Vondran Legal® - Trade Secrets mediation, arbitration, and Litigation: Overview of Arizona Trade Secret Misappropriation Elements.  For arbitration, mediation, litigation, and cease-and-desist letters and responses, call us at (877) 276-5084. 

Introduction 

Trade secrets are a crucial aspect of a business's intellectual property, providing a competitive edge by protecting confidential and proprietary information. In Arizona, trade secret misappropriation is governed by the Arizona Uniform Trade Secrets Act (AUTSA), which sets out the legal framework for protecting trade secrets and addressing their misappropriation. This blog will provide an in-depth overview of the elements of trade secret misappropriation under Arizona law, supported by examples and case law, and explained in a way that is easy to understand for those not familiar with legal jargon. 

What is a Trade Secret? 

The Arizona Legislature enacted AUTSA in 1990 and adopted most of the provisions of the Uniform Trade Secrets Act, "which codifies the basic principles of common-law trade-secret protection, to govern the resolution of trade-secret issues." Enter. Leasing Co. of Phx. v. Ehmke, 197 Ariz. 144, 148 ¶ 12, 3 P.3d 1064, 1068 (App. 1999). 

AUTSA defines "trade secret" as information, including a formula, pattern, compilation, program, device, method, technique, or process, that both:

(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.

(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

A.R.S. § 44-401(4).  See Orca Communs. Unlimited, LLC v. Noder (2014) 236 Ariz. 180, 182 [337 P.3d 545, 547].)

A trade secret is a type of intellectual property that comprises information that is not generally known or readily ascertainable and provides a business with a competitive advantage. To be protected under the Arizona Uniform Trade Secrets Act (AUTSA), the information must meet two key criteria: 

Independent Economic Value 

The information must derive independent economic value, actual or potential, from not being generally known to, or readily ascertainable through proper means by, other persons who can obtain economic value from its disclosure or use. This means the information gives the business a competitive advantage because it is not known by competitors or the public. 

Examples of Trade Secrets with Economic Value

Reasonable Efforts to Maintain Secrecy 

The owner of the trade secret must take reasonable measures under the circumstances to keep the information secret. This involves actively protecting the confidentiality of the information to prevent it from becoming generally known. If the information is easily accessible or not adequately protected, it may lose its status as a trade secret. 

See the Enter. Leasing Co. v. Ehmke case below.

Examples of Reasonable Efforts to Maintain Secrecy: 

Elements of Trade Secret Misappropriation 

To establish a claim of trade secret misappropriation in Arizona, a plaintiff must demonstrate three key elements: 

1. Existence of a Trade Secret 

To prove that a trade secret exists, the plaintiff must show that the information in question is indeed a trade secret as defined above. This requires demonstrating that the information has economic value because it is not generally known and that reasonable steps have been taken to keep it secret. 

 Example: In Enterprise Leasing Co. of Phoenix v. Ehmke (197 Ariz. 144, 3 P.3d 1064 (Ariz. Ct. App. 1999)), the court held that a computer program designed to manage car rentals qualified as a trade secret because it had economic value and the company took measures to keep it confidential, such as restricting access and requiring employees to sign confidentiality agreements.  

2. Acquisition of the Trade Secret by Improper Means 

The second element requires showing that the trade secret was acquired through improper means. Improper means can include theft, bribery, misrepresentation, breach of a duty to maintain secrecy, or espionage. 

 Example: In Calisi v. Unified Financial Services, LLC (232 Ariz. 103, 302 P.3d 628 (Ariz. Ct. App. 2013)), the court found that a former employee who accessed and downloaded confidential client lists after resigning used improper means to acquire the trade secrets, as he had a duty to maintain the confidentiality of this information.  

3. Use or Disclosure of the Trade Secret Without Consent 

Finally, the plaintiff must prove that the trade secret was used or disclosed without their consent. This can include situations where the trade secret is used in a way that benefits someone other than the owner or is disclosed to others who are not authorized to receive it. 

Example: In Microtek Int'l, Inc. v. Roper (222 Ariz. 676, 218 P.3d 1046 (Ariz. Ct. App. 2009)), the court held that a former employee who used a company's proprietary customer database to solicit business for a competitor was liable for trade secret misappropriation because he used the information without the company's consent. 

Arizona employees have a fiduciary duty to their employers

Proximate Damage Resulting from Breach of Fiduciary Duties

"Defendants argue Plaintiffs have suffered no damage as a proximate result of any wrongful conduct constituting a breach of fiduciary duties, including the duty of loyalty. In Arizona, an employee owes his or her employer a "fiduciary duty," which includes a "duty of loyalty." Security Title Agency, Inc. v. Pope, 219 Ariz. 480, 200 P.3d 977, 989 (Ariz. Ct. App. 2008). To recover for breach of the fiduciary duty of loyalty in Arizona, a plaintiff must prove proximately caused damages. See Agilysys, Inc. v. Vipond, 2006 U.S. Dist. LEXIS 65418, 2006 WL 2620103, *2 (D. Ariz. 2006). For the breach to proximately cause an injury, the wrongful conduct must be a "substantial factor in bringing about the harm." Standard Chartered PLC v. Price Waterhouse, 190 Ariz. 6, 945 P.2d 317, 343 (Ariz. Ct. App. 1997); see also Smith v. Johnson, 183 Ariz. 38, 899 P.2d 199, 202 (Ariz. Ct. App. 1995) (A tort plaintiff "must show a reasonable connection between the defendant's act or omission and the plaintiff's injury or damages.")

See Firetrace USA, LLC v. Jesclard (D.Ariz. 2010) 800 F.Supp.2d 1042, 1052.  Thus, you will often see a cause of action for breach of fiduciary duty.  See my breach of fiduciary duty explanation video here.

Potential Defenses to Trade Secret Misappropriation Claims 

Defendants in trade secret misappropriation cases may assert several defenses, including: 

Potential Remedies for Trade Secret Misappropriation 

Arizona law provides multiple remedies for trade secret misappropriation, including: 

AZ Case Law Example:

In Empire West Title Agency, LLC v. Tarter (202 Ariz. 345, 45 P.3d 494 (Ariz. Ct. App. 2002)), the court awarded injunctive relief to prevent a former employee from using or disclosing the company's trade secrets, as well as damages for the harm caused by the misappropriation. 

AUTSA provides protections and remedies in the trade-secret arena that are not generally available under common law. See A.R.S. §§ 44-402 (permitting injunctive relief for actual or threatened misappropriation), 44-404 (permitting award of attorney fees), 44-405 (preserving the secrecy of alleged trade secrets during litigation); Cortaro Water Users' Ass'n v. Steiner, 148 Ariz. 314, 316, 714 P.2d 807, 809 (1986) (noting the general rule that attorney fees are not recoverable unless provided for by statute or contract). See Orca Communs. Unlimited, LLC v. Noder (2014) 236 Ariz. 180, 183 [337 P.3d 545, 548].

Practical Steps for Protecting Trade Secrets 

If a company is not taking reasonable steps to protect its trade secrets, it may lose protection.  While there is no simple formula to do this, here are a few things to consider as part of a comprehensive trade secret protection program. Businesses can take several steps to protect their trade secrets and minimize the risk of misappropriation, including: 

Arizona case law:

The secrecy need not, however, be absolute. Henry Hope X-Ray Products, 674 F.2d at 1340. Rather, when evaluating the level of secrecy required, the owner need only be able to show that it made reasonable efforts to maintain the secrecy of the information such as to ensure that it would be difficult for others to discover the information without using improper means. Id.; K-2 Ski Co. v. Head Ski Co., 506 F.2d 471, 474 (9th Cir. 1974). Reasonable efforts do not require extreme and unduly expensive procedures to be taken [***18]  to protect trade secrets against industrial espionage, E.I. duPont de Nemours & Co. v. Christopher, 431 F.2d 1012, 1016 (5th Cir.), cert. denied, 400 U.S. 1024, 27 L. Ed. 2d 637, 91 S. Ct. 581 (1970), and the owner of a trade secret does not relinquish its secret by disclosure to employees on a necessary basis or by limited publication for a restricted purpose. Metallurgical Industries, 790 F.2d at 1200. To hold otherwise would greatly hinder the owner's ability to profit from its secret. Id. 

Thus, while public revelation would dispel all secrecy, the owner of a secret need not remain totally silent. Id. Ehmke contends that Enterprise did not keep the documents secret. However, all Enterprise need show is that it made reasonable efforts to maintain the confidentiality of the disputed information, see K-2 Ski Co., 506 F.2d at 474, and this it did. Not only did Enterprise make reasonable efforts to ensure the confidentiality of the information, such as limited disclosure to those employees in need of the information to perform their duties and general directives regarding confidentiality, but [***19]  it specifically included a confidentiality provision in its employment agreement for high-level managers such as Ehmke, as well as in the employee policy handbook that all employees had to acknowledge and sign. These measures demonstrate adequate safeguards to protect the financial documents and the Worksheet.  See Enter. Leasing Co. v. Ehmke (Ct.App. 1999) 197 Ariz. 144, 150-151.)

Arizona Trade Secrets Statutory Definitions

Other important definitions for a trade secret plaintiff to know under Arizona statute:

1. "Improper means" includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy or espionage through electronic or other means.

2. "Misappropriation" means either:

(a) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means.

(b) Disclosure or use of a trade secret of another without express or implied consent by a person who either:

(i) Used improper means to acquire knowledge of the trade secret.

(ii) At the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it, was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use.

(iii) Before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

The statute of limitations for a trade secret claim in Arizona is three years. A.R.S. § 44-406.