Thursday, February 7, 2008

Ohio Supreme Court holds that retained memory can constitute a trade secret

retained memory trade secrets It has long been thought that under Ohio's trade secret statute, R.C. 1333.61, that which an employee holds in retained memory does not meet the definition of a trade secret. Thus, prior courts have differentiated, for example, between employees who remove documents or files and those who recreate the contents of those documents from memory. The former were covered by the trade secret statute, while the latter were not. This week, the Ohio Supreme Court, in Al Minor & Assoc., Inc. v. Martin, has upended this conventional wisdom, and in doing so has greatly expanded the enforceability of not only the trade secret law, but also noncompetition agreements.

R.C. 1333.61(D) defines a "trade secret" as:

[I]nformation, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique, or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers, that satisfies both of the following:

(1) It 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.

(2) It is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

At issue in Al Minor & Assocs. v. Martin was whether a customer list compiled by a former employee strictly from memory can form the basis for a statutory trade secret violation. The Ohio Supreme Court unanimously answered this question in the affirmative, holding that information that constitutes a trade secret under R.C. 1333.61(D) does not lose its character by being recreated from memory. In reaching its conclusion, the Court relied upon the language of the statute, which does not differentiate between physical information and that which is reproduced from memory.

While this will change the landscape of trade secrets, it does not alter the longstanding rule that information which can otherwise be discovered through reasonable means does not qualify as a trade secret. Thus, customer lists often lose trade secret protection if they can be reverse engineered, such as by simply looking in the phone book. This decision, however, will make it more difficult for an employee to demonstrate that a customer list was reverse engineered, because of the fact that the fruits of such reverse engineering is often the product of the employee's memory.

This case will not only expand trade secret protection, but also the class of employees against whom noncompetition agreements can be enforced. One of the key factors that courts examine in the enforcement of such agreements is whether the agreement seeks to protect a legitimate interest of the employer. That component will be much easier to satisfy with the expansion of trade secrets to include retained memory.

This decision will be a boon for employers who want to protect information or lock up employees with noncompetition agreements. The flip side, however, is that employers must now be more diligent than ever in the hiring process. It will no longer be enough to simply ask that an employee not bring anything (documents, files, etc.) with him or her to a new job. At the same time, it is impossible to ask an employee to turn off his or her mind or erase his or her memory.

Thus, one possible unintended consequence of this decision will be an increase in the transaction costs of recruiting and hiring. Anytime an employee is recruited, that employee now has the potential to bring trade secrets with him or her in memory. The recruiting process might now have to include the former employer in the hiring process to ensure against any future legal claims concerning retained memory trade secrets. Otherwise, I don't know how an employer hiring anyone who had access to anything that could remotely be construed as a trade secret can have any comfort level with the hiring.