LAW REVENUE MANAGEMENT AS A TRADE SECRET Preserving Your Revenue-management System as a Trade Secret BY SHERYL E. KIMES AND PAUL E. WAGNER Make sure that your revenue-management system is safe from trade-secret piracy. The 1990s saw the wide implementation of sophisti- ees whom we interviewed were not required to sign any kindcated revenue-management systems in the hospi- of confidentiality agreement that specifically protected their tality industry, made possible by the development of employers’ revenue-management systems. In this article we computer technology. These systems involve considerable in- discuss how to prevent breaches of hotels’ revenue-manage- vestment of financial and human resources. Based on our ment systems by protecting them as trade secrets. interviews with revenue-management employees from vari- Revenue management, defined. Used most commonly by ous hotel companies, we are concerned that hotels are not airlines and hotels, revenue management involves matching taking sufficent steps to protect their revenue-management the supply of a perishable commodity with the demand for systems from misappropriation by their former employees that commodity by using strategies that manipulate the price and, by extension, their competitors. This article examines and timing of consumption. One popular expression of this how revenue-management systems can be protected as trade concept is “the application of information systems and pric- secrets and offers some tips to keep them from getting into ing strategies to allocate the right capacity to the right cus- the wrong hands. Most of the revenue-management employ- tomer at the right place at the right time.”1 The determina- 1 Barry C. Smith, John F. Leimkuhler, and Ross M. Darrow, “Yield Man- © 2001, CORNELL UNIVERSITY agement at American Airlines,” Interfaces, Vol. 22, No. 1 (1992), pp. 8–31. Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 8 Cornell Hotel and Restaurant Administration Quarterly OCTOBER–NOVEMBER 2001 REVENUE MANAGEMENT AS A TRADE SECRET LAW tion of “right” entails achieving both the most of information that is used by a particular busi- revenue possible for the hotel while also deliver- ness. In the United States, the law of trade se- ing the greatest value or utility to the customer. crets has developed on a state-by-state basis, al- Companies implementing revenue management though most state trade-secret laws closely report increases in revenue of 2 to 5 percent over resemble each other. As explained below, trade- the results of prior procedures.2 In practice, rev- secret laws set forth certain criteria that define enue management has meant setting prices accord- when a business process merits trade-secret sta- ing to predicted demand levels so that price-sensi- tus. When met, those criteria allow the owner of tive customers who are willing to purchase at a trade secret to prevent others from improperly off-peak times can do so at favorable prices, while taking and using those business processes. price-insensitive customers who want to purchase Most revenue-management systems used in at peak times will be able to do so as well. the hospitality industry could be considered trade Many fingers in the pie. A variety of employ- secrets if their owners took proper steps and pre- ees work with revenue-management systems. At cautions to make them so.3 To that end, owners the most elementary level, reservation agents of such systems should understand the prerequi- quote rates based on the recommendations from sites to trade-secret protection and actively take the revenue-management system. At the super- steps to ensure that those prerequisites are met. visory level, hotels typically have one person in Stated in the negative, an owner’s failure to take charge of revenue management (either a desig- the necessary steps and precautions may cause nated revenue manager or another employee who its valuable revenue-management system to fall handles revenue management in addition to other into the public domain, where its competitors responsibilities). The revenue manager has direct are free to use the system without restriction. access to the revenue-management system and The third edition of Restatement of Law de- can override the system’s recommendations fines “trade secret” as “any information that can if warranted. In addition, some hotel chains be used in the operation of a business or other (notably Hilton, Marriott, and Starwood) also manage revenue at the regional level and have regional revenue managers who are responsible for multiple hotels. Finally, corporate revenue- Most revenue-management systems used in management departments employ technical and the hospitality industry could be considered managerial personnel to assist with the deploy- ment and improvement of their revenue- trade secrets. management systems. Hotels with successful revenue-management systems clearly convey their pricing strategy to enterprise and that is sufficiently valuable and customers. Since revenue management depends secret to afford an actual or potential economic on demand-based pricing, it is essential that cus- advantage over others.”4 This definition is usu- tomers understand which prices are available and ally broken down into two required elements, what it takes to obtain discounted rates. Success- namely, value and secrecy. ful hotels use “qualified” rates (often referred to Value. The element of value simply requires as rate fences) which require that customers must that the trade secret be sufficiently valuable to meet certain restrictions to receive a discount. provide an actual or potential economic advan- tage over others who do not possess the informa- RM Systems as Trade Secrets tion. The advantage need not be great, but it must “Trade secret” is a legal term that describes a pro- be more than trivial. The mere use of a trade se- prietary process, formula, device, or compilation 3 Certain elements of revenue-management systems may be subject to other forms of intellectual-property protection, such as patents, and therefore may not be eligible for trade- 2 See: Ibid.; and Richard D. Hanks, Robert G. Cross, and secret protection. R. Paul Noland, “Discounting in the Hotel Industry: A New Approach,” Cornell Hotel and Restaurant Administration 4 Restatement of the Law, third edition, Unfair Competi- Quarterly, Vol. 33, No. 1 (February 1992), pp. 15–23. tion, § 39, The American Law Institute (1995). Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 OCTOBER–NOVEMBER 2001 Cornell Hotel and Restaurant Administration Quarterly 9 LAW REVENUE MANAGEMENT AS A TRADE SECRET cret in one’s business is evidence of its value, and would cost as much as $30 million. so are tangible benefits realized by the owner Secrecy. The element of secrecy is the sine qua through use of the trade secret, such as an iden- non of trade-secret law. This element requires that tifiable increase in revenue. Other evidence of owners take reasonable steps to keep their mate- value includes the willingness of others to pay rials and information secret from their competi- for a right or license to use the trade secret, tors. Secrecy need not be absolute. Instead, the and the amount of resources invested in the re- element of secrecy is satisfied if, as a result of the search and development or protection of the trade precautions taken by the owner, it would be dif- secret. ficult or costly for others who could exploit the The fact that revenue-management systems information to acquire it without resort to wrong- have value is easily established, in part because ful conduct.6 On the other hand, information the purpose of these systems is to maximize rev- that is generally known or readily ascertainable enue from a hotel or group of hotels. Since rev- through proper means by others to whom it has enue is measured in detail by the system itself, potential economic value would not be consid- ered to be a trade secret. For example, informa- tion that can be easily obtained from trade jour- Owners of a trade secret must take nals, scientific texts, or other published materiallacks the requisite secrecy to qualify as a trade reasonable steps to keep their materials and secret. Similarly, information about the nature, design, or manufacture of a product that can be information secret from their competitors. readily ascertained from an examination of the product on public sale or display is not a trade secret. However, public knowledge of some, or any revenue-management system worth protect- even all, of the components of a trade secret does ing can typically generate the evidence necessary not destroy its trade-secret status if the combi- to prove its own value. The claim of revenue- nation or integration of the known components management proponents that a properly inte- remains confidential. grated system can increase revenues by as much The fact of secrecy can be established by evi- as 5 percent over past practices can be evidence dence that others have tried and failed to dupli- of value. Furthermore, as many hoteliers who cate the information by proper means, and also have developed these systems will attest, they are by the willingness of others to pay for the right expensive to develop, implement, and operate. to use the information. Furthermore, should a Thus, the considerable resources devoted to de- competitor wrongfully attempt to acquire a trade veloping and operating revenue-management secret, such an effort would create an inference systems can be used to establish their value to that the trade secret is sufficiently inaccessible as the owner. to quality for protection. Also, successfully implemented revenue- Secrecy of information or material must be management systems often draw interest from preserved through the reasonable efforts of its competitors in the form of offers to purchase the owner. Mere intent to keep information confi- system. For example, in a closely watched law- dential is not enough to preserve trade-secret suit, American Airlines sued Northwest Airlines protection. An owner who fails to take affirma- for misappropriation of American’s revenue- tive precautions to protect the proprietary infor- management system.5 To establish the value of mation risks losing trade-secret protection for that its revenue-management system, American dem- information, even if it is initially disclosed onstrated, among other things, that Northwest through improper means (as we explain next). previously offered to purchase American’s system Confidentiality. The owner’s disclosure of a after Northwest concluded that the in-house de- trade secret to others will not destroy the trade velopment of its own “next generation” system secret’s status if the disclosure is made under the 5 Northwest Airlines v. American Airlines, 853 F. Supp. 1110 6 Restatement of the Law, Third, Unfair Competition, § 39, (D. Minn. 1994). comment f, The American Law Institute (1995). Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 10 Cornell Hotel and Restaurant Administration Quarterly OCTOBER–NOVEMBER 2001 REVENUE MANAGEMENT AS A TRADE SECRET LAW condition of confidentiality. For example, disclo- In Northwest Airlines v. American Airlines, sures to employees, licensees, and independent for instance, Northwest argued that American’s contractors will not destroy a trade secret’s pro- revenue-management system could not qualify tection as long as the information’s recipient for trade-secret protection because it contained knows of the confidential nature of the informa- information available in the public domain. Spe- tion and agrees not to disclose it to others. In cifically, Northwest claimed that the exponen- such cases, the law imposes a duty of confidenti- tial smoothing equations and other features of ality on the recipients of the information, the American’s revenue-management system were breach of which constitutes wrongful conduct. available in textbooks and industry literature. When information is no longer sufficiently Although the court acknowledged that certain secret to qualify for protection, it lapses into the aspects of American’s revenue-management sys- public domain and can be used by others with- tem could be ascertained from public sources, it out restriction. Thus, a competitor’s otherwise found evidence that this information did not exist wrongful acquisition of information will not give “at a level of specificity which would enable for- rise to a legal claim for relief by the owner if the mulation of working applications of the various information is no longer secret. principles solely from public sources.”7 The court One scenario for how such loss of secrecy also noted that Northwest’s argument was belied could occur might be as follows. Say that the by the fact that it did not obtain information owners of Hotel A confidentially disclose its regarding American’s revenue-management sys- revenue-management trade secrets to managers tem from public sources, but rather from Ameri- at Hotel B during negotiations of a possible li- can employees willing to disclose the informa- censing agreement. The negotiations break down tion in detail.8 and no agreement is reached, but Hotel B’s man- Vigilance. Given that a revenue-management agers retain photocopies of the trade-secret in- system can be a trade secret, hospitality opera- formation (although they cannot legally use that tors must remain vigilant in preserving their information). Subsequently, Hotel A’s revenue system’s secrets. Such vigilance is particularly es- manager discloses the same trade secrets to a job sential in view of the constant turnover of em- candidate during an interview. That candidate ployees among hospitality enterprises. Perhaps the rejects an offer from Hotel A and accepts an of- greatest threat to a system’s trade-secret status is fer from Hotel B. Because of Hotel A’s unpro- that a company’s former employees may be tected disclosure, Hotel B can now exploit the trade secret without liability, regardless of whether Hotel B extracts the information from its new employee, or relies on the prior confidential Hotels with strong revenue-management disclosure. systems may find that competitors are Revenue Management as a Trade Secret trying to learn their secrets. Most revenue-management systems in the hos- pitality industry can qualify as secret because the bulk of their components and the systems as a tempted to disclose the essential points of that whole are not ascertainable through public company’s revenue-management information to sources. The typical revenue-management system a subsequent employer. Indeed, the occasion comprises a number of integrated computer- arises that hotels with less-developed revenue- based systems that rely on a mix of publicly avail- management systems will raid the revenue- able data and hotel-specific information. Even if management departments of hotels with mature, some of the components of a particular revenue- successful systems by luring key employees away management system can be ascertained through with more lucrative salaries and benefits. the industry literature (e.g., the mathematical models used to forecast bookings), the integra- 7 tion of those components into the larger system 853 F. Supp. at 1114. is not. 8 Id. Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 OCTOBER–NOVEMBER 2001 Cornell Hotel and Restaurant Administration Quarterly 11 LAW REVENUE MANAGEMENT AS A TRADE SECRET Thus far, the only reported cases regarding should be permitted only on a need-to-know basis. trade-secret infringement appear in the airline Offices and file drawers containing revenue-man- industry (as in the case of Northwest Airlines v. agement information should be kept locked, and American Airlines). However, hotel-related cases computer files containing this information should are likely to crop up for two reasons. First, as be password protected. Likewise, communications certain hotels achieve a level of success with ma- containing confidential information should occur ture, computer-based revenue-management sys- only over secure telephone lines or computer net- tems (about a decade behind the airlines), other works. E-mail messages containing confidential rev- hotels with less-developed systems will look to enue-management information that are vulnerable mine the RM departments of the former, rather to interception should be encrypted, with the code than incurring substantial research and develop- given only to the intended recipients. ment costs to develop independently their own Restrictive legends. Documents and com- systems. This phenomenon is already occurring, puter files containing confidential information according to a number of hotel RM employees should be conspicuously marked with restrictive we spoke to while researching this article. Sec- legends such as “Confidential—Trade Secret In- ond, the popularity of trade-secret misappropria- formation,” and “Restricted Access—Do not tion lawsuits in the United States is on the rise, copy or distribute outside this company.” Restric- as employers discover that these actions are an tive legends accomplish two important goals. effective means to gain a competitive edge by cur- First, they instruct intended recipients of the in- tailing key former employees’ abilities to work formation that the document or computer file is for the competition.9 confidential, and the legends continue to rein- In the remainder of this article, we present force that message each time the recipient views precautions that can be taken to maintain trade- the information. Honest employees who are re- secret protection and reduce the risk that em- peatedly reminded of the confidential nature of ployees will actually disclose confidential infor- the information are less likely to disclose it. To mation either during or after employment. The the extent an employee wrongfully discloses the precautions that we recommend also improve a information, moreover, these restrictive legends hotel’s chances of successfully litigating a claim allow the hotel to rebut any claim by the em- of trade-secret misappropriation if confidential ployee that he or she was unaware of the confi- information is disclosed by an employee and used dential nature of the information at the time of by a competitor. the disclosure. Second, restrictive legends instruct unin- Preserving the Confidentiality of tended recipients that the information is confi- Revenue-management Systems dential and not meant for their review. In the Hotel companies should implement specific case of an accidental disclosure to an unintended policies and procedures to protect revenue- recipient, restrictive legends make it less likely management trade secrets. To begin with, each that the recipient will misappropriate or other- company’s situation is distinctive, and therefore wise use the information. In the case of an inten- legal counsel should review specific trade-secret tional misappropriation by a competitor, restric- policies and procedures. Following is a list of pre- tive legends probably will not dissuade the cautions that all hotel companies should consider. competitor from using the information, but those Physical security. Confidential revenue- legends will improve a hotel’s chances of demon- management information should be kept secure strating that the competitor knew that the infor- from hotel guests and other non-employees. Fur- mation was a protected trade secret. thermore, employees’ access to this information For particularly sensitive documents, employ- ers should distribute only a limited quantity of serially numbered copies, with a record of each 9 See: Michelle Singletary, “Some Employers Would Rather recipient by number. This will increase the Fight Than Let You Switch; Defections Bring Court Cases Against Key Workers, Recruiting Companies,” The Wash- chances of tracing an unintentional or wrongful ington Post, May 14, 1997. disclosure of the document. Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 12 Cornell Hotel and Restaurant Administration Quarterly OCTOBER–NOVEMBER 2001 REVENUE MANAGEMENT AS A TRADE SECRET LAW Employee handbooks. Employee handbooks possible, an employer should “give something up” should state a confidentiality policy that specifi- in exchange for an employee’s promise of confi- cally lists revenue-management information as a dentiality. The employer may “give up” the trade secret and provides detailed instructions to employee’s initial employment (that is, hire the prevent disclosure. Further, the handbook should person), a promotion, a raise, or a bonus. instruct that confidential revenue-management State laws differ as to whether continued em- information will be shared only with authorized ployment alone is sufficient consideration for an employees who have had the proper training and employee’s promise of confidentiality. In Min- signed a confidentiality agreement. nesota, for example, a promise not to disclose Confidentiality agreements. Before begin- trade secrets is not enforceable as a contract if ning to work with revenue-management infor- mation, all employees with access to the system should sign a specific confidentiality agreement regarding that information. Such agreements Hotels should specifically label the materials should contain an acknowledgment by the em- supporting their revenue-management ployee of the confidential and proprietary nature of the information, an express agreement to pre- systems as confidential. serve its confidentiality and report any unautho- rized disclosure of it, an acknowledgment that the employee’s duty to preserve the confidential- the employee signs it after employment has al- ity of the information continues after the em- ready commenced, because continued employ- ployment relationship has ceased, and an agree- ment alone does not constitute valid consider- ment to return all documents and materials ation.11 In other states (e.g., Indiana), however, containing confidential information at the end continued employment and payment of wages is of the individual’s employment. valid consideration for an employee’s promise of Confidentiality agreements are effective in two confidentiality. The ability to enforce the confi- distinct ways. First, by identifying the revenue- dentiality agreement as a legally binding contract management information as a trade secret as part gives an employer an additional claim, namely, of the confidentiality agreement,10 the employee’s breach of contract, against an employee who express acknowledgement of this fact rebuts any misappropriates trade-secret information. later claim by the employee that he or she did Employee training. Employees should receive not know of the confidential nature of the infor- thorough training and repeated reminders of the mation. This has great evidentiary value in a law- confidential nature of the revenue-management suit against such an employee for misappropria- information, the steps to ensure preservation of tion of trade-secret information. Second, to the its trade-secret status, and the employees’ obliga- extent that the confidentiality agreement pos- tion to protect the information from disclosure. sesses consideration, it can be enforced as a le- Training should begin when employees are first gally binding contract. Consideration simply re- hired to work with the revenue-management sys- quires that each party to a contract give tem and should be incorporated into the sub- something up in exchange for what the other gives stantive revenue-management-orientation pro- up. A confidentiality agreement requires an em- cess. Meetings should be held no less than ployee to give up the right to disclose or use the annually to remind employees of their legal obli- employer’s trade-secret information. Whenever gations to their employer. These meetings should include written handouts that can later be used 10 Indeed, these agreements should specify what informa- as evidence to demonstrate an employee’s knowl- tion and materials within the revenue-management system constitute the company’s trade secrets, because an agree- edge of the proprietary and confidential nature ment that prohibits employees from disclosing trade secrets of the information. may not be enforceable if it does not specify what those trade secrets are. See: Kurt H. Decker, Covenants Not to Compete, Second Edition, Volume 1 (New York: John Wiley 11 See: Freeman v. Duluth Clinic, Ltd., 334 N.W.2d 626 & Sons, 1993), p. 92. (Minn. 1983). Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 OCTOBER–NOVEMBER 2001 Cornell Hotel and Restaurant Administration Quarterly 13 LAW REVENUE MANAGEMENT AS A TRADE SECRET Exit interviews and reminder letters. When ality of those trade secrets and agreed not to dis- an employee with access to revenue-management close them (attaching copies of all written agree- information is terminating employment, man- ments and acknowledgments), and that any dis- agers should meet with that employee and ask closure of confidential information would be met the person to acknowledge her or his ongoing with appropriate legal action. Such a letter would obligations to their employer in writing. The put the new employer on unequivocal notice of written document signed by exiting employees a company’s claim of trade-secret protection and should acknowledge the confidential nature of eviscerate any potential claim by the new em- the company’s revenue-management informa- ployer that a disclosure and use of secret infor- tion, the employees’ continuing legal and con- mation is unintentional.12 However, such letters tractual obligations to keep the information se- come with certain legal risks, and so a company cret, and the fact that they no longer possess any should consult with legal counsel before taking documents or materials containing confidential this step.13 revenue-management information. The depart- ing employees should be advised in writing that Human-resources Considerations of any subsequent disclosure of this information Trade-secret Protection would violate their legal obligations to their em- Many employers are reluctant to require their ployer and subject them and possibly the newly hired employees to sign confidentiality information’s recipient to legal action. An em- agreements and other restrictive covenants be- ployee who refuses to acknowledge these things cause they feel such agreements set the wrong in writing by initialing an appropriately worded tone for the employment relationship. At a mini- document should be closely watched. In addi- mum, some employers believe these agreements tion to an exit interview, the former employer create an atmosphere of distrust. At worse, re- should send a letter to all exiting employees to strictive covenants may cause a potential em- remind them of their legal obligations, with an ployee to refuse an otherwise acceptable job offer. While these are valid concerns, the absence of confidentiality agreements significantly A prudent course would be to have revenue- increases the likelihood of an unprotected dis- management employees sign a confidential- closure, and the resulting loss of trade-secret protection. ity agreement. A prudent policy would be to require confi- dentiality agreements and to take the other pre- cautions set forth above, while at the same time enclosed copy of the company confidentiality acknowledging employees’ fears and taking steps policy, the employee’s confidentiality agreement, to allay those fears. First, employers should em- and the written acknowledgment by the employee phasize the positive aspects of the company’s con- at the exit interview, if available. fidentiality policies, such as the tremendous value Advisory letter to new employer. While this of the company’s trade secrets, the competitive step may not be appropriate in every case, in cer- advantage resulting from those secrets, and the tain circumstances one could send an advisory letter to the new employer of a former employee. 12 If a third party obtains a trade secret from a former em- For example, a revenue manager who quits to ployee whom the third party knows has disclosed the in- take the same or similar position with a com- formation in breach of a restrictive covenant or duty of confidentiality, the third party will bear liability for the mis- petitor is more likely to possess detailed trade- appropriation. See, for example: A.H. Emery Co. v. Marcan secret information and has the potential of using Prods Corp., 268 F. Supp. 289 (S.D.N.Y. 1967), aff ’d 389 that information for the benefit of the competi- F.2d 11 (2d Cir.), cert. denied, 393 U.S. 835 (1968). tor. The letter should advise the new employer 13 A letter to a former employee’s new employer may give that the employee was privy to all of the rise to a claim by the employee of tortious interference with the employee’s contract with the new employer, or worse, company’s revenue-management trade secrets, defamation. Because of these risks, the wording of such a that the employee acknowledged the confidenti- letter is critical and should be approved by legal counsel. Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 14 Cornell Hotel and Restaurant Administration Quarterly OCTOBER–NOVEMBER 2001 REVENUE MANAGEMENT AS A TRADE SECRET LAW fact that the employee is trusted enough to work with such sensitive information. Second, the employer should point out that the confidenti- ality agreements are not non-competition agree- ments and therefore do not restrict an employee from any future employment; they merely pro- hibit the employee from disclosing company trade secrets either during or after the employ- ment relationship. To emphasize this point, the employer should specifically identify the various materials and information that are trade secrets so the employee understands precisely what is covered by the confidentiality agreement. Be proactive. If your hotel does not have in place precautions like the ones we suggest here, we urge you to take appropriate precautions to protect your revenue-management system imme- diately before any unintended disclosure occurs. The hotel that implements these policies and pro- cedures only in reaction to a disclosure by a former employee may find itself unable to put the genie back in the bottle.  Sheryl E. Kimes (at left) is an assistant professor of quantitative methods at the School of Hotel Administra- tion at Cornell University. Paul E. Wagner (at right), is an adjunct professor of law at the School of Hotel Ad- ministration at Cornell University and a partner at Stokes & Murphy, a law firm providing labor and employment advice to clients in the hospitality industry. © 2001, Cornell University; an invited paper. Downloaded from cqx.sagepub.com at CORNELL UNIV on September 15, 2014 OCTOBER–NOVEMBER 2001 Cornell Hotel and Restaurant Administration Quarterly 15