Basics of Trade Secret Law Presented by Rick Anigian and Paul Hankins

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:
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Formulas, methods, pricing information,
client information, customer preferences,
buyer contacts, market strategies,
blueprints, and drawings.
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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
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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
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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:
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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.
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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
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A contract subject to interference;
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An intentional and willful act of interference;
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That such intentional act was the proximate
cause of plaintiff’s damage; and
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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
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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:
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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
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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
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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
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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
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Seal all court records and proceedings that might contain or
disclose any confidential information.
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Have a protective order entered by the court in which all
designated documents remain confidential.
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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.
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Assert any applicable trade secret privilege that might apply.
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Have the court seal the courtroom from the public or provide
alternative measures to protect the secrecy of the information.
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