Tips to Avoid Texas Trade Secret Lawsuits

file000931906908This article addresses steps Texas business can take to avoid trade secrets lawsuits.

A business that is interested in hiring skilled, knowledgeable, or high ranking officers from other companies needs to prepare for possible conflicts with the new hire’s former employers, who may object to the potential transfer of trade secrets.  Texas law prohibits a business from using another company’s confidential business information (“trade secrets”) to gain a competitive advantage.  This means that a manager, administrator, or highly knowledgeable technical employee, may come into her new job bringing information from a former employer that is legally protected, even against the new employer.

The first question is what kind of information is protected?  A “trade secret” under Texas law “means information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that:

(A) 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

(B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Tex. Civ. Prac. & Rem. Code 134A.002(6). To read the complete published text of the new Texas Uniform Trade Secret Act, click here: http://tinyurl.com/lubckgu.

That was a mouthful, but as we will see, it was worth it.  From this definition of a trade secret, we can learn at least three things that are useful to a business that is defending, or eager to avoid, a lawsuit for trade secret misappropriation.

First, a trade secret is a piece of information that is not generally known and not readily ascertainable by proper means.  “Proper means” is broadly defined in the statute as “discovery by independent development, reverse engineering unless prohibited, or any other means that is not improper.”  Tex. Civ. Prac. & Rem. Code 134A.002(4).  So, for example, while a customer list can be a trade secret under the right circumstances, a customer list composed of information that is also found in published directories or google search results will not be considered a trade secret, because the information is either generally known, or can be easily and independently discovered.  A company evaluating a potential new hire should find out in general terms what kinds of information the employee received from prior employers, that could not be easily or swiftly obtained through other sources.  The hiring company can then determine whether the new hire has any genuine trade secrets that may lead to a dispute with a former employer, and try to resolve the matter by either directing that the information not be used or by getting clearance from the former employer.

Second, a trade secret is a piece of information that has “economic value” as a result of being a secret.  Information that is out of date, obsolete, or which confers no provable competitive advantage on its possessor, is not a trade secret even if it is considered “private” in some sense by its owner.  While it might seem obvious that companies will not sue to protect meaningless information, the law does not simply take the value of the information for granted.  A plaintiff suing to protect a trade secret must prove that it is likely to suffer, or has suffered, financial losses as a result of the improper use or disclosure of the information.  A company evaluating a new hire need not worry much over receiving company information that does not result in any competitive advantage.

Third, a trade secret is one which the original holder or developer has taken reasonable steps to protect.  The right to protect a trade secret can be lost through a lack of diligence.  So, for example, an employer who never instructed its employees to protect confidential information, or never informed the employee what specific information was supposed to be confidential, may find that it is too late to do anything after the employee leaves to work for a competitor.  Thus, a company that is evaluating a new hire should ask the employee whether she or he had a non-disclosure agreement with a former employer, and if so, what general types of information were covered by the agreement.

 

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