DIY Audits of Coatings Companies Trade Secrets
By Steve McDaniel, JD PhD
Technology Litigators
smcdaniel@technologylitigators.com
The DIY approach looms large in certain sectors of our industry, with do-it-yourselfers painting
everything from model cars to kitchens to
yachts. As discussed in previous iPaint
columns, trade secrets as a means to gain
competitive edges also have a huge presence in our business.
I recently discussed these seemingly
disparate facts with a leading coatings
company serving a very large DIY market,
the products for which it chiefly protects
using trade secret techniques. It made me
wonder if our CW readers could use a
“guide book” for conducting their own
trade secret audits.
Listen, I do recommend professional
assistance, especially to get you started
down the right road. But, I even more
strongly recommend routine reviews of internal trade secret protection programs of
any coatings company. So, here’s an abbreviated discussion of how you may wish
to conduct a DIY trade secret audit.
There is one and only way to organize
your DIY trade secret audit and, that is by
preparing yourself for a trade secret lawsuit.
Sorry, that’s just the way it is. Physical security is fine, gotta have it. But, unless you
have built the legal barricades around your
trade secrets, you’re just whistling Dixie.
There are really only a few possible
legal theories (reasons you can use to sue
someone for swiping your trade secrets)
and chiefly there are two upon which you
should focus your audit. Namely, either
the bums broke a contract with you under
which they promised NOT to steal them,
or they committed the civil equivalent of
criminal theft (the “tort” of trade secret
misappropriation).
This means that your audit should
have two principal assessments of equal
importance—a review of all contractual
relationships giving rise to a duty to protect your trade secrets, and a review of all
possible avenues by which someone might
tortuously steal your trade secrets. Ancillary to these reviews, you must be mindful
of where it is you will likely bring the lawsuit (the venue), what laws will govern the
suit (the choice of laws) especially if you
are a multi-state or multi-national organization (and, who isn’t these days), and
when it is you must bring the lawsuit (a
matter of tracking statutes of limitations).
You are going to have to establish
your case using facts and as the trade secret owner, you have the burden to do so
by presenting the court with a preponderance of the evidence in your favor.
Sometimes, you have to do so very
quickly if you are seeking any sort of preliminary relief to prevent use of your secrets (injunctions, seizures, freezing of
assets, bankruptcy proceedings, etc.). So,
prepare well in advance for this aspect of
your case. You can do so by having at
least compiled categorical listings of your
trade secrets and by making some
SWAGs as to the value of each. For example, in your formulations lab, it is
likely that there are ranges of tolerances
in your formulations for each of the components with which you build your coatings. These are very likely generally
referred to in your published MSDS pamphlets, but are actually much more
tightly defined by your chemists. Such a
categorical listing might be: “The Supplier identity for Additive ABC and tolerable ranges for same in Formulation
XYZ, representing 70-90% of the market advantage value of the product over
the nearest competitor’s product.” That is
what you would list on your pleadings,
say if you were forced to sue an ex-for-mulation chemist who walked the ACTUAL trade secret range tolerances to
your competitor.
The elements of a trade secret case for
which you must provide proofs are that
(a) the trade secret actually exists; (b) the
trade secret was disclosed in confidence to
the defendant or otherwise illegally gotten; and (c) the defendant’s use or disclosure of the trade secret was in violation of
that confidence, causing quantifiable injury to you. There are numerous versions
of these elements depending upon the jurisdiction and the facts of the case, but
they kind of boil down to these three. For
this reason, regardless of the theory under
which you bring your suit against the
thieves, your DIY audit should address the
factual underpinnings of these three requisite proofs.
In many jurisdictions, the question of
whether or not there is “use in one’s own
business” comes into play. In one of the
recognized definitions of trade secrets
(called the Restatement of Torts), for in-
formation to constitute a trade secret it
must be “information used in one’s own
business, and which gives him an oppor-
tunity to obtain an advantage over com-
petitors who do not know or use it” and
be in “continuous use.”
In another definition source (Uniform
Trade Secrets Act), it need not be used
since the owner may not have yet had an
opportunity to use it. So, your DIY trade
secret audit is going to have to address
which of these rules applies and set up
systems accordingly, or make sure you
