Cartier and Tiffany & Co. recently settled a lawsuit that pitted the two jewelry companies against one another after the latter allegedly lured at least two employees away from Cartier. In the complaint that Cartier filed against the Tiffany in February 2022, it argued that LVMH-owned brand had engaged in a scheme “to solicit and receive … trade secrets and other confidential information [from Cartier employees] that would facilitate the pursuit of [its] stated corporate goal of competing with Cartier’s High Jewelry business.” At the heart of the competition-centric squabble was proprietary and confidential information about Cartier’s strategy for its High Jewelry business, which the Richemont-owned company alleged amounts to a trade secret-protected asset.
As this case and others – such as the ones that Seed Beauty filed against Kim Kardashian’s KKW Beauty, Coty, and Kylie Jenner’s corporate entity, the recently stayed case involving Valentino, and Le Tote v. Urban Outfitters – indicate, trade secrets are not merely assets held by pharma and tech companies, where innovation is particularly rampant. Since trade secrets broadly consist of formulas, patterns, compilations, programs, devices, methods, techniques and/or processes that provide a company with a competitive advantage, they encompass things like proprietary stitching techniques (which are at issue in Mrinalini, Inc. v. Valentino S.p.A.) and others methods/aspects of manufacturing. Chanel, for example, recently asserted in response to an Office action from the U.S. Patent and Trademark Office that “the method and cost of manufacture” for its No. 5 fragrance bottles and caps “are proprietary to [it] and constitute a trade secret.”
In an effort to guard such secret/valuable information, companies – including those in fashion, footwear/sportswear, and retail more broadly – tend to rely on noncompete clauses with employees. After all, in order to claim trade secret ownership (and misappropriation), a company need not only show that it has proprietary information from which 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.” It must also establish that such information is “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
Among the policies and procedures aimed at limiting access to trade secrets is the inclusion of noncompete and non-solicitation provisions in employee contracts, as well as the use of password locking, secrecy-centric training, etc.
The budding issue is the growing pushback against noncompete clauses among lawmakers and regulators. Early this year, for instance, the Federal Trade Commission (“FTC”) initiated an effort to “generally prohibit employers from using noncompete clauses” in employee contracts on the basis that they “constitute an unfair method of competition and therefore violate Section 5 of the FTC Act.” The proposed rule would make it illegal for an employer to: (1) enter into or attempt to enter into a noncompete with a worker; (3) maintain a noncompete with a worker; and/or (3) represent to a worker, under certain circumstances, that he/she is subject to a noncompete. (As of March 6, the FTC voted to extend the public comment period for the proposed new rule.) Not exactly an unprecedented move, California law is among a small number of states that largely prohibit employers from enforcing noncompetes.
Such a rule would be significant, as at least “some companies rely exclusively on noncompete agreements with their employees and contractors to protect their valuable trade secrets and other intellectual property,” according to Phelps Dunbar’s Lindsay Calhoun and Matthew Slaughter.
A broadening of noncompete bans from state law mandates to a potential prohibition at the federal level would require companies to rely more heavily on alternative protections for trade secrets. Confidentiality agreements, for example, can be “a useful, legally enforceable tool for a company to protect its proprietary information in situations where the company has reason to believe that the former employee is using the company’s proprietary information to compete,” Foley & Lardner’s Krista Cabrera and Mikle Jew stated in a note late last year. Cautioning companies against adopting sweeping confidentiality clauses, they point to the 2020 decision in Brown v. TGS Management Co., in which the California Court of Appeal held that an employer’s confidentiality agreement was too broad and essentially amounted to a voidable noncompete where it defined “confidential information” as “all information that is ‘usable in’ or that ‘relates to’ the [applicable] industry.”
In addition to confidentiality and/or non-disclosure agreements, Calhoun and Slaughter highlight limited use agreements, which “allow employees or contractors to use trade secrets for a specific purpose but prohibit them from using it for any other purpose or disclosing it to others;” limited noncompete agreements; and timely responses to breaches that occur as ways for companies to protect their valuable intellectual property in light of the “current uncertainty surrounding noncompete agreements.” In terms of the latter, they state that if a trade secret’s confidentiality is breached, “companies should move swiftly to investigate the breach and take legal action, if necessary, such as enforcing their rights under the Defend Trade Secrets Actor state law equivalents.”
THE BIGGER PICTURE: The potentially shifting landscape for noncompete agreements comes amid the larger rise in trade secret litigation that has been underway following the enactment of the Defend Trade Secrets Act in 2016, and more recently, as “more employees are changing companies due to the pandemic, more companies are using trade secret classification to protect their intellectual property, and courts have emphasized the importance of the statute of limitations,” Crowell’s Astor Heaven stated in a litigation forecast.
GreenbergTraurig attorneys similarly anticipate more activity in the trade secret counseling – and litigation space – since “the long echo of the ‘great resignation’ of 2021-22 continu[es] to produce instances of insider theft of confidential information.” Moreover, they state that “the prospect of losing the protections of noncompete agreements (in states that presently allow them) could leave trade secret law as the only viable game in town,” which means it is a good time for companies “to be thinking about auditing and improving trade secret protection policies and procedures.”