Under the Uniform Trade Secrets Act, a “trade secret” is information that (1) derives independent economic value by virtue of its being secret; and (2) is the subject of reasonable efforts by the plaintiff to maintain its secrecy.  Although the first criterion is often discussed in judicial opinions, the second is not. The recent Seventh Circuit Court of Appeals case Fail-Safe, LLC v. A.O. Smith Corporation [pdf], No. 11-1354 (Mar. 29, 2012) is among the few reported cases that turn on the second prong of analysis.

Fail-Safe, LLC and A.O. Smith Corporation (AOS) held a series of discussions over the course of two years concerning a possible joint project to develop technology to make swimming pool drains safer.  Throughout these meetings and conversations, Fail-Safe shared with AOS sensitive technical information.  Yet Fail-Safe never entered an agreement requiring AOS to keep that information confidential, nor did Fail-Safe even identify the information it provided to AOS as confidential.  (AOS, by contrast, required Fail-Safe to sign a one-way confidentiality agreement.)  After the two companies decided not to pursue the joint development project, Fail-Safe alleged AOS introduced two pump motors incorporating Fail-Safe’s trade secrets.  Fail-Safe then filed a complaint alleging, among other things, that AOS thus violated the Uniform Trade Secrets Act.

The district court granted summary judgment in favor of AOS, reasoning (in relevant part) that, because Fail-Safe failed to take reasonable steps to protect the secrecy of its data, the information that AOS allegedly incorporated into its pump motors was not a trade secret.  The Seventh Circuit affirmed on the ground that, because Fail-Safe “failed to take any steps” to maintain the secrecy required for trade secret protection, its claim failed as a matter of law. 

Although Fail-Safe did not arise in the employment context, and the Seventh Circuit aptly characterized Fail-Safe as an “extreme case,” it underscores the importance of an employer’s documenting the steps it took to maintain the secrecy of any information it seeks to protect.  For example, an employer may include in its employees’ restrictive covenants a provision identifying the categories of the employer’s secrets, noting how those secrets are protected (e.g., via employee confidentiality agreements, password protections, etc.), and requiring the employee’s acknowledgment that such protections are reasonable under the circumstances.  Employers should also periodically audit their categories of secret information and update their security procedures.  Fail-Safe emphasizes that, although the bar is low for proving that information was the subject of reasonable efforts by the plaintiff to maintain its secrecy, that bar does exist.  Companies that lose sight of that burden may forfeit protections for their sensitive data.