Basics of Trade Secret Law Presented by Rick Anigian and Paul Hankins WHAT IS A TRADE SECRET? Restatement of Torts: “any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know it or use it.” Uniform Trade Secret Protection Act • defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique or process that: (i) 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, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Texas courts look at the following factors: + the extent to which the information is known outside the employer’s business; + the extent to which the information is known by employees and others involved in the business; + the extent of the measures taken to guard the secrecy of the information; + the value of the information to the business and its competitors; + the amount of effort exerted in developing the information; and + the ease or difficulty with which the information could be properly acquired or duplicated by others. Trade Secrets Include: + Formulas, methods, pricing information, client information, customer preferences, buyer contacts, market strategies, blueprints, and drawings. + To be a trade secret it “must not be generally known or readily ascertainable from independent sources.” MISAPPROPRIATION OF TRADE SECRETS ELEMENTS: • the existence of a trade secret; • the trade secret was acquired through a confidential relationship or through improper means; • the trade secret was used or disclosed without the owner’s authorization; and • damages resulted from the misappropriation. Confidential Relationship: typical example is the employer/employee relationship. Confidential Employment Relationship exists if a contract provides that it is confidential or it is implied based on the nature of the relationship. CRIMINAL LIABILITY FOR THEFT OF TRADE SECRETS + Texas Law A person commits an offense, if without the owner’s effective consent, he knowingly: – steals a trade secret; – makes a copy of an article representing a trade secret; or – communicates or transmits a trade secret. CRIMINAL LIABILITY FOR THEFT OF TRADE SECRETS • Federal Law Economic Espionage Act – Whoever, with intent to convert a trade secret – to the economic benefit of anyone other than the owner, intending or knowing that the offense will injure any owner of that trade secret, knowingly: EEA LIABILITY FOR THEFT OF TRADE SECRETS steals information; without authorization copies information; receives information, knowing it has been stolen; attempts or conspires to commit any offense; may be fined or imprisoned not more than 10 years, or both. – Any organization shall be fined not more than $5,000,000 – – – – – WHEN EMPLOYEES LEAVE Typical scenario giving rise to a claim of misappropriation of trade secrets is when an employee with knowledge of his employer’s trade secrets leaves. Possible causes of action include: Misappropriation of Trade Secrets; Breach of Covenant not to Compete; Breach of Confidentially or Non-disclosure Agreement; Tortious Interference with Contract; Breach of Fiduciary Duty; Unfair Competition; Conversion; and Breach of the Duty of Loyalty. COVENANTS NOT TO COMPETE Enforceable if: “it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made,” and “it contains limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee.” Light v. Centel Cellular Co. of Texas In Light, Light the court stated that for a covenant not to compete to be enforceable, two factors must be met: + + consideration given by the employer in the otherwise enforceable agreement must give rise to the employer’s interest in restraining the employee from competing; and the covenant must be designed to enforce the employee’s consideration or return promise in the otherwise enforceable agreement. Reasonable Restrictions • Covenant must contain limitations as to time, geographic area, and scope of activity to be restricted that are reasonable. Duration and Geographic Restrictions • Nature of the industry will have significant impact. • Courts have found two year post-employment restrictions reasonable. • Highly technical may be shorter (6 months). • Geographic restriction is generally the territory in which the employee worked while employed. Scope of Activity Restriction • Should be limited to the activity the employee performed while employed. • If occupation involved personal services, the restraint should be limited to the clients or customers with whom employee dealt during his employment. Section 15.51(c) of Texas Business & Commerce Code If the covenant is found to be ancillary to or part of an otherwise enforceable agreement but contains limitations as to time, geographical area, or scope of activity to be restrained that are not reasonable and impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee, the court shall reform the covenant to the extent necessary . . . and enforce the covenant as reformed . . . This is known as the “blue-pencil rule.” Employer Beware • If the non-compete agreement is for personal services, and the employer knew at the time of execution that the restrictions were overbroad, court may award the employee reasonable attorney’s fees in defending the action to enforce the covenant. • • • • NON-DISCLOSURE AND CONFIDENTIALITY AGREEMENTS Not limited to strict standards of non-compete agreement. Defines information the company treats as trade secret. Impresses upon the employee (and fact finder) the importance of the information. Serves as evidence of attempt to keep information confidential. TORTIOUS INTERFERENCE WITH CONTRACT + A contract subject to interference; + An intentional and willful act of interference; + That such intentional act was the proximate cause of plaintiff’s damage; and + Actual damage or loss occurred. TORTIOUS INTERFERENCE WITH CONTRACT • Cannot interfere with a contract that no longer exists. • Cannot interfere with a contract that is void. • The fact that the employee was an “at-will” employee is no defense to a claim of tortious interference. AFFIRMATIVE DEFENSE OF LEGAL JUSTIFICATION + + He does it in a bona fide exercise of his own rights, and He has equal or superior rights in the subject matter to that of the plaintiff. TORTIOUS INTERFERENCE WITH CONTRACT • Not necessarily a tort for one to induce a party to a contract to exercise his rights to terminate the contract. • Merely offering an at-will employee better terms is not tortious interference. DUTY OF LOYALTY • Every employee has an implied duty at common law to do no act which would injure the employer’s business. • Does not prevent former employee from using any general knowledge, skills, and experience acquired during his employment to compete with his former employer. RELIEF AVAILABLE Injunctive relief is often the most important relief sought. Monetary Relief • Depending on causes of action, damages may include: – – – – Actual Damages Lost Profits Punitive Damages Attorneys’ Fees INEVITABLE DISCLOSURE DOCTRINE • Employee should not be allowed to compete with the former employer because he will inevitably disclose the former employer’s trade secrets. INEVITABLE DISCLOSURE DOCTRINE • Allows the employer benefits of a covenant not to compete without satisfying statutory requirements. No proof of misappropriation is required, it is presumed. INEVITABLE DISCLOSURE DOCTRINE • Enjoin employee’s employment with a new employer if: – former employer and the new employer are competitors; – employee’s new position is comparable to his or her former position; and – new employee will inevitable disclose the former employer’s trade secrets irrespective of his good faith attempt not to use or disclose the information. INEVITABLE DISCLOSURE DOCTRINE • No reported Texas case has expressly adopted the inevitable disclosure doctrine. Texas courts have granted injunctions where the use or disclosure of confidential information was “probable.” INEVITABLE (“PROBABLE”) DISCLOSURE DOCTRINE • Dallas court considered, but did not adopt the following factors as a checklist in determining whether to enjoin a former employee: – Conduct on part of departing employee; – New employer’s need for the information; – Similarity between the employee’s former and current positions; – Absence of efforts by the new employer to protect former employer’s trade secrets; and – Existence of a non-competition agreement. PRACTICAL STEPS FOR BUSINESSES TO PROTECT TRADE SECRETS + + + + Develop a company policy relating to trade secrets and confidential information. Identify the information the company deems to constitute its trade secrets as well as its confidential and proprietary information. Restrict access to trade secrets and confidential information to those employees on a “need to know” basis. Enforce the non-competition, confidentiality, non-disclosure, and non-solicitation agreements executed by employees. ADVISING EMPLOYEES WHO ARE CONTEMPLATING LEAVING + + + + Review any non-competition, non-disclosure and/or confidentiality agreements executed by the employee. Advise employee not to physically remove or copy any of the employer’s property or information. Do not conduct any business on behalf of new employer or start-up company during normal business hours or from employee’s existing office. If employee is concerned about inevitable disclosure, at least initially, do not have identical duties and responsibilities in new position. ADVISING COMPANIES WHO RECRUIT EMPLOYEES FROM THEIR COMPETITORS + + + + Develop recruitment policies that do not target any particular or small group of competitors. Determine whether a recruit is subject to any non-competition, non-solicitation, non-disclosure, or confidentiality agreements. Advise the recruit not to solicit the customers or employees of the impending former employer on behalf of your company. Advise the recruit not to make any disparaging comments regarding the impending former employer during or after the notice of resignation period. PROTECTING TRADE SECRETS DURING LITIGATION + Seal all court records and proceedings that might contain or disclose any confidential information. + Have a protective order entered by the court in which all designated documents remain confidential. + Carefully review all discovery material to be produced to ensure that confidential documents are appropriately designated as “Confidential” or “Highly Confidential - Attorneys’ Eyes Only” or some like manner in accordance with the protective order. + Assert any applicable trade secret privilege that might apply. + Have the court seal the courtroom from the public or provide alternative measures to protect the secrecy of the information.