Business Tip: Include a liquidated damages clause in your restrictive covenant agreements that clearly sets forth how damages will be calculated in the event your employee breaches the non-competition agreement.

As a President, CEO or General Counsel of your company, you have recognized the need to have your key executives and employees enter into non-competition or non¬-solicitation agreements. Those non-competition agreements are usually a cost effective way to stop your key executives and employees from competing against when they leave your company. However, in those instances where you have to go to court to enforce your non-competition agreement, the experience can be costly, in terms of attorneys’ fees, your time and your company’s resources.

One of the factors that makes the enforcement of a restrictive covenant costly is that damages can be difficult to prove as it is hard to quantify the damaging effect of the competition on your business. Often times you will have to hire an expert to determine the appropriate damages formula to use and calculate what damage your company has incurred as a result of your former executive or employee competing against you. A cost effective way to help minimize some of this cost is to include a provision in your agreement with the key executive or employee that sets forth the damages that your company will be entitled to recover if they violate their restriction.

Unfortunately, such a damages provision cannot provide that if your key executive or employee violates the restriction that your company is entitled to hundreds of thousands or millions of dollars in damages. In fact, if a court views the damages provision as imposing a penalty, it will not enforce the provision. A penalty is one which is grossly disproportionate to the probable loss that your company is likely to incur. Instead, the damages provision must be a “reasonable forecast” of the damages that your company is likely to incur as a result of the breach of the restriction.

What is a “reasonable forecast” of damages for one type of business or employee may not be a “reasonable forecast” for another type of business or employee. Therefore, care needs to be given in the drafting of such damage provisions. An examination of several cases that have discussed such damages provisions is instructive in determining what types of clauses courts have found to be “reasonable forecasts” and which have been found to be penalties.

Two Times Lost Profits A Reasonable Forecast. Two securities traders agreed if they traded any of the products that they had traded for their employer in the three months before they left their securities trading firm, their employer would be entitled to between $700,000 and $800,000 in damages or, alternatively, would be entitled to obtain an injunction against them. When the securities traders violated their non-competition agreement, their former employer sought damages in the amount of the profits that the securities traders generated for their new employer while breaching their non-competition agreements. While the court recognized that it would be difficult if not impossible to calculate the trading profits the securities trading firm would have made but for the violation of the non-competition agreements, the court held that the profits earned by the securities traders for their new employer was not necessarily equivalent to the losses suffered by the securities trading firm as damages. Instead, the proper measure of damages in this case were the profits the securities trading firm would have made on sales it could reasonably have expected to secure had the securities traders not sold securities in breach of their non-competition agreements. However, the court noted that had such a provision been included in the non-competition agreement, that upon breach of the agreement, the securities trading firm could have recovered the profits earned by the two securities traders while breaching their non-competition agreement.

Two Times Previous Years Customer Commissions A Reasonable Forecast. One shareholder of a closely held company purchased the shares of the other shareholder under an agreement that precluded the selling shareholder from competing against the company for three years. In the event that the selling shareholder violated the non-¬competition provision, he agreed to pay two times the previous year’s commissions for the customer or account to which the breach relates. The court found that since the damages calculation was directly tied to the previous year’s commission earned from the customer to whom the breach related, the calculation was a reasonable method of calculating damages.

Two Times Lost Annual Premiums A Reasonable Forecast. An insurance salesman had an employment agreement that contained a non-solicitation provision that prevented him from soliciting the insurance companies’ clients for two years after he left the insurance company. Further, in the event of breach of that provision, the agreement provided that the insurance company was entitled to recover as damages two times the annual premiums it lost as a result of the violation. The court found that because the insurance company had an historic renewal rate of ninety percent, the loss of one customer had the potential to have recurring impact. Therefore, the court found the formula to be reasonable in determining damages.

One And One Half Times Lost Fees Could Be A Reasonable Forecast. A manager at the Buffalo office of a national accounting firm entered into a non-competition agreement with his employer in which he agreed that since his position gave him an advantage in attracting certain clients to the accounting firm, that if he served any former client of the Buffalo office within eighteen (18) months of his departure from that accounting firm, that he would compensate the accounting firm one and one-half times the fees that the accounting firm had charged that client over the preceding fiscal year. The rationale for this formula was that it used a client’s gross billings to value the loss of the client. While the court recognized that such a formula had been accepted by other courts in evaluating accountant non-competition agreements, the court said that in this case evidence needed to be presented that showed that such a formula compensated the accounting firm for the actual damages that it had incurred as a result the loss of client as opposed to penalizing its former employee.

The goal of any damages formula provision should be twofold. First, the provision should allow former employers to easily calculate damages, saving it the cost and expense of proving complicated damages at trial. Second, the provision should serve as a deterrent to the employee (and possibly the new employer) by establishing the damages the employee may have to pay as damages for violating the restriction. Such provisions may give a company another basis to stop employees from competing against them.

Business Tip: Include extension clauses in your restrictive covenant agreements to ensure that the time of the restrictions will not begin to run until the employee has stopped violating the restrictions.

In order to make sure that an employer gets the full benefit of the restrictive time period in its non-competition, non-disclosure or non-solicitation agreements, employers in Illinois should make sure that such agreements contain “extension clauses.” Extension clauses will extend the time period or modify the start date of the restrictive covenant in the event that an employer does not discover the former employee’s breach until near the end of the restrictive time period or the employee continues to violate the restriction during litigation.

The Illinois Appellate Court for the First District addressed the issue of extension clauses in Citadel Investment Group, LLC v. Teza Technologies LLC, et al. In that case, Citadel sought to enforce a non-competition agreement against two former employees that prohibited the employees from competing against Citadel for nine months following the end of their employment. Several months into the nine-month non-competition period, Citadel discovered that its former employees were competing against it and filed an emergency motion for a preliminary injunction. After a preliminary injunction hearing, the employees were enjoined from engaging in any competitive activity as defined by the non-competition agreements from the date of the order and ending at the termination of the nine-month restrictive time period set forth in the non-competition agreements, which deprived the Citadel of nine full months without competition. In its opinion, the trial court noted that the non-competition agreement did not have a clause extending the restriction period based on a violation of its terms.

On appeal, Citadel argued that its former employees should have been enjoined for the full nine-month restrictive time period as contemplated under the agreement starting from the date of the injunction order, despite the lack of an extension clause in the non-competition agreements. However, in upholding the trial court, the First District Appellate Court recognized that under the plain language of Citadel’s restrictive covenants, the restrictions terminated by their own terms nine months after termination of employment. Further, the Appellate Court recognized that the agreements did not contain any provision for allowing for an extension or modification of the commencement date of the restriction.

In light of this decision, which is in accord with decisions from other districts of the Illinois Appellate Courts, employers in Illinois should review the non-competition or non-solicitation agreements that they currently use and that they have used in the past to see if they contain extension clauses. If any of these agreements do not contain extension clauses, Illinois employers should consider revising these agreements to include extension clauses to ensure that the employer gets the full benefit of the restrictive time period in these agreements.

In a recent decision from the United States District Court for the Northern District of Illinois in Intertek USA Inc. v. AmSpec, LLC, the Court found that certain financial information, aging and sales reports and laboratory equipment wish list qualified as trade secrets and entered a preliminary injunction to protect the use of that information by a competitor and former employees.

Intertek tests and inspects petroleum products and chemicals and owns about 60% of the market share of petrochemical testing and inspection in the Chicago market. AmSpec was a competitor of Intertek that sought to expand into the Chicago market. When the branch manager of Intertek’s Chicago operation learned that AmSpec was seeking to expand into the Chicago market, he, along with an administrative assistant and lab manager, contacted AmSpec about jobs and provided AmSpec with the following information of Intertek:

1. Aging and sales reports that listed Intertek’s Chicago area clients and their outstanding balances;
2. Recent profit and loss statement that included information about quantities of chemicals tested, payroll structure of the branch office and the branch office rent and electricity costs; and
3. A list of methods and instruments that Intertek’s lab manager thought AmSpec should have in the lab of its Chicago office (this list closely resembled Intertek’s lab).

The Court found that the information above to be trade secrets. Intertek took adequate measures to protect the secrecy of the above information by having its employees execute Employee Confidentiality and Innovation Agreements; only allowed employees access to information if such information was necessary for that employee’s job; and protected computer access to such information with passwords.

In addition, the Court found that while AmSpec may have been able to obtain a list of methods and instruments needed for its lab from publically available information, such as customers and recognized testing methods, the precise mix and volume of methods that Intertek used and the profitability of those methods was not public knowledge. And while AmSpec might have been able to discover this information from communicating with customers, that process would have taken time, effort and expense.

The relief granted by the court was aimed at eliminating the unfair advantage that AmSpec gained by using plaintiff’s trade secret information, not to punish AmSpec, which presumably would occur if a verdict were rendered against it at trial. The preliminary injunctive relief entered, among other things, prohibited AmSpec from opening its Chicago office for an additional two months and barred the use of Intertek’s trade secrets until trial. In addition, the Court ordered AmSpec to pay the salaries of the former Intertek employees during the two-month period to mitigate some of their injury and as punishment for encouraging these former employees to disclose Intertek’s trade secrets.

There are several takeaways that business owners should recognize from this case. First, taking steps to protect the confidentiality of information is critical to a court finding that the information is a trade secret. Second, should Intertek have been more vigilant to prevent employees from taking its trade secret information? For example, if Intertek had been monitoring employee email usage would it have known that company files were being emailed to employee personal email accounts. Third, Intertek did not have agreements restricting non-competition or non-solicitation of customers with its employees. While favorable, the Court’s decision may have been more favorable if Intertek had such agreements with its employees.

A recent Illinois Appellate Court decision found that one’s physical location is irrelevant in determining whether one has violated a non-competition provision.

In this case, the defendant owned and operated an integrative medicine business that provided services to patients in and around Bloomington and Peoria, Illinois. Defendant sold his business to the plaintiff through an asset purchase agreement. Among the assets purchased by the plaintiff were the patient list, patient records, goodwill, books, files, marketing data and all creative and promotional materials. The asset purchase agreement contained a non-competition clause that prohibited the defendant from providing integrative medical services within 30 miles of Bloomington and Peoria for three years after the sale.

After the defendant sold his business, defendant moved to California and began practicing integrative medicine with a company in California. However, defendant sent a letter to his former patients in Illinois stating that he was moving his physical office to a new location in California and that he looked forward to continuing to service his patients through his new location. The website of California company allowed patients to schedule at home blood draws and personal consultations, among other things.

Plaintiff subsequently filed suit against the defendant for violation of the non-competition clause, among other things. Defendant argued that providing services remotely to patients located within 30 miles of Bloomington and Peoria did not violate the non-competition clause. Both the trial court and the appellate court disagreed and entered (and upheld) a preliminary injunction prohibiting the defendant from continuing to contact former patients.

In upholding the trial courts entry of a preliminary injunction, the appellate court found that the elements of a preliminary injunction had been met: the harm to be suffered by the plaintiff was obvious as the loss of customers and sales and the threat of continuation of such losses to a legitimate business interest was sufficient to show that plaintiff would suffer irreparable injury unless protected; monetary damages would not compensate plaintiff for the potential loss of patients and competitive position threatened by defendant’s conduct; and the non-competition clause was reasonable and enforceable in the context of the sale of a business as in such a situation the goodwill purchased by the buyer is protected. Finally, the court found that the solicitation of clients that lived within 30 miles of Bloomington and Peoria through the internet was a violation of the non-competition clause and the fact that the defendant was not physically present in Illinois did not exempt him from the non-competition clause.

Most business owners believe that their business has important confidential information which must be protected from competitors. Obvious examples of confidential information are secret formulas or recipes for certain cola drinks or fragrances. But what about customer lists, customer ordering patterns or preferences, pricing formulas, marketing strategies, product designs, sales strategies, and the like? Most business owners would not dream of disclosing these types of information to a competitor. But when an employee resigns or is fired, the former employee may decide to disclose this confidential information to a competitor or the employee may become the competitor. Most business owners believe that everything about their business is a trade secret, but they may be in for unpleasant surprises. Just because a business labels something a trade secret, does not mean that a court will recognize it as a trade secret. The goal of this article is to give business owners a better understanding of what factors courts consider to determine whether a business has a trade secret and what business owners can do to increase the chance of the court finding that their information is a trade secret.

Definition Of A Trade Secret.

In Illinois the definition of a trade secret is very broad. Illinois, like 46 other states, has adopted the Uniform Trade Secret Act (“Act”). The Illinois version of the Act defines a trade secret as:

information, including but not limited to, technical or non-technical data, a formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, or list of actual or potential customers or suppliers, that: (a) is sufficiently secret to derive economic value, actual or potential, from not being generally known to 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 or confidentiality.

While not determinative, the courts in Illinois also look to the following factors to assist them in determining whether information is a trade secret:

• The extent to which information is known outside of the business;

• The extent to which the information is known by employees and others involved in the business;

• The extent of measures taken to guard the secrecy of the information;

• The value of the information to the business and competitors;

• The amount of effort or money expended by the business in developing the information; and

• The ease or difficulty with which the information could be properly acquired or duplicated by others.

In sum, whether the information sought to be protected qualifies as a trade secret depends fundamentally on whether such information has been kept secret.

The Business Must Be Able To Specifically Identify The Trade Secret.

While it may be obvious, before a business can determine whether it has a trade secret, the business has to be able to specifically identify the trade secret. Defining the trade secret in generalities, such as business and strategic planning information, manufacturing information, capacity information, marketing information, customer information and costs, without more, is insufficient. Whether preparing an employment agreement with a clause regarding trade secrets and/or confidential information or suing to stop an employee or third party from taking a trade secret, a business must be able to specifically identify its trade secrets. The more specifically a business can identify and describe a trade secret, the better off it will be.

What Is Not A Trade Secret.

Because trade secret protection depends on both the nature of the information and its secrecy, it is important to understand what is not a trade secret. As a trade secret has to be secret, generalized confidential business information and information that is generally known or understood within an industry is not a trade secret, even if that same information is not known to the public at large. Being the first one to use certain information does not, in and of itself, transform otherwise general knowledge into a trade secret. Otherwise, the first person to use information, no matter how ordinary or well known, would be able to appropriate it to his or her own use under the guise of a trade secret.

Mere legwork in acquiring information on the basics of a business cannot be the basis of a trade secret claim as a party who learns the basics of an industry from an employer would be precluded from entering the business at all in a competitive relationship. Price information disclosed by a business to its customers is usually not a trade secret as those customers are free to disclose that pricing information to anyone, including a competitor. Similarly, a design or process that can easily be ascertained from an examination of the product itself cannot be a trade secret.

The protection given by the law to trade secrets reflects a balancing of conflicting social and economic interests. Where an employer has invested substantial time, money, and effort to obtain a secret advantage, the secret information should be protected from an employee or third party who obtains the secret information through improper means. On the other hand, information that is generally known or easily reproducible by competitors is not given the same protection.

Pricing formulas can be a trade secret if a business can establish that the value in the pricing formula lies in the fact that it is not generally known to others who could benefit by using it, or that the information could not be acquired or derived through general skills and knowledge. However, mere knowledge of the price desired by a business or a formula that permits one to charge a certain amount to allow that business to make a good profit is not a trade secret.

Factors That Determine A Trade Secret.

One factor that the courts look to is how easily the information can be duplicated without involving substantial time, effort or expense. Information that is developed over a long period of time and at great expense is more likely to be afforded trade secret protection than information that is developed inexpensively over a short period of time. For example, courts have found that under certain circumstances customer lists can constitute trade secrets where that information has been developed by the employer over the years at great expense, kept under tight security and cannot be duplicated merely by an examination of the industry or reading the yellow pages or industry publications.

Another factor that the courts look to is whether a business took reasonable steps to maintain the secrecy of the information. Where a business has failed to take reasonable steps to protect the secrecy of the information, a business will not be afforded protection for its trade secret. While not a prerequisite to the protection of a trade secret, one manner in which a business can protect a trade secret is by entering into confidentiality agreements with employees and third parties who have access to the trade secret.

A “textbook” example of steps a court found to be reasonable to maintain the secrecy of a formula were as follows: employees who had access to the formula were required to sign confidentiality agreements which advised the employees that the formula was secret; only those employees who signed the confidentiality agreements had access to the formula; labels on ingredients of the formulas were coded; and the formula ingredients were referred to in company documents by their code names.

Many businesses in the service sector keep extensive files with information on their customers. This information may include customer contact information, service history, customer preferences and materials pricing to customers. Where a customer list is created over several years and cannot be duplicated without referring to multiple sources and calling potential customers to determine if they were in the market to purchase the product, one may be able to establish that the customer list is a trade secret because it is not readily ascertainable and can only be produced with considerable time, effort and expense. However, a business must also show that it took reasonable measures to protect the secrecy of the customer list. Trade secret protection of the same customer list can be lost where copies of the list are not kept under lock and key, not marked confidential, or are given to third parties who are not instructed or required to maintain the secrecy of the list.

One court found a customer list of mobile tool jobbers to be a trade secret. The court found that the list of mobile tool jobbers could only have been developed using considerable time, effort and money as such a list could not have been created from the telephone book, library, special directories, or any other publicly available sources. In addition, the office in which the list was kept was locked, special computer access codes were used, customer information was limited on a need-to-know basis, hard copies of the list were kept in one place, salesmen’s call books could not be removed from the office, security cameras were used, employee confidentiality agreements were utilized, and employees were constantly reminded of the confidentiality of the list.

While the steps taken by the businesses above to maintain the secrecy of certain information was found to be reasonable, what is “reasonable” depends on the circumstances of each case, including, in part, on whether the business is large or small. What would be reasonable for a Fortune 500 company might by unreasonable, due to expense and nature of the business, for a small company.

For example, the owner of a custom tailor shop maintained a customer list that had the customer’s name, information unique to each customer, and information known only to the salesmen who dealt with the customer. The list was kept in a closed file drawer at the store, employees with access to the list were repeatedly informed that the list was confidential, and only those salesmen that contacted the customer had access to the information. Based on this, a court found that the customer list was a protectable trade secret.

In contrast, a court found a customer list of a multi-million dollar company not to be a trade secret because the company did not establish that it undertook reasonable efforts to protect the secrecy of the information. The company maintained the customer list on a computer that was only accessible by three employees and each of those employees had received a company manual which provided that the company information was confidential. However, there was no evidence of internal security, the employees who had access to the customer list had not entered into confidentiality agreements, the customer list was not stamped “confidential,” hard copies of the customer list were not kept under lock and key, and upon departure employees were not reminded of the confidential nature of the customer lists.

Conclusion.

Every business wants to protect certain information in order to maintain its competitive advantage. Whether that information is entitled to trade secret protection depends on a variety of factors. While this article cannot tell you if your information will be entitled to trade secret protection by the courts, it is hoped that the article has given you an idea of some steps you or your business can take to increase the chance that information will be afforded trade secret protection. There are multiple avenues that a business can take to protect its business information and consultation with legal counsel is important before there is a problem.

Whether big or small, a customer base is vitally important to any business. Depending on the size and sophistication of a business, a customer list may be kept in one’s head, on index cards, in a book or on a computer. Regardless of how that customer list is kept, a business wants to take steps to protect that customer list from being disclosed to people outside of the company, especially its competitors. And by taking those steps, a business may be able to qualify its customer list as a trade secret, which would allow it to take advantage of certain legal protections, such as those offered by the Uniform Trade Secret Act. This Act is an important tool in preventing third parties from obtaining and using a business’s customer list.

Just because a company believes that its customer list is a trade secret, does not mean that it is. Whether a customer list is a trade secret reflects a balancing of conflicting social and economic interests. In determining whether a customer list is a trade secret, courts typically look to the following factors:

• Does your company gain a competitive advantage from its customer list because its customers are not generally known to others?

• Does your company take affirmative steps to keep others from gaining access to its customer list?

• To what extent is the information in the customer list known to others outside the company?

• To what extent is the information in the customer list known to people within the company?

• How valuable is the customer list to competitors?

• How much time, effort or money did it take to develop the customer list?

• How easily could a third party duplicate the customer list?

While no one of the above seven factors is determinative of whether a customer list qualifies as a trade secret, the primary focus is whether the customers are not generally known to competitors and whether the company has taken the necessary steps to maintain the confidentiality of the customer list.

Generally, customer lists that are developed over time with considerable effort and expense are given more protection provided that the company has taken the appropriate steps to maintain the confidentiality of the customer list. Courts use a sliding scale of confidentiality, holding larger companies to more rigorous standards of confidentiality than smaller companies. Regardless of the size of a company, at a minimum, all companies should take the following steps to protect their customer lists:

• Have employees sign confidentiality/non-disclosure agreements;

• Advise employees that the customer list is confidential;

• Label the customer list “Confidential” or “Trade Secret”;

• Keep the customer list under lock and key and/or on a password protected computer. If you keep the customer list on a computer, make sure that each employee uses a different password to access the computer;

• Restrict access to the customer list to those that really need access;

• Maintain as few copies of the customer list as possible; and

• Shred or delete old customer lists before they are thrown away.

In addition, companies that have large sales forces should consider implementing the following additional procedures to maintain the confidentiality of customer lists:

• Instead of having just one combined customer list, have separate customer lists for each sales territory. This will prevent employees from having access to the entire customer list, which will help guard against misappropriation of the entire customer list.

• Only allow sales teams to access the customer list for that sales teams’ territory.

• If the customer list is stored on a computer, give each member of the sales team his/her own password and identification number that will allow him/her to access the relevant customer list or the relevant portion of the customer list. This will allow a business to limit who can access the customer list.

• When a sales person accesses the customer list through the computer, have a confidentiality reminder statement pop-up on the computer screen before the customer list can be accessed.

• Make sure the Employee Handbook contains a confidentiality provision that explicitly states that the customer list is considered confidential information and have all employees acknowledge receipt of the Employee Handbook.

• When a member of a sales team leaves or changes territory, eliminate or change that person’s access to the customer lists.

Despite implementing the steps above, a customer list may not qualify as a trade secret. If a customer list is generally known or understood within an industry, it will not qualify as a trade secret. If a customer list is derived from public sources and did not require a lot of time and effort to compile, cull or analyze, it may not qualify as a trade secret. However, even if a customer list does not qualify as a trade secret, implementing the steps above will still help a company protect its customer list and decrease the likelihood that its customer list will come into the hands of its competitors.

Though your business may not have “secret recipes” for cola drinks or fried chicken, your business undoubtedly has some process or information that it believes gives it an advantage over its competitors. This confidential information may take many forms such as a customer list that has been created through the years at considerable expense and effort; a product design that a business’s competitors do not have; or a pricing formula that generates greater profits. Importantly, if a business takes certain steps to keep this information confidential, the law will help protect it from becoming public information and getting into the hands of competitors. On the other hand, if a business does not take the correct steps your competitors are free to gain access to your information and use that information to their advantage.

This article recommends important steps that a business can take to protect its confidential information. The steps range from simple to more complex. However, from a legal perspective all of these steps are recognized as necessary in order to protect the confidentiality of your information.

• Identify The Confidential Information. Before a business can protect its confidential information, or expect someone else not to disclose it, the business must be able to specifically identify what the information is that it considers to be confidential. The more specific a business is in identifying the confidential information, the better chance it has of protecting it.

• Be Realistic In Identifying The Confidential Information. Obviously not all information can be classified as confidential. Generally, confidential information is information that is known only within the business and is not publically available. Narrowly and specifically identifying the confidential information allows a business to support its determination that the information is confidential.

• Make Sure All Employees Understand What Information Is Confidential. Once a business has identified what information it believes to be confidential, it is essential that its employees understand what information the business considers to be confidential. The precise nature of the confidential information does not need to be revealed to the employees, but they must be told enough so that they know that the particular information is confidential and not to disclose it to others. For example, employees may be told that the pricing formula for Product X is confidential, without telling them the pricing formula.

• Include A Confidentiality Statement In Your Employee Handbook. An Employee Handbook sets forth, among other things, an employer’s expectation of its employees. The Employee Handbook should also identify what a business considers to be confidential and inform employees of his/her obligation not to disclose that information. It is hard for an employee to claim that he/she was unaware that certain information was confidential if language to that effect is in the Employee Handbook and the employee has acknowledged receipt of that handbook.

• Use Confidentiality/Non-Disclosure Agreements With People Who Have Knowledge Of And Access To The Specifics Of The Confidential Information. Certain people within a business, and consultants or others outside of a business, will have access to confidential information. In such cases, a business should have those individuals and/or entities sign Confidentiality/Non-Disclosure Agreements to put them on specific notice that the business considers certain information to be confidential and to give the business certain remedies against them should they disclose the confidential information.

• Protect Confidential Information. It almost goes without saying that a business should not leave confidential information in the open. There are different steps a business can take to prevent others from gaining access to the information. For a smaller company, these steps might involve keeping the information under lock and key, while for a larger company, it might mean keeping the information in a password protected database.

• Limit Access To The Confidential Information To Those With A Need To Know. Depending on the size of a business and the nature of your confidential information, not everyone should be given access to the confidential information. Access to this confidential information should be on a need-to-know basis. For example, a nationwide sales company may want to allow only its sales people to access its customer lists for that sales person’s territory, as opposed to allowing access to customer lists for all territories.

• Protect Computerized Confidential Information With Advances In Technology. More and more confidential information is being stored on computers. At a minimum, access to confidential information on these computers should be password protected with the password being changed at regular intervals, i.e. every 3-6 months. In addition, you might consider a confidentiality “reminder” pop-up on the computer screen before the confidential information can be accessed reminding employees that the information is confidential.

• Label The Information As Confidential. Consider placing labels on confidential information that clearly states that the information is “confidential.” This label can appear on the information itself and or on the container in which it is kept. It is yet another reminder to employees and others that information is considered to be confidential.

• Conduct Employee And Consultant Exit Interviews. Exit interviews are generally important to remind departing employees and consultants of their obligations to the company, and to make sure that the employee’s departure or termination of a business relationship is smooth. An exit interview also presents an opportunity to reiterate to the employee and/or consultant his/her obligation to keep information confidential.

The steps outlined above are all fairly easy to implement. The more of these steps that a business undertakes, the more likely its employees will understand that certain information is confidential, and the more likely a court will help a business protect the confidential information.

Finally, a business should review the steps it has taken to protect its confidential information on a yearly basis. Protections that are in place during one year may need to be updated the following year due to developments in the law and changes within the business. Implementing the steps above will help a business protect its confidential information and maintain its competitive advantage.

Disputes between members of limited liability companies can get messy fast. A recent decision by the Illinois Appellate Court for the First District illustrates the importance of treating the limited liability company as a separate entity in disputes between members. The attorney-client privilege may hang in the balance.

In Janousek v. Slotky, 2012 IL App (1st) 113432 (2012), the plaintiff was a forty-percent member of a member-managed limited liability company (the “LLC”) when the individual defendants, a father and son who held the remaining sixty-percent interest, excluded the plaintiff from the LLC and started a competing business. The plaintiff sued the individual defendants and the LLC, both individually and derivatively on behalf of the LLC, claiming breaches of fiduciary duties and violations of the Illinois Limited Liability Company Act (the “Act”) and seeking an accounting.

The individual defendants (improperly) retained one law firm to represent them individually and the LLC in response to the plaintiff’s claims. In this case, the individual defendants retained counsel that purported to represent them and to represent the LLC. The plaintiff sought access to the LLC’s communications with counsel for the defendants. He contended that he was entitled to communications with the LLC’s counsel because he was a member of the LLC. And, since the same counsel also represented the individuals, he contended that they had inherently waived any claim to privilege by seeking individual representation from the LLC’s counsel. A discovery dispute arose after the individual defendants and the LLC refused to produce communications with their attorneys regarding the LLC. The defendants argued that those communications were protected by the attorney-client privilege and that the plaintiff had to establish that he was a member of the limited liability company before he had a right to review those communications. The trial court, after motion practice, ordered the defendants to produce the communications withheld as privileged, finding that the plaintiff had a right to discover those communications to support his claims. The defendants refused to produce the communications, and, instead, chose to take a friendly contempt and have the Appellate Court decide the issue.

The Appellate Court noted that the attorney-client privilege is an exception to Illinois’ policy of broad discovery and only applies if the communications were expressly made privileged or the party claiming privilege reasonably believed that the communications would be kept confidential. The Appellate Court further noted that both the LLC’s operating agreement and the Act granted all members of the LLC the right to review the LLC’s records and that the Act even granted former members the right to review records in certain circumstances. The Court concluded that, in light of the fact that the plaintiff had a contractual and statutory right to review the LLC’s records, the individual defendants could not have reasonably believed that communications with their attorneys regarding the LLC would be kept confidential.

The Court held that the plaintiff had the right to review all of the LLC’s records in discovery and that such records included communications between the individual defendants and their attorneys. The Court also held that the communications were not privileged because the individual defendants and the LLC were being defended by the same attorneys. The Court concluded that the individual defendants could not have reasonably believed that communications with their attorneys regarding the LLC would be kept confidential because their attorneys simultaneously represented the LLC in the same dispute.

For limited liability company members and managers, the take away from the Appellate Court’s decision is to remember that a limited liability company is a separate legal entity apart from its members. Always observe formalities. If a dispute between members arises, retain separate counsel to defend the limited liability company and never use limited liability company funds to pay for the defense of a member.