What’s (all the) Muckenfuss about? Trade Secrets and Non-Disclosure Provisions

In Carolina Chemical Equipment Company v. Muckenfuss 322 S.C. 289, 471 S.E.2d 721 (S.C. Ct. App. 1996), the South Carolina Court of Appeals held that when a broad trade secret provision “basically has the effect of a covenant to to compete, [the Court] must subject it to the same scrutiny as a covenant not to compete.”  Although the South Carolina legislature attempted to limit the holding of Muckenfuss the following year, the case remains important for several reasons:  It began the difficult task of culling “trade secrets” from general business information as well as because it did so in the defense of an employee’s right to work.

The case involved claims by Carolina Chemical against a former shareholder in a closely held company.  In 1989, Daniel Muckenfuss, one of three shareholders, sold his stock in Carolina Chemical.  The stock redemption agreement included a one year covenant not to compete as well as a non-disclosure provision.  He did nothing for two years. However, in 1991,Muckenfuss went to work with Energen, a competitor of Carolina Chemical in the industrial cleaning supplies business since 1976.  

Carolina Chemical sued alleging breach of non-disclosure and misappropriation of trade secrets.  A jury found in favor of Carolina Chemical, and the judge issued an five year injunction prohibiting Muckenfuss and Energen from selling four products anywhere in Charleston County.  The Court of Appeals reversed.  

The most important fact of the case is that the nondisclosure provision defined “trade secrets” so broadly that it covered virtually all business related information and general knowledge as a trade secret belonging to Carolina Chemical. The court noted: “However, this is not to say all business ideas are trade secrets. A trade secret must be secret.”

As mentioned previously the court held that if a trade secret provision in a contract had the “basic effect” of a non-compete then it will be analyzed just like a non-compete. “An employer has no legitimate commercial interest in prohibiting competition in itself.”  Here is the line in the sand: “When an employee leaves a job, he is entitled to take his skills and general knowledge he has either acquired or increased during his employment.”  

Importantly, the Court wrote in defense of a basic human right:  The Right to Work.  The case contains one of the clearest (albeit borrowed) expressions of the scope of the right to work:

[T]he right of an individual to follow and pursue the particular occupation for which he is best trained is a most fundamental right. Our society is extremely mobile and our free economy is based competition. One who has worked in a particular field cannot be compelled to erase from his mind all of the general skills, knowledge and expertise acquired through his experience. These skills are valuable to such employee in the market place for his services. Restraints cannot be lightly placed upon his right to compete in the area of his greatest worth. 

 So, what are the main lessons of Muckenfuss?  (1) Pursuing your occupation (your “greatest worth”) is a fundamental right; (2) Prohibiting competition is presumptively invalid; (3) Not all business information is trade secret, particularly not the “skills and general knowledge’ of the exiting employee”; and (4) Broad limits on the use of business related information and generalized just like a non-compete.

In response, the South Carolina legislature amended the Uniform Trade Secrets Act in with the following provision:  “A contractual duty not to disclose or divulge a trade secret, to maintain the secrecy of a trade secret, or to limit the use of a trade secret must not be considered void or unenforceable or against public policy for lack of a durational or geographical limitation.” S.C. Code section 39-8-30(D). However, the primary importance of Muckenfuss lives on:  An employer may protect is trade secrets, but it may not limit an employee from earning a living by using his skills, knowledge and expertise acquired through experience.

Leave a Reply

Your email address will not be published.