Worried About Trade Secret Poaching? Check in With Your Third-party Service Providers

Hiring external contractors is common practice in the fast-paced tech-industry where talent is scarce and in high-demand, but such a practice can expose a company’s most valuable IP to the confidentiality measures, or lack thereof, of those external contractors. This type of common business model is an area ripe for trade secret theft. University Accounting Services (“UAS”) alleges that this is exactly what happened when their point person at ScholarChip, an external tech company hired by UAS to design and maintain their tuition collection software “eUAS,” left ScholarChip and formed a product in direct competition with UAS. UAS filed suit in Oregon against ScholarChip and its former employee, and both filed a motion for summary judgement. The court denied the motion and held that there were genuine disputes of material fact surrounding the breach of contract and misappropriation of trade secrets claims, among others.

To successfully bring a claim under Oregon’s Uniform Trade Secrets Act, a plaintiff must prove that (1) the information qualifies as a trade secret, (2) it reasonably attempted to keep the information secret, and (3) the defendant misappropriated the information.

UAS claimed the customer lists and webinars copied by the employee constituted trade secrets under Or. Rev. Stat. § 646.461(4). ScholarChip argued, however, that the information was merely unprotected “general business knowledge.” The court sided with UAS, explaining that the granular knowledge provided in the customer list ordered by revenue was more than general business knowledge, and that the employee’s actions of copying the materials demonstrated their value. ScholarChip further claimed that it made extensive, industry-accepted efforts to protect UAS’s data, and therefore was not liable for the employee’s conduct. But the court ultimately determined that whether UAS exercised the “reasonable degree of care” necessary to avoid liability and whether the action of taking the customer list constitutes misappropriation remain disputed.

For companies like UAS, involved with external contractors, this case serves as a reminder to examine the steps that external contractors are taking to protect proprietary information prior to doing business with them and to call out specific protections in contracts prior to disclosing proprietary information. Furthermore, external contractor employees with deep knowledge of client affairs should be fully briefed on company expectations and enforcement mechanisms for ensuring that client trade secrets remain confidential. An excellent general starting list on maintaining trade secrets is available here.

Law Clerk Jenée Iyer also contributed to this post.