Protecting the Confidentiality of Your Key Suppliers

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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.


Do Product Labels Matter? Maybe.

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Why is a can for Minute Maid juice like a coat? The answer: Because federal statutes and government regulations prescribe how each is labeled. In the case of juice, the label is prescribed by the U.S. Food and Drug Administration (FDA) regulations promulgated under the Nutritional Labeling and Education Act of 1990. In the case of the coat, as apparel manufacturers are all too aware, by the Federal Trade Commission (FTC) under either the venerable Wool Products Labeling Act of 1939 or the Textile Fiber Products Identification Act. The regulatory schemes share ostensibly the same goal: to assure a uniform national standard and to inform consumers of the content and the qualities of the goods. But what if prescribed rules do not further that purpose?

That is a question posed by a case that the Supreme Court heard on April 21, 2014 Pom Wonderful LLC v. The Coca-Cola Company. Pom’s business revolves around marketing beverages featuring pomegranate juice. Coca-Cola, wishing to cash in on the craze for such beverages, introduced a Minute Maid juice it called “Pomegranate Blueberry.” Notwithstanding the name, pomegranate juice constituted only 0.3% of the contents, and blueberry only 0.2%. The 99.4% of the contents which consisted of apple and grape juice was uncredited in the product name and the graphics decorating the label. Pom sued, claiming that the name “Pomegranate Blueberry” constituted false advertising and unfair competition, as consumers would naturally infer that the product’s main ingredients were pomegranate and blueberry juices. Unfortunately for Pom (and, one might add, for consumers seeking the health benefits of pomegranates and blueberries), FDA regulations specifically permit naming a product for ingredients so minor that they could be described as no more than flavoring.

So, now, the Supreme Court will decide whether a competitor can sue for false advertising and unfair competition when the contents of a label are authorized (or sometimes even required) by government regulations, no matter how misleading. In the language of the law, do the specific provisions of federal labeling law preempt federal and state laws that more broadly and generally protect consumers and competitors from deception as to the contents or quality of the goods?

Should the Court find for Pom, attention will have to be given not only to technical compliance with legal requirements, but also to whether consumers are likely to be misled. One might think Coca-Cola has the better argument. After all, if your labels comply with federal regulations, you should not have to worry about what consumers think. If there is a problem, the fault lies with the government and its regulations. But that conclusion might be wrong. Some of the justices appeared to view the labels as very misleading. Others wondered whether the FDA considered anything other than health and safety in promulgating the regulations and questioned whether assuring that consumers are not misled was the responsibility of the FDA.

Of course, that is the responsibility of the FTC and it is the purpose ostensibly served by the FTC labeling rules for textiles. But even under the FTC rules, you can name your line of sheets “Bamboo,” as long as that is just the name and the fine print on your label states that the fabric is rayon made from bamboo fibers. After all, this is consistent with a regulatory scheme that requires you to state the country of origin of a coat but not that of vitamins or toothpaste.

Credit:  Helene M. Freeman