercising reasonable diligence to maintain the secrecy of all proprietary information.  Employers should not expect the courts to be both their watchdog and policeman.  These preventative measures not only decrease employer risk, but bolster the likelihood that a court will find and enforce trade secrets when litigation is required.  In short, because former employees cannot be permanently impeded from maintaining their livelihood, employers should undertake reasonable and preventative efforts to safeguard all proprietary information to ensure enforcement by the court is less of a crap shoot when it counts.

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