Employers Seeking to Protect Confidential Information and Trade Secrets in New Jersey – Legal Overview, Best Practices and Practice Tips

Non-compete agreements are often used to protect confidential information from getting into the hands of a competitor. A recent New Jersey case regarding non-competes validated the use of both non-competes and non-solicit agreements in New Jersey. At the moment, employers can continue complying with the parameters that have been approved by the courts, including a narrowly drawn agreement tailored to protect relationships and confidential information that is not unduly restrictive to employees. However, employers do need to be prepared to address potential changes in the law in the states where they have employees (whether in offices or remote). An employer’s restrictive covenants may become unenforceable overnight, leaving them with little protection over one of their most important assets – their confidential information.

If non-compete agreements become unenforceable, employers should still take steps to safeguard their interests with respect to their confidential information. Those protections can be an employer’s best tool to protect confidential information if a key employee departs to a competitor and their non-compete is deemed unenforceable. Even for employers located in states that still enforce non-competes, like New Jersey, their workforces likely have many remote employees who live in states that limit those clauses more strictly than the employer’s home state. This may be an issue even with a forum selection clause/choice of law clause selecting New Jersey as the governing law, as certain states may not enforce those clauses as to employees working within their borders. For these reasons, protection of trade secrets is more important than ever in order to ensure a legal right to take action against an employee who discloses secrets to a competitor. A robust trade secret plan that is consistently applied and enforced can be the answer to the changing landscape of non-competes.

Trade secret claims in New Jersey

Trade secrets in New Jersey are protected by statute at the state and federal level, as well as under New Jersey common law:

• New Jersey Trade Secrets Act (NJTSA): New Jersey enacted the NJTSA in 2012 (modelled after the Uniform Trade Secrets Act, a version of which has now been adopted in every other state besides New York), to provide rights and civil remedies concerning the misappropriation of trade secrets, without displacing or replacing any other pre-existing rights or remedies for misappropriation of trade secrets.
• Defend Trade Secrets Act of 2016 (DTSA): The federal DTSA creates a federal civil action for misappropriation of trade secrets, which allows plaintiffs to bring a trade secret claim in federal court and to seek injunctive relief, damages, restitution, and exemplary (punitive) damages, as well as attorneys’ fees for an actual or threatened misappropriation of trade secrets.

Although attorneys’ fees may be awarded to either a successful plaintiff or a successful defendant, such awards are left to the discretion of the trial judge, not decided by the jury. Fees may be awarded in favour of the plaintiff where the “trade secret was willfully and maliciously misappropriated”, and in favour of the defendant where the “claim of the misappropriation is made in bad faith”. Successful defendants are not typically awarded fees in trade secret misappropriation cases, absent evidence that the plaintiff knew, or was reckless in not knowing, that the misappropriation claim lacked merit.

Trade secret claims under the DTSA, NJTSA, and New Jersey common law claims of misappropriation are frequently brought together. New Jersey courts have held that analysis under the DTSA “folds into” the analysis under the NJTSA with respect to determining whether the plaintiff has sufficiently identified a trade secret and has otherwise alleged a claim of misappropriation. New Jersey courts permit common law claims for misappropriation to proceed alongside the statutory claims because common law claims are considered to be broader than the DTSA and NJTSA – in that they protect confidential information that may not qualify as trade secrets under the DTSA or NJTSA.

Elements of a trade secret claim in New Jersey

To prevail on a claim for misappropriation of trade secrets under the DTSA or the NJTSA in New Jersey, a plaintiff must establish three elements:

• the existence of a trade secret;
• that the trade secret was subject to reasonable measures to maintain its secrecy; and
• that the trade secret has been misappropriated or is threatened to be misappropriated.

There is no heightened pleading standard for trade secret misappropriation claims in New Jersey.

New Jersey courts not only recognise a claim for actual misappropriation but allow a court to grant a temporary or permanent injunction to prevent any actual or threatened misappropriation of trade secrets. Under the DTSA, a court may enjoin an actual or threatened misappropriation of trade secrets so long as the injunction does not prevent a person from becoming employed or practising a lawful profession, trade, or business in the state. Any injunction under the DTSA must also be based on evidence of threatened misappropriation, including circumstantial evidence, such as evidence that the new position will be overlapping with the position in which trade secrets were learned, where the concept of inevitable disclosure may apply.

What information qualifies as trade secret in New Jersey?

The DTSA defines a trade secret as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes...”, where two additional conditions are met:

• the owner thereof has taken reasonable measures to keep such information secret; and
• the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.

Similarly, the NJTSA defines “trade secret” as “information, held by one or more people, 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:

• 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; and
• is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

New Jersey courts require that the subject matter of the alleged trade secret actually be a secret, rather than merely the plaintiff’s proprietary information; New Jersey trade secret protections typically terminate once the information becomes public knowledge. For example, when a company is developing a new product in secret, information relating to that product may qualify as a trade secret, but it will no longer qualify as a trade secret once the product is released on the market if the secret information is actually disclosed. Likewise, a commercial process described in a draft patent application will lose trade secret protections once the patent application is filed and the process is publicly disclosed through patent applications.

Confidential compilations of public information may be deemed trade secret in New Jersey. A company’s critical business information, including client lists, compiled customer information, market and financial analyses, research materials, and data compilations may be protectable trade secrets, even if the underlying information is publicly available. In addition, trade secret information will not lose trade secret protection solely because portions of it are publicly available. For example, New Jersey courts may extend trade secret protections to pricing information, purchase orders, customer complaint information, strategies, marketing information, and even patent information, provided that there is a non-public aspect of the information that goes beyond what is publicly available.

A trade secret must also have economic value. In a recent decision, the Third Circuit Court of Appeals held that a confidential list merely containing passwords to a variety of the company’s systems and client databases was not a trade secret. Although the information protected by such passwords may be trade secrets, the court held that the passwords themselves were not valuable, particularly because the company immediately rendered the list of passwords useless by simply changing the passwords.

New Jersey courts have held that numerous categories of confidential business information meet the definition of a trade secret, such as pricing, business plans and strategies, contact lists, and data compilations. A trade secret with economic value may also include proprietary manufacturing processes, development methods, testing protocols, and regulatory strategies.

Defining trade secrets in New Jersey litigation

Recently, trade secret litigation in New Jersey has continued to define what information qualifies as a trade secret and what plaintiffs must allege to identify the trade secret adequately in each stage of litigation. New Jersey courts have held that trade secrets must be described with sufficient particularity to distinguish the information from “matters of general knowledge in the trade”. A plaintiff in a trade secrets case does not have to “spell out the details” of a trade secret at the pleading stage, but must at least provide sufficient information “to place a defendant on notice of the bases for the claim being made against it... and to permit the defendant to ascertain at least the boundaries of within which the trade secret lies”. 

A plaintiff may be able to identify the trade secret by pointing to an example of the trade secret or by identifying confidential documents containing trade secrets that the defendant has allegedly misappropriated. Thus, for example, in a recent New Jersey decision, plaintiff alleged that its former employee misappropriated a confidential document by sending it to his personal email address, when the document contained aspects of plaintiff’s confidential business plans, pricing, business initiatives and strategy, performance, and financial analysis. Although the categories of information alleged to have been taken were similarly vague and generic, the plaintiff’s reference to the document containing the trade secrets was sufficient to allow the defendant and the court to “ascertain at least the boundaries within which the secret lies”.

New Jersey courts often find, as noted above, that customer lists constitute trade secrets, even if the customer lists contain publicly available information, so long as the plaintiff has created or compiled the list, maintained it, and took steps to keep it secret. For example, courts in New Jersey have recently rejected defendants’ arguments that customer lists are not entitled to protection because the list could easily be recreated by reference to the public sources or the internet, or by asking customers for their information.

On the other hand, although a private compilation of publicly available information may constitute a trade secret, the publicly available information contained in the compilation is not entitled to trade secret protection. New Jersey courts have held that while a plaintiff’s customer list was a trade secret, plaintiff did not own the underlying customer contact and personal information, and where the customers provided that information directly to the defendant, defendant’s use of such information did not constitute misappropriation, even if the customers would not have provided that information to the defendant without the plaintiff’s efforts.

Alleging reasonable measures to protect secrecy in New Jersey litigation

The plaintiff in a trade secrets case must allege that it took “reasonable measures” to maintain the secrecy of the trade secret at issue. Such measures may include non-disclosure and confidentiality agreements, appropriate facility security protections, and employment agreements containing non-compete and non-solicitation covenants. New Jersey courts have also found that computer network restrictions, software security systems, and employment policies requiring employees to return company property at the time of separation may constitute reasonable efforts to maintain secrecy. New Jersey courts have not required perfect secrecy or required plaintiffs to demonstrate extraordinary measures to maintain the secrecy of trade secrets. Rather, the standard is one of what is reasonable under the circumstances.

The best way to ensure that this test is met for companies with significant confidential information is to put into place a trade secret protection plan. That plan must, at a minimum, ensure that the company has agreements with all employees and with third parties to whom confidential information is disclosed, protecting the information. The plan should also implement written policies regarding how that information is protected, limit access to confidential information, train employees on those policies, and enforce the policies. When an employee who has had access to significant confidential information joins a competitor, the company should also have specific plans in place as to how to address that departure, including preservation of equipment, assessing whether employees actually took information with them and potentially the conducting of forensic examinations by qualified third-party examiners who can ultimately testify if a matter goes to litigation.

Alleging misappropriation in New Jersey litigation

Under the NJTSA, misappropriation is defined as:

• 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; or
• disclosure or use of a trade secret of another without express or implied consent of the trade secret owner by a person who:
1. used improper means to acquire knowledge of the trade secret; or
2. at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was derived or acquired through improper means; or
3. before a material change of position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired through improper means.

Thus, in New Jersey, the plaintiff is not required to plead that the defendant actually used or disclosed the trade secret. Allegations that the defendant acquired the trade secret through improper means are sufficient to support a trade misappropriation claim. Moreover, when pleading misappropriation by use or disclosure, the plaintiff is not required to plead detailed allegations about how the defendant used or disclosed trade secrets.

Rather, the plaintiff must demonstrate that the trade secret was acquired, used, or disclosed through improper means. “Improper means” is defined under the NJTSA as “theft, bribery, misrepresentation, breach or inducement of a breach of an express or implied duty to maintain the secrecy of, or to limit the use or disclosure of, a trade secret, or espionage through electronic or other means, access that is unauthorized or exceeds the scope of authorization, or other means that violate a person’s rights under the laws of this State”. Improper means are distinguished from “proper means” of acquiring the information, such as “independent invention, discovery by reverse engineering, discovery under a license from the owner of the trade secret, observation of the information in public use or on public display, obtaining the trade secret from published literature, or discovery or observation by any other means that is not improper”.

Threatened misappropriation and inevitable disclosure

Trade secret claims may be based upon threatened misappropriation as well as actual misappropriation. New Jersey recognises a claim for threatened misappropriation based on the doctrine of inevitable disclosure. Under the inevitable disclosure doctrine, where an employer’s former employee begins working for a competitor, the employer does need to establish that its former employee has actually used or disclosed a trade secret, but that there is a sufficient likelihood that the former employee will inevitably disclose or use trade secrets by working for the competitor.

The inevitable disclosure doctrine is frequently raised in an application for a preliminary injunction against an employer’s former employee and their new employer. The plaintiff must satisfy the usual requirements for seeking temporary or preliminary injunctive relief. However, in New Jersey, courts typically find that inevitable disclosure of a trade secret qualifies as irreparable harm. Courts do not require proof of actual misuse or disclosure, but may infer inevitable disclosure where the former employee’s role at a competing company would require the use of the confidential information learned from the previous employer and therefore creates a substantial likelihood of harm.

In a recent trade secrets decision, the District Court reiterated that where a plaintiff can demonstrate a substantial likelihood of inevitable disclosure, the plaintiff does not need to come forward with direct evidence of actual disclosure. The plaintiff demonstrated that likelihood by alleging that a high-ranking employee had access to the plaintiff’s trade secret information, including customer lists, pricing data, and other confidential business information. The plaintiff further alleged that prior to resigning to join a competitor, the former employee emailed this confidential information to his personal email account. In addition, the former employee’s role with the competitor involved working on a project to directly compete with the plaintiff, which made it inevitable that the employee would use or disclose the plaintiff’s trade secrets in his new role.

Best practices when an employee leaves for competitor

Once an employee leaves, the company should determine its exposure to trade secret misappropriation as well as investigate potential security breaches. The company should at minimum:

• determine whether that employee is bound by an enforceable non-compete agreement;
• verify whether there is evidence of wrongdoing before the employee’s departure;
• conduct a forensic examination of the employee’s devices;
• identify all of the trade secret information to which the employee had access;
• determine what can be done to protect the trade secrets from disclosure and mitigate harm from a breach; and
• determine if there is particular concern that an employee’s new position would necessitate his/her use of trade secrets.

Sometimes, a company can negotiate with the new employer and the former employee to restrict the employee’s role to activities for which they do not possess trade secret information. If such negotiations fail, litigation seeking injunctive relief may be the only option to prevent the disclosure of the trade secrets.