“It is wise not to seek a secret, and honest not to reveal one.”
PROTECTING COMMERCIAL INFORMATION
THE ARIZONA UNIFORM TRADE SECRETS ACT
Employment agreements and the duties of employees during and after employment with regard to trade secret information can be a troublesome issue facing business owners. In the absence of written trade secret protection or a written employment agreement with a non-compete or non-disclosure clause, the conduct of employees can still be covered by Arizona’s Uniform Trade Secrets Act (the “Act”). The Act is found in A.R.S. § 44-401 et. seq. The “policy supporting trade-secret law is to balance [the] public interest in competition in the workplace with the need for commercial ethics.” Joshua David Mellberg LLC v. Will, 96 F. Supp. 3d 953, 972–73 (D. Ariz. 2015).
There are several important definitions in section 44-401.
- “Misappropriation” means either:
(a) Acquisition 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.
(b) Disclosure or use of a trade secret of another without express or implied consent by a person who either:
(i) Used improper means to acquire knowledge of the trade secret.
(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.
(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
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- “Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique or process, that both:
(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
APPLICATION OF THE ACT
Trade-secret law “provides protection to the owner of a trade secret, but only while the information and knowledge remains a secret. The threshold determination whether to protect information as a trade secret therefore depends upon the nature of the information and the circumstances surrounding its secrecy and the maintenance thereof.” Enterprise Leasing Co. of Phoenix v. Ehmke, 197 Ariz. 144, 148, ¶13 (App. 1999). A trade secret:
“is not simply information as to single or ephemeral business events. [citation omitted]. Rather, a trade secret may consist of a compilation of information that is continuously used or has the potential to be used in one’s business and that gives one an opportunity to obtain an advantage over competitors who do not know of or use it.”
Id., 197 Ariz. 144, 149 [emphasis added].
The protection applies only to things that are secret and not published to the public or competitors in a particular industry. Id. at 149. In “every case where the plaintiff seeks protection for a trade secret, it must appear that it really is secret. If a so-called secret process is known to others in the trade, no one will be enjoined from disclosing or using it.” Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1184 (D. Ariz. 1973).
Confidential information often enjoys better protection with an express written agreement such as a non-disclosure agreement (“NDA”) but meeting the elements of the Act can provide a business with valuable protection for proprietary information. Thus, employers should consider the value of both the Act and a thorough NDA. Capable legal counsel can provide a well tailored NDA to businesses disclosing trade secret information to employees.
There is typically a serious dispute and substantial litigation in trade secret cases about whether a misappropriation has occurred. A misappropriation requires the acquisition of information or data by improper means such as “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage. . .” A.R.S. § 44-401. Misappropriation “involves the unfair taking for profit, at little or no cost, of property acquired by another through investment of substantial time and money.” IOW, LLC v. Breus, 425 F. Supp. 3d 1175, 1189 (D. Ariz. 2019).
Once a misappropriation is shown, a party can recover damages under A.RS. § 44-403(A) which states:
- Except to the extent that a material and prejudicial change of position before acquiring knowledge or reason to know of misappropriation renders a monetary recovery inequitable, a complainant is entitled to recover damages for misappropriation. Damages may include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. . .
This provision refers to both actual damages and other types of damages resulting from a misappropriation. The Act also allows for punitive or exemplary damages in the case of a “willful and malicious misappropriation” in an amount “not exceeding twice any award made under subsection A.” A.R.S. § 44-403(B).
The relevant statute of limitations states that an action under the Act “must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered.” A.R.S. § 44-406. The Act provides that “a continuing misappropriation constitutes a single claim.” Id. Therefore, “where misappropriation constitutes a continuing tort, the statute of limitations time period is effectively extended; each new instance of misappropriation restarts the limitations period.” 9 Ariz. Prac., Business Law Deskbook § 18:37 (2022-2023 ed.)
The Act is an important tool in any case involving the obligations of former employees related to trade secrets. This article only touches on several facets of the Act which contains numerous provisions that should be carefully considered by anyone in a legal action related to the Act. The Act is a very complicated tool and often presents sophisticated, commercial litigation issues. Highly experienced, capable legal counsel should assist you in navigating these issues. In any consultation with an attorney, you should always ask about their experience in court generally with large commercial cases and specifically with the Act.
Timothy Watson is the co-chair of the commercial litigation and trial practice group at Provident Law®. He is a trial advocate with more than 24 years of experience in high profile, high value litigation. He has successfully tried numerous cases in state and federal courts including multi-million dollar claims in the areas of business litigation, real estate, high net worth probate, injury and insurance matters. He holds a Martindale Hubbell peer review rating of AV-Preeminent with high ethical standing. In addition to representing clients in large, complex litigation, Mr. Watson provides mediation and arbitration services. He can be reached at: Tim@ProvidentLawyers.com or at 480-388-3343.
Disclaimer: The information in this article is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this article should be construed as legal advice from the individual author or the Firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this article should act or refrain from acting on the basis of any information included in, or accessible through, this article without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the reader’s state, country or other appropriate licensing jurisdiction.