Tennessee Trade Secret Law

How does Tennessee law protect your company's trade secrets?

Countless Tennessee businesses rely on an important form of intellectual property, known as trade secrets, that they have carefully developed over many years. Trade secrets often comprise things like customer lists, sensitive marketing information, non-patented inventions, software, formulas and recipes, techniques, processes, and other business information that provides a company with a business edge.

What Is a Trade Secret?

Information is likely to be considered a trade secret if it is:

  • not known outside of the particular business entity
  • known only by employees and others involved in the business
  • subject to reasonable measures to guard the secrecy of the information
  • valuable, and
  • difficult for others to properly acquire or independently duplicate
Trade secrets are different from copyrights, trademarks, and patents in that there is no formal "registration" process with the state or federal government. Trade secrets can come into existence merely through their use in business.

Using Nondisclosure Agreements to Protect Tennessee Trade Secrets

Many Tennessee businesses will attempt to protect their trade secrets by the use of nondisclosure agreements (NDAs). NDAs are essentially private contracts in which the employee promises not to disclose certain information learned while working for a prior employer to a future employer.

For example, imagine that you own a bottle factory in Nashville. You have developed certain methods of bottle production that give you a competitive edge by allowing you to produce industrial bottles more efficiently than other similar businesses. You have your employees sign an NDA, so that if they leave for a competitor, they are contractually obligated not to share the information about bottle production that they have learned while working for you.

If you believe that an employee has violated this obligation, you can sue for breach. This threat of litigation is often enough to prevent employees from stealing trade secrets.

Misappropriation of Trade Secrets in Tennessee

In addition to private agreements like NDAs, state law also protects trade secrets. Tennessee is one of the many states that have adopted a version of the Uniform Trade Secrets Act (UTSA), a model law that states will customize. Tennessee’s trade secret law is codified at Tenn. Code Secs. 47-25-1701 et al.

Tennessee defines a trade secret as "information, 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."

Tennessee’s version of the UTSA refers to the theft of trade secrets as misappropriation. Under Tennessee law, "misappropriation " refers to the acquisition of a trade secret by someone who knows or has reason to know that the trade secret was acquired by improper means, such as theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy. It also includes the disclosure or use of a trade secret without consent by someone who used improper means to acquire knowledge of the trade secret, for example, an ex-employee who spills company secrets to a rival.

Tennessee's "Reason to Know" Standard

Tennessee prohibits use of trade secrets by a company that has “has reason to know” that the material constitutes a trade secret. This is known as constructive knowledge (versus actual knowledge). In other words, even if a Tennessee company was unaware it possessed purloined trade secrets, it can still be prosecuted under Tennessee law if it should have known.

Penalties for Misappropriation in Tennessee

Under Tennessee law, a trade secret thief can be prevented from disclosure by court order, known as an injunction. This is true for both actual or threatened misappropriation. The injunction may be terminated when the trade secret has ceased to exist, but the injunction may be continued for an additional reasonable period of time in order to eliminate any commercial advantage that otherwise would be derived from the misappropriation. In exceptional circumstances, an injunction may condition future use upon payment of a reasonable royalty for no longer than the period of time for which use could have been prohibited. Exceptional circumstances can a theft that is so bad that the court order would be meaningless.

A victim of trade secret theft can also seek financial compensation that measures the actual loss attributed to the theft or the profits (or “unjust enrichment”) acquired by the trade secret thief. In egregious situations, a Tennessee court can award punitive damages up to twice the amount of any award. Attorney fees will also be awarded in egregious (willful and malicious) situations or if a claim is brought in bad faith.

Tennessee Statute of Limitations for Misappropriation

In Tennessee, an action for misappropriation must be brought within three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered. Consequently, if you believe that your company's trade secrets were stolen, do not delay for too long before contacting an attorney.

Federal Trade Secret Law

In addition to Tennessee’s rules regarding trade secrets, certain federal rules also apply in Tennessee. The Economic Espionage Act of 1996 makes the theft of trade secrets a federal crime. The Act prohibits the theft of a trade secret by a person intending or knowing that the offense will injure a trade secret owner. The Act also makes it a federal crime to receive, buy, or possess trade secret information knowing it to have been stolen.

The Act’s definition of “trade secret” is similar to that of the Uniform Trade Secrets Act. The penalties for a violation of this statute include a potential prison term of 15 years and fines up to $5 million, depending on whether the defendant is an individual or a corporation. A private party can still sue for trade secret theft even if the federal government files a criminal case under the Economic Espionage Act.

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