An employee must abide by a trade secrets injunction but is free to compete and solicit his former employer’s clients

There have been few if any reported cases until now involving the recently-enacted Puerto Rico Law of Commercial and Trade Secrets. It is not difficult to discern that controversy is likely to arise at the intersection between non-competition agreements (especially in their absence) and confidentiality obligations created by the new trade secrets law.

As shown by American Paper Corporation v. Irizarry, 2013 WL 5522747 (TCA Aug. 9, 2013), confidentiality and non-competition agreements have ramifications in distribution cases. There, an employee of plaintiff American Paper, a Puerto Rico distributor of paper products, defected to form his own company to compete for the same business. Not thrilled by the prospect that the defendant–employee would make a living and form a company to compete, plaintiff sued the employee under Puerto Rico’s trade secret law and sought enforcement of a non-compete agreement.

The employer alleged that one of its most important customers transferred business to the employee’s new company. The trial court issued an order compelling defendant not to use or divulge plaintiff’s “trade secrets” which include contact persons of plaintiff’s clients, profit margins, and marketing strategies. As far as reaching out to bar defendant from using his knowledge or information to compete with the clientele, the trial court invalidated the non-competition agreement as a matter of Puerto Rico law.

Only plaintiff appealed the order invalidating the non-competition agreement. In granting certiorari and affirming the judgment below, the appellate court held that the non-compete obligation was overbroad for it was not restricted to commercial activities similar to his employer and was excessive in terms of the clients that could not be served. “Said another way, Mr. Irizarry could not make any type of solicitation or offering of service directly or indirectly to no one, that has been a client of the employer or is engaged in the paper distribution business.” (translation ours). Because the non-compete clause is legally incapable of being reformed by the court, the entire agreement was declared to be null and void.

The trial court’s injunction under Puerto Rico’s Trade Secrets Law and the appellate court's invalidation of the non-compete agreement can be reconciled. This case demonstrates that a non-compete agreement is severable from an obligation imposed by law or required by contract to preserve the confidentiality of trade secrets. A prohibition from using or divulging confidential information or trade secrets does not necessarily extend in scope to prohibit the employee from using his knowledge, information, or business acumen to compete or solicit business from his employer’s customers at least when there is no non-competition agreement or it is determined to be invalid.

A powerful weapon in the arsenal: the new trade secrets Puerto Rico Law No. 80 of June 3, 2011 would provide substantial remedies for violations of confidentiality obligations in distribution contracts

Distribution contracts generally contain provisions protecting confidential business information, such as client lists, price lists, marketing and other business plans and strategies.

It used to be that a party affected by a breach of a confidentiality obligation had to sue in tort or breach of contract under the Civil Code with the burden to establish the existence of a trade secret under the rules of evidence and prove damages. Law 75 did not provide a claim for relief. In the distribution context, breach of confidentiality issues may arise when a key employee with access to confidential information leaves the firm to a competitor or to the other contracting party, or when the principal terminates the contract and the distributor uses confidential information obtained during the relationship for its financial benefit (or the other way around).

On June 3, 2011, the Legislature of Puerto Rico enacted a far-reaching law protecting trade secrets and providing substantial remedies for unauthorized violations. The law is patterned after the Uniform Trade Secrets Act.

The elements of a claim under Law 80 are: 1) proof of a “commercial secret” (a defined term meaning information which provides an actual or potential economic benefit, is not public, and whose confidentiality has been maintained by reasonable means); 2) the commercial secret has been misappropriated; and 3) it has caused damages to the owner.

The statute provides preliminary, permanent injunctive relief, and the payment of royalties in extraordinary circumstances. The measure of damages can be substantial; including actual damages and “additional damages” to the extent that the offending party has derived a benefit from the use of the confidential information, or in the alternative, the payment of royalties. The measure of damages includes lost profits, the value it would have cost to develop the information, depreciation, development costs, and market value of the information.

If the violation was intentional or in bad faith, the court has discretion to award three times the amount of actual damages and grant attorney’s fees. The Law supplements any remedies that the parties may have under the contract and other laws. Thus, regardless of any contractual provision, Law 80 provides relief to the owner for damages caused from the misappropriation of commercial secrets.

Law 80 claims will most certainly arise in the labor-employment context and in actions involving a breach of fiduciary duties. But, Law 80 will become relevant in commercial litigation as well. I would expect that a Law 80 trade secret claim will go hand in hand with trademark infringement claims and those under Law 75. Because of its recent enactment, there is no case law so far interpreting its provisions.