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Pa.’s trade secret laws and medical practices

By Vasilios J. Kalogredis, JD

Prior to February 19, 2004, when Pennsylvania adopted the Uniform Trade Secrets Act to be effective April 19, 2004, there was no statutory protection relative to trade secret rights in Pa. This caused those having issues in this area to rely upon the case law.

There was an interesting health care case that arose in the Court of Common Pleas of Philadelphia County, Commerce Case Management Program on October 5, 2004. The case was Andrew Pollack, N.D. d/b/a Philadelphia Institute of Dermatology v. Skinsmart Dermatology and Aesthetic Center, P.C., et al. This was a pre-effective date of the Act case.

Dr. Pollack, the Plaintiff, was the sole owner of Philadelphia Institute of Dermatology (PID). Toby Shawe, N.D. was a dermatologist and Samy Badawy, N.D. was a surgeon. They had both worked as independent contractors of PID for several years until August 21, 2002. At that time they left PID and formed their own new practice, called “Skinsmart.”

In late 2001, Dr. Pollack started negotiating with Drs. Shaw and Badawy regarding the possibility of selling part of his practice to him. Attorneys were engaged. Dr. Pollack had the practice appraised. The parties had reached a tentative agreement in June of 2002. On August 5, 2002, Drs. Shaw and Badawy presented PID with resignation letters. Prior to that date, the departing doctors had PID staff members make copies of the appointment books and printouts of certain portions of the database (the “Patient List”).

Skinsmart opened its doors on September 3, 2002. It had negotiated a lease for its office space and the departing doctors had signed it prior to their final day at PID. Furthermore, while still affiliated with PID, the two doctors offered employment to a long-term PID employee by the name of Ms. Wilson. She accepted the new employment.

Ms. Wilson used the Patient List to call scheduled PID patients and attempt to reschedule them with Skinsmart. Drs. Shaw and Badawy also called those patients and sent out a mailing to patients and referral sources informing them about Skinsmart. The Court found that a substantial number of Skinsmart’s patients came from the Patient List and resulted in approximately $700,000 of revenue to Skinsmart.

Count I asserted a claim for misappropriation of trade secrets. To prevail, the Plaintiff had to show (1) the existence of a trade secret; (2) that it was of value to him and important in the conduct of his business; (3) that by reason of ownership, he had the right to the use and enjoyment of the secret; and (4) that the defendants obtained the secret while they were in a position of trust and confidence under circumstances making it inequitable and unjust for them to disclose it to others or make use of it themselves, to the prejudice to the Plaintiff.

The Pollack Court listed several factors to determine whether certain information is a trade secret: (1) the extent to which the information is known outside of the owner’s business; (2) the extent to which it is known by employees and others involved in the ownerbusiness; (3) the extent of measures taken by the owner to guard the information’s secrecy; (4) the information’s value to the owner and to his competitors; (5) how much effort or money the owners spent in developing the information; and (6) how easily or difficultly others could properly acquire and duplicate the information.

The Court found that the 20,000 name Patient List was indeed a trade secret worthy of protection. It had been compiled over many years by PID’s substantial efforts. PID spent money on computers, software, personnel, and the like to keep and maintain the Patient List. The information was not universally known or accessible. PID did attempt to protect the information’s secrecy and confidentiality. The Patient List was indeed found to be a valuable and important part of PID’s business. Since Dr. Pollack was the sole owner of PID, he therefore owned the Patient List.

As has been the case in other Pennsylvania cases, this Court noted that the ability to enforce a trade secret claim may arise from an express covenant within an Agreement specifically restricting the use of trade secrets or from an implied contract whereby an employee was bound to secrecy by virtue of a confidential relationship between the individual and the entity employing/contracting with him/her.

In assessing trade secret claims based upon implied contracts, the focus is on whether the individual is in a position of trust and confidence, thereby establishing a duty of non-disclosure.

In the Pollack case (the facts of which arose prior to the enactment of the Act), even though the parties had no written contracts guiding them, the defendant doctors were found to have a confidential relationship and a duty to not disclose and misappropriate these trade secrets.

The Section 5308 of the Act states that the Act “displaces conflicting tort, restitutionary and other law of this Commonwealth providing civil remedies for the misappropriation of a trade secret.” The exceptions are: (1) contractual remedies; (2) other civil remedies that are not based upon the misappropriation of a trade secret; or (3) criminal remedies, whether or not based upon the misappropriation of a trade secret.

The Act also extends the statute of limitation for trade secret claims to “three years after the misappropriation was discovered or by the exercise of reasonable diligence should have been discovered.” Under prior common law, the misappropriation claim statute of limitations was two years. The statute of limitation for violating the terms of a contract are four years.

The Act not only defines misappropriation to include the “disclosure or use of a trade secret of another without express or implied consent.” It also expands it to include (in Section 5302) the “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.” Acquisition of a trade secret of another is enough to assert a claim, even if they do not actually use it. This provision might make it easier to assert a claim against a third party (such as a new employer of one’s former employee/contractor) who acquires a trade secret, even if they end up not “using it.”

The Act, in Section 5302, defines “trade secret” as “information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that: (1) 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. (2) [I]s a subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Under Pennsylvania case law and the Act, equitable relief (injunctions and other restraining type orders) and monetary damages may be available to an employer whose trade secrets have been misappropriated. These might include obtaining an injunction to restrain a former employee/contractor and potentially his new employer, from use or dissemination of the trade secret information.

Monetary damages would include either liquidated damages (a sum called for in a contract for a violation of its particular provisions) or compensatory damages (which would reimburse the plaintiff for what it has lost economically because of the misappropriation or use of the trade secrets).

Relative to injunctive relief, prior to the Act, Pennsylvania Courts generally required proof of a substantial threat of impending injury before issuing an injunctive order. The Act changed the requirements necessary to obtain injunctive relief. Section 5303 of the Act states that “actual or threatened misappropriation may be enjoined.” This gives the employer more than it had prior to the Act. In the past the employer would have to show that an actual misappropriation had taken place. Under the Act proving that a misappropriation is likely to occur without injunctive relief is enough.

The Act also expressly permits the recovery of attorneys’ fees. Section 5305 gives the Court the right to reward reasonable attorneys’ fees, expenses and costs to the prevailing party if a claim of misappropriation is made in bad faith; a motion to terminate an injunction is made or resisted in bad faith; or willful and malicious misappropriation exists.

Section 5304(a) addresses monetary damages. The Act expressly states that damages may include both the actual loss caused by the misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. A court may measure damages caused by misappropriation by imposing liability for a reasonable royalty for a misappropriation’s unauthorized disclosure or use of a trade secret. An employer may seek to recover lost profits. Often times it is easier for a court to measure a defendant’s gain as opposed to measure the plaintiff’s loss.

Section 5304(b) of the Act also provides for exemplary damages. It states that if willful and malicious misappropriation exists, the court may award exemplary damages in an amount not exceeding twice any award made under the Section 5304(a) monetary damages subsection.

In closing, it is clear that there will be more activity in this area, in light of the new Act and the increasingly competitive nature of health care today. In advising health care entities and professionals, it is important that they be made aware of these important aspects of the law so that there are no unexpected and unpleasant surprises.

Vasilios J. Kalogredis, J.D., CHBC, CFP is founder and a shareholder of Kalogredis, Sansweet, Dearden and Burke, Ltd. in Wayne, Pa.

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