Can Information That Isn’t Considered A Trade Secret Be Protected?
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by: gill@nadel-law.co.il
Word Count: 2025
Date: Sun, 8 May 2011 Time: 9:39 AM
Can Information That Isn’t Considered A Trade Secret Be Protected?
Adv. Gill Nadel, Keydar Halali
Recently, a decision was issued by the Magistrate's Court of Jerusalem, which forced a pair of investors to compensate an owner of a clinic for skin care treatments at a sum of approximately 200,000 NIS, additionally ruling that the investors violated an unwritten commitment not to use information received from the clinic owner, by setting up a similar clinic in Hungary.
The facts of the case and the claims of the parties:
In 2004, a business meeting took place between a medical doctor, who owned a clinic for treating skin illnesses by phototherapy (treatment via light rays) and a pair of investors, in hopes of examining the possibility of setting up a joint venture for a clinic abroad. In the course of the negotiations, the two investors signed a confidentiality and non-competing agreement for five years, which the clinic owner drafted, which also included a section discussing liquidated damages of $200,000.
According to the clinic owner, the specialty of his clinic was owed to the fact that during treatment a certain kind of light-bulbs were used, which were safer to use than the bulbs used in other phototherapy clinics. Using this technology allowed the clinic to be run without constant doctor supervision thus leading to significant cost reductions in the whole operation.
In the end, the contract between the parties did not come to fruition, and a dispute arose, with the clinic owner claiming that the two investors opened a clinic dealing in phototherapy in Hungary, in violation of their commitment not to open a clinic, even abroad, for five years.
The clinic owner claimed that the investors, by opening a clinic in Hungary, violated the secrecy and the non-competing agreement and thus unjustly made a profit on his expense. He further claimed that the investors conducted the negotiations in bad faith and they must compensate him with the sum specified in the agreement or another sum reflecting his damages.
In opposition, the investors claimed that there was nothing special nor was there a trade secret regarding the way the clinic owner operated his clinic, and that the secrets that he claimed made his clinic special were common knowledge and could easily be attained. They further claimed that the condition in the contract that forbade them from opening a clinic abroad for five years, even one that didn't resemble the clinic owner's clinic, violated the Basic Law of Freedom of Occupation, and should be void.
In response, the doctor claimed that the way that his clinic operated was a result of an idea that he came up with due to his wide knowledge in the field of dermatology and after adding together different pieces of information into one, single, consolidated idea. Therefore, he claimed that even though each of the pieces of information that went into the "idea" was public knowledge, their combination into one idea was his invention.
Regarding the compensation for which the clinic owner sued for, the investors claimed that it was set without any rational proportion to the damage that could have been anticipated at the time of the signing of the contract, and that even if it was determined that the plaintiff deserved compensation, it should be drastically reduced.
The decision:
The court ruled that the clinic owner operated in a way that was not known to everyone, and even if the clinic was not operated in a way that could be considered a trade secret by law, a business owner has a legitimate interest in not having his way of doing business copied.
It was further ruled that the investors’ obligation not to open another dermatological phototherapy clinic was necessary to ensure that the clinic's model would not be copied and another clinic would not be opened besides it. In practice, it was ruled that the two investors violated the secrecy and non-competing agreements simply by opening the clinic in Hungary.
The court also ruled that this is not a violation of the investors’ Freedom of Occupation Since the agreement is not an agreement between employer and employee but one between two sides of equal standing who debated opening a joint venture. In addition, because the investors did not devote their lives to dermatology but invested wherever they found a profitable channel of investment, the injury to their freedom of occupation resulting from the contract was limited and proportionate, particularly since the clinic owner is not a side with a strong bargaining position compared to the investors.
However, the court ruled that the reasonableness of the limiting contract, and thus its validity, should be judged according to the period of time it applied to, as well as to its geographic scope.
Accordingly, the court ruled that a period of five years, as set in the parties’ agreement , deviates from the period of time needed to protect the clinic's owner's legitimate interests, particularly since the agreement forbade establishing any dermatological clinic, not only one which performed treatments similar to those of the clinic owner. However, since this part of the negotiation focused on establishing a clinic abroad, it was ruled that the prohibition set upon establishing a clinic abroad was reasonable.
In the end, the court accepted the clinic owner's action, but in light of the fact that the agreement and its limitation extended beyond what was reasonable, the court reduced the liquidated damages from $200,000 to 200,000 NIS only, and obliged only one of the investors in paying the damages (the link between the other investor and the establishment of the clinic was not successfully proved and therefore he was not obliged to pay the compensation). In addition, the court obliged one of the investors to pay for the clinic owner’s attorneys' fees a total sum of 50,000 NIS.
(CA (Magistrate's Jerusalem) 2764-07 Gill Teva v. Dr. Yair Gorvitz et al, Judge Irit Cohen, issued 23.11.10. Advocates: the clinic owner was represented by Adv. Oz Eldad, the investors were represented by Adv. Amnon Gilbert and Adv. Amit Cohen).
About the Author
Gill Nadel - Born in Israel in 1969, graduated from Bar Ilan University&s Faculty of Law (cum laude) and from the Department of Musicology. He also has a master&s degree in law from the same institution. Member of the Israel Bar since 1999. Speaks Hebrew, English and Polish. Fields of expertise: Commercial and Business Law, International Trade Law, Import and Export Law, Intellectual Property Law, Maritime and International Forwarding Law, Litigation and Court Representation. Adv. Nadel provides lectures on international trade law and import and export law to in courses organized by the Bar Ilan University Center for Commercial Law, Israel Bar, Israel Chambers of Commerce, Manufacturers Association of Israel, Israel Export Institute, Customs Brokers Association, International Forwarders, and more.
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