The Keys to Keymon: Examining a Recent Case on Trade Secret Law in Tennessee

By Joseph Allen Kelly

Have you ever asked yourself the question, "what would I do if I were laid off from my job today?" When Tammy Keymon, the appellant in a recent Tennessee case, Hamilton-Ryker Group, LLC v Keymon, 2010 WL 323057 (Tenn.Ct.App), asked herself the same question, she apparently answered, "start competing with my soon-to-be-former employer tomorrow." Sure enough, the day after Tammy was laid off from her job at Hamilton-Ryker, she started her own competing-business, taking one of Hamilton-Ryker's biggest clients in the process. Life was good, until Hamilton-Ryker sued her for misappropriating trade secrets and violating a non-compete agreement. The damages, which included a large punitive component, totaled almost one million dollars. This article explores various facets of the Keymon case, including the meaning of "trade secret" in Tennessee.

I. Tennessee Trade Secret Law

The bulk of the damages awarded in the Keymon case were based on the misappropriation of trade secrets, which was governed by Tennessee common law until relatively recently. The term "trade secret" was defined under the common law to include " any formula, process, pattern, devise or compilation of information that is used in one's business and which gives him an opportunity to obtain an advantage over competitors who do not use it." Hickory Specialties, Inc. v. B & L Laboratories, Inc., 592 S.W.2d 583, 586. In determining whether information was truly a protectable trade secret, courts at common law also considered several factors, including the measures taken by the business to guard the secrecy of the information, the value of the information to the business and to its competitors, the effort and money expended by the business in developing the information, and other factors. Matters of public knowledge or information that were well known or easily ascertainable did not qualify for trade secret protection.

Today, however, trade secret law in Tennessee is governed by the Tennessee Uniform Trade Secrets Act (TUTSA), Tennessee's version of the Uniform Trade Secrets Act. TUTSA was enacted in 2000 to provide protection to individuals and businesses possessing trade secrets. More specifically, TUTSA provides that a plaintiff may obtain injunctive relief and/or an award of damages for the "misappropriation" of a "trade secret" as those terms are defined in the Act. See T.C.A. § 47-25-1701 et seq. When TUTSA was enacted, it expressly "preempt[ed] and displace[d] conflicting or inconsistent common law in Tennessee regarding the misappropriation of trade secrets." See T.C.A. § 47-25-1708(a).

TUTSA's definition of "trade secret" is similar to the common law definition:

[I]nformation, without regard to form, including, but not limited to, technical, nontechnical or financial data, a formula, pattern, compilation, program, device, method, technique, process, or plan that:

(A) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by 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.

T.C.A. § 47-25-1702(4). Under TUTSA, a claim for misappropriation can consist of either acquisition of a trade secret of another by a person who knows the trade secret was acquired by improper means, or disclosure and use of a trade secret under one of several defined circumstances. T.C.A. § 47-25-1702(2).

II. Misappropriation of Trade Secrets

In the Keymon case, one of the main issues on appeal was whether the information Tammy Keymon was alleged to have "misappropriated" was even a protectable "trade secret" under TUTSA. Tammy had been working for Hamilton-Ryker as a supervisor at a facility that prepared mailing labels for Verizon and other telephone companies when she was temporarily laid off pending employment negotiations. The very next day, Tammy called several of Hamilton-Ryker's clients (including Verizon) and negotiated to perform their telephone directory preparation work herself. She then e-mailed some fifty-six documents related to the work Hamilton-Ryker had performed for those clients from her work e-mail to her personal e-mail address.

According to Hamilton-Ryker, these documents, which included Verizon's list of mailing addresses that were used for fulfillment work, the anticipated production schedule for the remainder of the year, internal profit analysis, invoices for the most recent work, and mailing addresses from Verizon that had already been reformatted with Hamilton-Ryker's computer software, constituted trade secrets. Tammy argued that the documents were not trade secrets, pointing out that none of the information contained in the documents was really secret-for example, she could have obtained much of the information from Verizon directly.  The Court disagreed, citing Wright Med. Tech., Inc. v. Grisoni, 135 S.W.3d 561, 589 (Tenn.Ct.App.2001), for the proposition that, even if the information could have been developed by independent means, it may be protectable if the former employee actually obtains it from the former employer instead of through independent means.

Grisoni was a pre-TUTSA case decided under common law trade secrets law. It involved a determination as to whether information constituted confidential business information. As the Keymon Court acknowledged, the terms "trade secret" and "confidential information" have been used interchangeably in Tennessee courts. However, "confidential" business information is only protectable to the extent that it qualifies as a trade secret. Hickory Specialties, Inc. v. Forest Flavors Int'l, 26 F. Supp. 2d 1029, 1031 (M.D. Tenn. 1998). Going back to prong A of TUTSA's definition of "trade secret", it clearly requires that the information derive economic benefit from not being "generally known" or "readily ascertainable by proper means." The Court in Keymon did not explain how the information Tammy emailed herself satisfies this prong. The Court stated that Tammy received an economic benefit from the information in the form of a speedy 6-day turnaround between acquisition and ability to compete, but it is not clear that the benefit was a result of the information being otherwise unascertainable.

For purposes of illustration, assume a Tennessee company maintains a password-protected document listing the name of every country in Europe and its respective capital. Then assume that Jack, an employee of the company, emails the list to himself on his last day of work and then uses it to form his own competing-business just 6 days later. Jack could have obtained the names of the countries and capitals from the internet, but he chose to rely on the list instead. Does the list constitute a trade secret? Under Keymon, the answer is maybe. Clearly, prong B of the definition of trade secret would be satisfied, as the list's password-protection shows the company used reasonable means to maintain its secrecy. However, prong A of the definition should not be met, because although Jack's competing business benefitted from the list, that benefit was not a result of the list being not generally known or readily ascertainable. In fact, Jack benefitted from the list notwithstanding the fact that it was readily ascertainable.

The point of the illustration is that the Court in Keymon seems to skip over an important aspect of the definition of a trade secret - the extent to which the information is generally known or readily ascertainable. Tammy Keymon claimed the information she emailed to herself was not a trade secret because she could easily have obtained it through other means. However, the Court dismissed that argument, ruling that even though most of the information could have been gathered from public sources, the integration and aggregation of the information, the speed of its acquisition, and its password-protection, together, justified a finding that Tammy misappropriated Hamilton-Ryker's trade secrets. By focusing on where, when and how Tammy obtained the information, rather than on the nature, availability, and attainability of the information itself, the Court essentially put the cart before the horse.¹ That is, the Court determined that Tammy misappropriated a trade secret before establishing that there was even a protectable trade secret.

When the Tennessee legislature adopted the definition of "trade secret" from the Uniform Trade Secrets Act, it was already broader than its Tennessee common law counterpart. Then, the legislature expanded the definition even further to make it the version that it is today. Perhaps Keymon simply represents the next era of trade secrets protection law in Tennessee -one with broader and more expansive protections for businesses than before.

III. Violation of Non-Compete

Unfortunately for Tammy, her troubles were not limited to the misappropriation of trade secrets. As part of her Employment Agreement with Hamilton-Ryker, Tammy had signed a restrictive covenant where she promised that for 12 months after her employment, among other things, she would not solicit the company's clients.   Tammy claimed she should not be bound by the "non-compete" because it did not have any geographic limitation. In this case, the term "non-compete" was a misnomer.  The restrictive covenant Tammy was bound by, and was eventually held to have violated, was actually a non-solicitation agreement. Tennessee law has been clear for years that to be enforceable, a non-compete must have limitations as to time and geography.

However, the Court pointed out that in Tennessee, prohibitions on soliciting clients can take the place of the geographic limitation.  In short, Tammy could have started competing with Hamilton-Ryker the next day, right next door - just as long as she did not call on clients she worked for at Hamilton-Ryker. Unfortunately, Tammy had done just that. Accordingly, the Court found Tammy liable for violating the restrictive covenant of the Employment Agreement.

IV. Punitive Damages

Having found Tammy liable, the Court next determined what damages were appropriate. TUTSA provides for an award of exemplary damages in cases of "willful and malicious misappropriation." T.C.A. § 47-25-1704(b). However, TUTSA does not define "willful and malicious." The Keymon Court set about providing a definition. Tammy argued the definition of "willful and malicious" should be the one traditionally used for punitive damages, which requires a showing of "hatred, ill will or spite." Tammy argued that while she may have intended to take the information, she was not motivated by "hatred, ill will or spite" and therefore no exemplary damages should be awarded.

Citing cases from other jurisdictions interpreting the Uniform Trade Secrets Act, the Court held that the standard for "exemplary damages" under TUTSA was different from the standard for traditional punitive damages. No showing of "hatred, ill will or spite" was necessary to prove malicious intent in a trade secret misappropriation case. The Court agreed with the trial court that the proof showed malicious intent where Tammy drew unemployment compensation and accepted a severance while "surreptitiously utilizing Hamilton-Ryker's trade secret information to purloin Verizon's telephone directory business, even utilizing Hamilton-Ryker employees to do so." So, exemplary damages were awarded.

V. Conclusion

While the Keymon case presents several interesting issues on trade secrets and non-compete law, there are really three keys to remember. First, the Court granted trade secret protection to categories of information that in the past have often been held to not constitute trade secrets. In doing so, it appears that Tammy's decision to e-mail herself client related information the day before she left Hamilton-Ryker tipped the balance in favor of a finding of trade secret protection. Also, how the information was actually obtained and who actually obtained it seemed to be just as important, if not more important, than how it could have been obtained and who could have obtained it.

Second, the "non-compete" in the case was enforced without a geographic limitation. This was because it was really a non-solicitation agreement. Tammy arguably could have started competing next door, the day after leaving Hamilton-Ryker, so long as she had not solicited Hamilton-Ryker's customers.

Third, it is clear that exemplary damages under TUTSA are easier to obtain than traditional punitive damages. This is because the proof of malice for the showing of a "willful malicious misappropriation" under the Act does not require the showing of "hatred, ill will or spite" required to show malice under traditional punitive damages case law.

¹ These factors (where, when and how the informant was obtained) would be relevant to other aspects of the case, such as the determination of whether the definition of misappropriation is met or whether punitive damages are appropriate.