Monday, January 11, 2016

The Three Categories of Business Information

The Sixth Circuit Court of Appeals recently had the opportunity to assess the three categories of business information that are at the center of nearly all non-compete and trade secrets cases:

(1) Trade secrets;

(2) Confidential information; and

(3) General skills and knowledge.

The question that often appears in lawsuits is to what extent the law protects these three categories of information. As discussed in Orthofix, Inc. v. Hunter (and countless other articles and cases), the law generally answers the question in the following way:

(1) Trade secrets are protected in most states by statutes (and in a few by the common law), irrespective of any contractual agreement. They are protected under the law of property and of confidence.

(2) Confidential information is protected if there is a specific contractual arrangement in place to do so, and information that does not rise to the level of a trade secret still can vest the owner with legal rights based on contract law.

(3) General skills and knowledge are protectable only through a non-competition agreement, which must be limited in time, scope, and duration. Importantly, the skills and knowledge must derive from the employment relationship - not the individual's free-standing experiences.


Professor Orly Lobel has written that "[e]mployers have been going after employees for using what many courts have defined as general problem-solving abilities. In response, courts repeatedly struggle with separating trade secrets from employees' aptitude, mental and physical abilities, and skills." Talent Wants to Be Free (Yale Univ. Press), at p. 107. She notes several flash-points in the law, where courts have struggled and taken different views as to the three types of business information:

(1) Training (which some courts use as a justification for enforcing restrictive covenants);

(2) Negative know-how (or, the knowledge of what does not work); and

(3) Memorized or internalized information (the so-called "embedded knowledge" problem).

Coming up with a way to differentiate trade secrets and confidential information is not an easy task, but as a shorthand approach, trade secrets typically are used continuously in the operation of a business while confidential information tends to be more ephemeral and have a shorter shelf life.Though this question is difficult in its own right, the harder question may be coming up with an intelligible standard to divide confidential information from general skills and knowledge.

And it becomes more difficult when the subject "skills and knowledge" were developed on the job (as opposed to some pre-existing job experience). The Restatement (Third) of Unfair Competition provides only the following general guidance:

(1) Separating out general skills and knowledge from protectable business information is intensely fact-specific.

(2) Trade secret rights are recognized only in specialized information.

(3) Courts will assess whether the employee took some "physical embodiment of the information" with her.

Ultimately, the Restatement (and common sense) seems to suggest that if what the employer is trying to protect is central to the employee's marketability in general, then the information likely falls within general skills and knowledge. If, however, the employer is trying to protect something unique that others have been unsuccessful in developing, then legitimate trade secrets and confidential concerns arise.

In the Sixth Circuit's Orthofix case, the court addressed a common plus-factor that allowed the employer to retain rights to certain confidential information (without concluding the same was a trade secret). The employee who left took that information with him and apparently conceded that it would take months to recreate it. The value of this specific information to the employer, coupled with a physical taking, therefore removed it from the general-skills-and-knowledge category.

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