Protecting the Confidentiality of Your Key Suppliers

trade secrets label

A case that was decided last year by the New York Supreme Court, Kings County, illustrates the importance of protecting the confidentiality of proprietary supplier and manufacturing sources.
In this case, a wholesale distributor of off-price apparel engaged an employee to assist the distributor in sourcing merchandise from overseas manufacturers. The distributor and employee made a number of trips to a South American country where the distributor sourced merchandise through a business broker who provided introductions to local apparel factories.

After a few years, the employee left the distributor to work for a competitor that began to place orders for merchandise with these same factories through the same broker.

The distributor subsequently brought an action against the employee and the competitor for unfair competition claiming that the identity of the broker and associated factories constituted trade secrets, which the employee misappropriated for his own and the competitor’s benefit.

Under New York law, a former employee may generally solicit a business’s customers, so long as the employee is not bound by a non-compete agreement, does not solicit the customers while still employed by the business and does not rely on customer information that was wrongfully obtained or which constitutes a trade secret. The courts have applied a similar standard when evaluating whether the identity of a company’s suppliers may be treated as a trade secret, often also considering whether the company had exclusive arrangements with those suppliers.

In determining whether information is a trade secret, New York courts frequently apply a six factor analysis:

  1. the extent to which the information is known outside of the company;
  2. the extent to which it is known by employees and others involved in the business;
  3. the extent of measures taken by the company to guard the secrecy of the information;
  4. the value of the information to the company and its competitors;
  5. the amount of effort or money expended by the company in developing the information; and
  6. the ease or difficulty with which the information could be properly acquired or duplicated by others.

The court ultimately decided the action in favor of the employee and competitor, determining that the identity of the broker and the associated factories were not trade secrets. The distributor did not establish that the broker or the factories had promised to or did, in fact, sell exclusively to the distributor and did not show that the identities of the broker and the associated factories were confidential. The distributor also failed to provide evidence that it had undertaken great effort in discovering the factories, in establishing a business relationship with the broker or in keeping the identities of the parties secret.

The lesson here is that businesses that depend on key suppliers should not rely on trade secret protection alone to protect these relationships. Instead, they should take steps to identify as proprietary that information which they wish to protect and should enter into appropriately tailored non-compete and non-solicitation agreements with their employees that are designed to prevent them from disclosing or otherwise taking unfair advantage of such information of which they become aware during the course of their employment.

Credit: R. Brian Brodrick

Brian is a partner in Phillips Nizer’s Corporate Law and Securities & Private Placement Practices.