Trade Secrets


What Are "Trade Secrets" in Arizona and Can Companies Protect Them?

This article will provide an overview of what information is considered a “trade secret” under Arizona law and how companies can protect such information.

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.

What Is a "Trade Secret"?

In Arizona, a “trade secret” is a statutorily defined term that is protected by the Arizona Uniform Trade Secret Act (“AUTSA”). See Enter. Leasing Co. of Phx. v. Ehmke, 197 Ariz. 144, 148 (Ct. App. 1999) (“Like the majority of states, Arizona has adopted the Uniform Trade Secret Act, which codifies the basic principles of common-law trade-secret protection, to govern the resolution of trade-secret issues.”). The AUTSA broadly defines “trade secret” as (see A.R.S. § 44-401[4]):
[I]nformation, including a formula, pattern, compilation, program, device, method, technique, or process, that both: (a) 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 (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Regarding the first prong, only that information affording a “demonstrable competitive advantage” or “economic advantage over others in the industry” will be deemed a trade secret. Enter. Leasing Co. of Phx., 197 Ariz. at 150 (citations omitted).

As to the second, “most important” factor, the owner must be able to demonstrate that it “has taken such precautions as are reasonable under the circumstances to preserve the secrecy of the information.” Id. (citations omitted). To establish this prong, the owner must show that its efforts to maintain the secrecy of the information ensure that it would be “difficult for others to discover the information without using improper means.” Id. The owner’s efforts need not be unduly expensive, nor is the owner prohibited from disclosing the information to employees when necessary or from publishing the information on a limited basis for a restricted purpose. See id. However, if an owner of a trade secret makes no or minimal effort to maintain the secrecy of the alleged trade secret, a court will likely find that the information is not protectable as a trade secret. See, e.g., id. ; B2B CFO Partners, LLC v. Kaufman, 856 F. Supp. 2d 1084, 1091–94 (D. Ariz. 2012) (applying Arizona law and finding that information that is publicly revealed or subject to only scant precautions is not eligible for trade secret protection).

Examples of Trade Secrets

Compilation of Customer-Service Factors. The Arizona Court of Appeals concluded that a compilation of customer-service factors in managing a car-rental business and financial records that the owner treated as secret, even though the information contain therein was old and possibly outdated, was entitled to trade secret protection. See Enter. Leasing Co. of Phx., 197 Ariz. at 150.

Customer Lists. In many instances, court have determined that a company’s customer or client list is protectable trade secret. See HTS, Inc. v. Boley, 954 F. Supp. 2d 927 (D. Ariz. 2013) (applying Arizona law and finding that a company’s former employee misappropriated its trade secrets in the form of customer lists, customer contact information, financial information, and metrics). In this context, trade secret protection does not depend on whether the “list” misappropriated was in written form or memorized. See Calisi v. Unified Fin. Servs., LLC, 232 Ariz. 103, 106 (Ct. App. 2013) (citations omitted). Instead, courts will review several factors to determine whether a customer list qualifies as a trade secret.

For example, a customer list may be entitled to trade secret protection if it “represents a selective accumulation of detailed, valuable information about customers—such as their particular needs, preferences, or characteristics—that naturally ‘would not occur to persons in the trade or business.’” Id. (quoting Enter. Leasing Co. of Phx., 197 Ariz. at 149); see Prudential Ins. Co. of Am. v. Pochiro, 153 Ariz. 368, 371 (Ct. App. 1987) (holding that under Arizona common law, specific policyholder information, including amount of outstanding loans and dividends accrued, was a trade secret); c.f. Wright v. Palmer, 11 Ariz. App. 292, 296 (1970) (holding that under Arizona common law, general knowledge of business and customers acquired during employment was not a trade secret).

“A customer list may also be entitled to trade secret protection if the claimant demonstrates it compiled the list by expending substantial efforts to identify and cultivate its customer base such that it would be difficult for a competitor to acquire or duplicate the same information.” Calisi, 232 Ariz. at 106; see Prudential Ins. Co. of Am., 153 Ariz. at 371 (holding that under Arizona common law, a list of customers, “if their trade and patronage have been secured by years of business effort and advertising and the expenditure of time and money . . . is in the nature of a trade secret” (citation omitted)).

A relevant factor in this analysis is, of course, whether the information contained in the customer list derives independent economic value from its secrecy, and gives the holder of the list a “demonstrable competitive advantage” over others in the industry. Enter. Leasing Co. of Phx., 197 Ariz. at 148; see Amex Distrib. Co., Inc. v. Mascari, 150 Ariz. 510, 517 (Ct. App. 1986) (holding that under Arizona common law, a customer list was not a trade secret when the customers were known and generally accessible to competitors).

In addition, courts also consider the extent to which the company divulged its customer list externally and internally, i.e., to people outside of its business as well as to its own employees. See Miller v. Hehlen, 209 Ariz. 462, 470–71 (Ct. App. 2005) (customer list was not trade secret when employer gave it to former employee and did not condition its use); Enter. Leasing Co. of Phx., 197 Ariz. at 150 (while employer does not relinquish trade secret by disclosure to employees on a necessary basis or by limited publication for a restricted purpose, business that takes only scant precautions in safeguarding trade secret will not receive protection).

Training Videos. One federal court sitting in Arizona recently held that an insurance agency’s allegations were sufficient to state an AUTSA-based claim against its former employee for misappropriation of trade secrets arising from the agency’s training and educational videos. See Joshua David Mellberg LLC v. Will, 96 F. Supp. 3d 953 (D. Ariz. 2015). The agency asserted that the former employee illegally downloaded the videos, launched a similar website, and approached a competing agency to develop a web-based program mirroring the agency’s program. Id. at 965–66. According to the court, such claims adequately set forth a claim for trade secret misappropriation under AUTSA. Id.

Misappropriation of a Trade Secret

Initially, a tort action for misappropriation of a trade secret that conflicts with AUTSA is preempted by the legislation. See A.R.S. § 44-407(A). AUTSA does not, however, impact any contractual, civil, or criminal remedies even if they are based on misappropriation of a trade secret. See id. § 44-407(B). AUTSA also does not preempt a claim based on the misuse of confidential information that does not rise to the level of a trade secret. See Orca Comm’ns Unlimited, LLC v. Noder, 236 Ariz. 180, 182–83 (2014) (concluding that AUTSA does not preempt common law tort claims based on misappropriation of information that is not a trade secret, such as contractually defined “confidential” information). Accordingly, as will be further explained below, a company is well-served by contractually protecting information it considers to be “confidential,” rather than solely rely on AUTSA’s protections.

The owner of a trade secret must bring a misappropriation claim within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. See A.R.S. § 44-406. Under AUTSA, “misappropriation” means either:
(a) 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 (b) Disclosure or use of a trade secret of another without express or implied consent by a person who either: (i) Used improper means to acquire knowledge of the trade secret; (ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use, or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.
Id. § 44-401(2). AUTSA defines “improper means” as “include[ing] theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.” Id. § 44-401(1). Notably, use of trade secret information legitimately obtained during employment after that employment has ended also constitutes improper means. See Enter. Leasing Co. of Phx., 197 Ariz. at 151.

In sum, to establish a claim for misappropriation under AUTSA, the claimant must show that: (1) a legally protectable trade secret exists and (2) the defendant misappropriated the trade secret through improper means. See Miller v. Hehlen, 209 Ariz. 462, 471 (Ct. App. 2005) (rejecting argument that information that former employee misappropriated information because even if the information was trade secret information, the employee did not use improper means to obtain the information).

Remedies

AUTSA provides three primary remedies for companies that have been harmed through misappropriation of trade secrets: injunctive relief, monetary damages, and attorneys’ fees. See A.R.S. §§ 44-402, 44-403, 44-404.

Injunctive Relief. A company may obtain relief from the court prohibiting the misappropriator from further disseminating or using the trade secret. See id. § 44-402. While such relief may seem like a shallow victory, subsequent misuse of the trade secret would subject the misappropriator to contempt proceedings and sanctions for violating a court order.

B. Monetary DamagesUnder AUTSA, claimants may recover monetary damages based on the defendant’s misappropriation of a trade secret. A claimant may seek to recover “both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” Id. § 44-403(A). In addition, the statute provides that “[i]n lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty.” Id. Finally, “[i]f willful and malicious misappropriation exists, the court may award exemplary damages” in an amount up to twice the award for actual damages or unjust enrichment. Id. § 44-403(B).

Notably, if the owner seeks monetary damages as the result of the misappropriation, it must allege a cognizable theory for damages as damages are not presumed even if misappropriation is proven. Damages are an essential element of a trade secret misappropriation claim, and the claim will fail as a matter of law if it does not include a “cognizable theory of proximately caused damages.” W.L. Gore & Assocs., Inc. v. GI Dynamics, Inc., 872 F. Supp. 2d 883, 888 (D. Ariz. 2012) (citation omitted). Thus, even if the plaintiff is able to demonstrate that the defendant disclosed a trade secret, but fails to establish that the defendant or the entity to which the defendant disclosed the secret profited from the disclosure, the claim will fail. See id. at 888–94 (stating principle but holding that the record contained evidence from which a reasonable jury could conclude that the defendant used the plaintiff’s alleged trade secrets to develop its competing product).

Attorneys’ Fees. Finally, a company who sues for trade secret misappropriation may be able to recover its attorneys’ fees in certain circumstances. See A.R.S. § 44-404. Namely, the court “may award reasonable attorney fees to the prevailing party” for a “claim of misappropriation made in bad faith,” a “motion to terminate an injunction made or resisted in bad faith,” or “willful and malicious misappropriation.” Id.

Protection of Confidential Information

As indicated above, companies can and should protect their trade secrets and other confidential information through contractual arrangements, such as employment or confidentiality agreements. A confidentiality agreement may protect information broader than the category of information otherwise covered by AUFTA. That is, as “confidential information” that does not rise to the level of “trade secret” under AUFTA is not protected by AUFTA, it would behoove companies to separately define and specify what type of information is deemed protected as “confidential” by the company. Such agreements should also specify the company’s remedies in the event of the disclosure or use of such information.

If a company successfully tailors its relevant agreements and an employee violates the agreement by using confidential or trade secret information, the company will have a breach of contract claim against the employee in addition to a claim for misappropriation under AUFTA.
Conclusion
Companies are entitled to protect the sensitive and proprietary information that makes their company successful. Arizona’s legislature and courts understand the importance of maintaining the privacy of such information both to the individual companies themselves but also for public confidence in innovation and advancement. As set forth above, companies should proactively protect such information by explicitly defining what information is considered confidential in their employee agreements.

Properly drafted, a confidentiality agreement can serve three purposes:
  • place the employee on notice of what information the employer considers a trade secret or confidential,
  • evince the employer’s steps to maintain secrecy of the information, and
  • provide the employer with a breach of contract claim in addition to any trade secret misappropriation claim.
All told, employers should take all appropriate and reasonable steps to ensure the secrecy of their confidential and trade secret information.

If you have questions concerning a possible claim based on misappropriation or misuse of your trade secret or confidential information, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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