Protecting Proprietary Information and Trade Secrets under Arizona Law

Even your secret BBQ sauce could be a trade secret!

All businesses have a need to protect information considered proprietary or confidential information. Other businesses have trade secret information that is directly related to a product or service that generates income. This information, especially trade secret information, can be essential to finding a competitive edge and must be protected to maintain that edge. Such information is legally protected under certain common law claims and the Arizona Uniform Trade Secrets Act. This article explores the basics of protecting proprietary and trade secret information under Arizona law.

What is Proprietary Information?

“Proprietary information” is a very broad term that covers intellectual property protected under federal law (patents, copyrights), confidential information, and trade secrets. Proprietary information is confidential if it relates to a business process, procedure, or personnel and is maintained by the business for internal use only. Proprietary information and confidential information can include formulas or spreadsheet for calculating a bid, marketing plans, design specifications, customer lists, business records, software developed for or by a business for its own use, human resources files, among other types of information. It can be protected under common law but does not have the stricter level of legal protection provided by statutes affecting trade secrets.

What is a Trade Secret?

Under Arizona law, a trade secret is any information that:

1. Has “independent economic value, actual or potential,” because it is not generally known to and cannot easily be ascertained “by proper means by, other persons.” The “other persons” are persons who do not have the information but can use it for financial gain if the information is disclosed; and

2. Was kept secret by the use of reasonable efforts under the circumstances.

A.R.S. § 44-401(4). In short, a trade secret is any information that has economic value because it is not known to others, would difficult to discover through independent efforts, and was kept secret by reasonable efforts. An oft-cited example is the secret formula for Coca Cola™, but any method, formula, design, ingredient list, software, data, or other information can, potentially, be a trade secret.

What Is Misappropriation under the Arizona Uniform Trade Secrets Act?

The Arizona Uniform Trade Secrets Act (“AUTSA”) is a state law that protects against misappropriation of trade secrets. A trade secret is misappropriated if it was either:

1. Obtained by a person who knew or had reason to know the trade secret information was acquired by improper mean (in other words, by theft or misrepresentation); or

2. Disclosed or used by a person without authorization, and the person:

   1. Used improper means to obtain the trade secret;

   2. Knew or had reason to know the trade secret was obtained by improper means; or

   3. Knew or had reason to know the information was a trade secret but gained knowledge of it by accident or mistake.

A.R.S. § 44-401(2); see also A.R.S. § 44-401(1). In sum, the AUTSA applies to misappropriation of trade secret information either by direct use of improper means or by disclosure or use of the information in almost any circumstance except by a third party with no prior knowledge that it was a trade secret.

The most-important remedy for misappropriation of trade secret information is an injunction, which is a court order directing a person to stop using the trade secret information and/or take other steps to return or destroy the information. A.R.S. § 44-402(A). The AUTSA also allows the business to recover monetary damages for the person’s misappropriation. The monetary damages can include both the value of any actual loss resulting from the misappropriation and any “unjust enrichment” (financial benefit) not covered by the actual loss calculation. The damages may be calculated as a royalty during the period of any unauthorized disclosure or use. A.R.S. § 44-403; see also A.R.S. § 44-402(B). Finally, the AUTSA also allows claims for attorneys’ fees against the person who misappropriated the trade secret. A.R.S. § 44-404.

How Do I Protect Proprietary Information and Trade Secrets?

Many techniques are available for the protection of proprietary information and trade secrets. Some businesses only need to protect proprietary and confidential information, but other businesses also need to protect trade secrets, which requires stronger and more well-developed techniques. The following is a brief overview of common techniques that are used to protect proprietary and trade secret information, but the list should not be considered exhaustive. Although I can address the legal perspective on protecting this information, I am not a security or cybersecurity expert, and depending on your business, the information to be protected, and how it is stored, you may need to consult a security or computer consultant:

Nondisclosure and Non-Compete Agreements / Clauses. Nondisclosure agreements or clauses are commonly used with employees and persons outside the company who will be allowed access to the proprietary or trade secret information. The employee or other person agrees not to disclose or use the information as part of the agreement for employment or access to the information. The agreement or clause will remain in effect after employment or access to the information ends.

Non-compete agreements or clauses require that an employee or other person not engage in competition with the business, especially if the competition is based on the proprietary or trade secret information. These agreements and clauses, however, can be difficult to enforce.

Policies and Procedures that Limit Access. Policies and procedures, whether written or unwritten, provide evidence that a business has identified information or files that are proprietary, confidential, or a trade secret and has taken steps to protect the information from misuse or misappropriation. A primary feature of the policies is that access to the protected information is limited only to those within the business who have a need to know. Because a trade secret has “independent economic value,” policies and procedures can be very useful confirmation that the business took steps to treat the information as a trade secret. The best approach is to document the effort to protect the information by developing written policies and procedures.

Employee Training. Policies and procedures will have little effect if a business’s employees do not know or understand them. This is where training of employees (at least the employees with access to the information) is important. A good approach is to train all new hires on the policies and procedures covering proprietary and trade secret information and schedule additional trainings at least annually. Document the training sessions by using a sign-in list and issue certificates of training or keep some other documentation of the employee training. If some misappropriation occurs, the documentation serves as proof that the person knew and understood the policy.

Security and Cybersecurity. In today’s fast-paced and technology-driven workplace, security and cybersecurity are an important consideration. Although some businesses are large enough to employ security professionals, many businesses will need to hire security consultants who can help identify gaps that employees or others can exploit. Similarly, IT consultants or cybersecurity experts can be retained to review technology systems for possible vulnerabilities. Finally, regular security audits can be essential to ongoing protection of proprietary, confidential, and trade secret information.

Conclusion

Protecting proprietary information and trade secrets is vital for the success of any business in Arizona. With a good understanding the legal framework and a practical approach, business owners can make informed decisions about protecting their business’s proprietary information and trade secrets. An experienced attorney can provide guidance and help businesses navigate the legal complexities and take appropriate measures to secure their proprietary information and trade secrets. Attorney James D. Griffith at Endurance Business Law, PLLC, can provide advice and guidance on protecting and preserving this valuable information, and, if necessary, litigate proprietary information and trade secret matters. To set up a paid consultation, please call our office at (480) 997-2951 or use the Contact form on this website. If we establish an attorney-client relationship, the consultation fee will be deducted from the fees for our services.