Don't Let Your Competitor Wear it Better: Protect Your Fashion Trade Secrets

Forget about crop tops and boyfriend jeans: the real fashion trend that everyone is talking about is trade secrets. 

Admittedly, that was a hokey opener, but its message still rings true. Trade secrets are a buzzword legal concept in boardrooms across various industries.   President Obama even used his last State of the Union address to discuss the problems that U.S. businesses face as a result of stolen trade secrets and called for legislation on the matter.

This serious issue is especially acute within the fashion industry.  This article explores the basics of what constitutes a trade secret and what steps fashion retailers, designers, manufacturers, and others in the industry should take to protect their trade secrets.

What risks do I face as a member of the fashion and retail industry?
A recent dispute between Nike and three of its former designers who left to work for Adidas offers a good example of the threat that companies face from departing employees. Nike alleged that the employees conspired to steal Nike's trade secrets and apply their knowledge at Adidas. If true, this type of behavior was clearly a danger to Nike's business, as its competitor could profit from Nike's hard work in developing its valuable information. According to the legal complaint, the employees detailed their alleged scheme on company cell phones and computers from which Nike uncovered the plot – notwithstanding the trio's attempts to delete the data before turning in their devices. The case settled out of court after several months of discovery but it is emblematic of the ease with which trade secrets and confidential information can be taken and misused, even where a company takes steps to protect its property. 

What is a trade secret?
A trade secret can be any kind of information that is not generally known and gives a business a competitive edge.  Examples of information that may constitute trade secrets in the fashion industry include design and manufacturing processes, cost data, non-public marketing strategies, and customer and supplier lists, if time and effort was invested in identifying customers or suppliers with particular characteristics. The Uniform Trade Secret Act ("UTSA"), enacted in 49 states and Puerto Rico, Washington D.C., and the U.S. Virgin Islands, frames the issues related to most trade secret cases in the United States.

The UTSA defines a trade secret as information that: (i) derives independent economic value from not being generally known or readily ascertainable, and (ii) is the subject of reasonable efforts to maintain its secrecy.

Thus, the first question that one should ask in assessing whether information is a trade secret is – not surprisingly – "Is it secret?"

The next step is to weigh whether the information at issue confers a competitive advantage to its owner.  In making this determination, courts will look at a number of factors, including:
  • the value the information has to the owner and its competitors;
  • how much effort or money the owner put into developing the information;
  • how seriously the owner tried to keep the information secret;
  • how hard it would be for others to properly acquire or duplicate the information; and
  • the degree to which others have placed this information in the public domain or made the information readily ascertainable.
The third step requires that the information is subject to reasonable efforts to maintain its secrecy. "Reasonable" is a fluid word that is determined by a cost-benefit analysis that varies from case to case. For example, while Coca-Cola reportedly keeps its formula locked in a vault and only makes it available to a handful of executives, such extreme measures are not necessary or practical for many businesses.

How can I keep my company's trade secrets safe?
Companies should implement robust policies and procedures to guard their trade secrets.  It is not only good practice, but if your company finds itself in litigation over stolen information, the court will analyze whether your company's steps to protect the information at issue was sufficient. If the court concludes that your company's procedures are inadequate, it may find that the information is not a "secret" and thus not entitled to protection. 

Below is a non-exhaustive list of steps that companies should take to keep their secrets safe:

Employee procedures
  • Implement a formal, written confidentiality and trade secret policy.
  • Provide employee training to explain and emphasize confidentiality policy at various intervals, including when hired, in period refreshers, and updates when new information arises.
  • Conduct exit interviews to reiterate the company's policy and the provisions of any agreements the employee signed.
  • Have employees certify in writing that all secret material in his/her possession is returned upon leaving.
Contract procedures
  • New employees, suppliers, manufacturers, and others who need access to your company's confidential information should be required to sign non-disclosure agreements. Be sure to update as necessary to cover new trade secrets.
  • Require new employees with access to conformational information to sign non-compete agreements to limit their ability to work for competitors after leaving the company.
  • New hires should also be required to sign non-solicitation agreements to prevent departing employees from poaching remaining employees.
  • Invention and disclosure agreements secure intellectual property rights to creative work by employees in their capacity at the company. 
Common sense procedures
  • Place a legend on documents that indicates that the information is confidential or a trade secret. It is important to maintain labels on physical or electronic documents, as well as on distributed materials.
  • Create a document retention policy to dispose of sensitive documents when they are no longer needed.
  • Restrict physical access to all confidential information and databases so that only those employees who need the information have access to it.
  • Protect electronic information with passwords and encryption.
  • Restrict downloading and copying abilities on company computers and software.
  • Keep confidential information on a strict "need to know" basis.
Ok, now what?
Theft of trade secrets will not be going out of style anytime soon.  Businesses in the fashion and retail industries should ensure that their procedures are current and more importantly, actually enforced and applied within the workplace.  That way, if your company finds itself in litigation over stolen trade secrets, it will be well positioned to argue that the information should be protected.

David I. Zalman is a partner in Kelley Drye & Warren LLP's litigation practice. He focuses on commercial and complex civil litigation, including trade secret misappropriation, and the intricate challenges companies face when designing and implementing confidentiality policies and drafting enforceable agreements to protect trade secrets.

Alina C. Mejer is an associate at Kelley Drye & Warren LLP. She focuses her practice on several aspects of complex commercial litigation in diverse areas including trade secret misappropriation and intellectual property.
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