Trade Secrets

The NRLB Chimes in on Non-Competes

June 8, 2023

A few months ago the NRLB made some noise when it imposed restrictions on non-disparagement and confidentiality provisions in releases/settlement agreements. Now it’s back at it with non-competes following the footsteps of the FTC.

In her memo, General Counsel Jennifer Abruzzo asserted that non-compete agreements impact the ability of employees to exercise their right to quit or change jobs. Though not outright declaring all non-competes unenforceable, she advises limiting their use. So without a doubt the FTC has non-competes in its cross-hairs with the NRLB behind.

At this point we don’t have anything definitive from either agency. What we do have are a number of state legislatures limiting or outlawing non-competes. Yesterday the New York state senate passed non-compete legislation and it is likely to be signed by the governor. New York follows Minnesota and a number of states that enacted legislation in 2022.

Instead of worrying about what the FTC/NRLB may or may not do employers should be focused on changes impacting non-compete law in states where they employ workers. The good news for Texas employers is there are no changes to the Texas non-compete statute this session. We have other things to worry about.

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My Attorneys’ Fees Please (Texas Trade Secrets)

March 25, 2016

Inevitably whenever I talk with a client there is always the discussion about attorneys’ fees and how to get the other side to pay them. The unfortunate reality is there are very limited circumstances where attorneys’ fees are recoverable. The US has the “American Rule” which generally means that each party pays their fees. There are exceptions. For instance, a contract can provide that if there is a dispute related to a contract, the prevailing party can recover their reasonable and necessary attorneys’ fees. Statutes can also provide for recovery of fees such as the the Texas Deceptive Trade Practices Act.

In 2013, the Texas Legislature adopted the Texas Uniform Trade Secrets Act. It provides for the recovery of attorneys’ fees to a prevailing party if: (1) a claim of misappropriation is made in bad faith; (2) a motion to terminate an injunction is made or resisted in bad faith; or (3) willful or malicious misapporpriation exits. This was a departure from the common law that did not provide for fee recovery. In a recent case my client succesfully argued that it was entitled to its fees (as a Defendant) because the Plaintiff brought the case in bad faith. Here is a link – Stream Awarded Legal Fees in Litigation with Solavei _ Business Wire

Unfortunately, the statute does not define what bad faith is. Courts from other jurisdictions have not been consistent on the issue either. We argued that bad faith (based on on other cases) equates to an ulterior motive. The argument went that the Plaintiff brought the case to damage the client’s business, not to litigate or resolve a bona fide trade secret dispute. This is hard to prove. There will be very limited circumstances where a defendant will be able to prove “bad faith”. In terms of the mechanics for prevailing under the statute, we were a “prevailing party” by way of summary judgment. The same can be acheived by prevailing at trial. We then proceeded with an evidentiary hearing on bad faith.

So the good news is there is a mechanism, even for defendants, to recover fees under the trade secret act. The bad news is it will be hard to prove. We’ll keep you posted as more cases come out that address what constitutes “bad faith” under the statute.

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Trade Secrets / Trial and Pre-Trial Procedure / Uncategorized

The Fifth Circuit Chimes In on Inevitable Disclosure

November 10, 2015

We’ve discussed the inevitable disclosure doctrine in previous posts. It’s a powerful claim and whether adoption of the uniform trade secrets act makes it viable in Texas remains to be seen. What is it? Assume that in your prior job you were exposed to certain trade secrets of your employer that you would “inevitably” use in new employment. The argument goes from the former employer that you should not be able to work at your new job because of inevitable use. In practice, the employer would not need an agreement to enforce this type of claim, only the existence and provision of trade secrets. Wow. Many courts are reticent to invoke such a doctrine.

Whether such a concept is enforceable in Texas remains an open question. This is especially true with adoption of the Texas Uniform Trade Secrets Act. It provides that “Actual or threatend misappropraiation may be enjoined.” So, could a court use this provision to prevent a former employee from working somewhere else in order to protect a trade secret? In theory, yes. There is no reported case of a Texas court doing so.

Last week the Fifth Circuit Court of Appeals waded into the state of the law in Texas on inevitable disclosure. The results were mixed, but the Court was clear to say that Texas has not adopted inevitable disclosure as a “categorical rule”. Here is a really long but helpful quote from the case:

It is thus not surprising that more recent Texas case law has rejected the notion of a categorical rule. See Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 242–43 (Tex. App.—Houston [1st Dist.] 2003, no pet.) (observing that “no Texas case expressly adopt[s] the inevitable disclosure doctrine” and holding that it need not decide whether to follow Rugen and Conley’s “modified version of the doctrine” because the employee produced evidence that “raise[d] a reasonable inference . . . that disclosure and use [of former employer’s confidential information] was not probable”); see also M-I, L.L.C. v. Stelly, H-09-cv-01552, 2009 WL 2355498, at *7 (S.D. Tex. July 30, 2009) (stating that “inevitable disclosure” is not yet the law in Texas, and refusing to order an injunction due to lack of evidence that former employees “took any confidential informationwith them or that they are using such information” at their new employers); see also Troy A. Martin, Comment, The Evolution of Trade Secret Law in Texas: Is It Time to Recognize the Doctrine of Inevitable Disclosure?, 42 S. TEX. L. REV. 1361, 1376 (2001) (concluding that “the functional premise behind the doctrine itself is clearly at odds with Texas jurisprudence” and noting that “very few courts in Texas have advanced the theory”).

We’ll continue to montior the state of the law on inevitable disclosure in Texas. The bottom line is our state courts have been quiet on the subject and the Texas Supreme Court has not addressed the issue. Here is a link to the opinion.

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Recent Cases / Trade Secrets / Trial and Pre-Trial Procedure / Uncategorized

Texas Employers and the Trade Secrets Act

September 27, 2013

At the beginning of the September, the State of Texas followed the majority of other states becoming the 48th to adopt a version of the uniform trade secrets act. So the question becomes, why does this matter to my business or in the context of the employee/employer relationship?

Though the instances where true “trade secrets” are in play is limited, employers that have trade secrets or think they have trade secrets must protect them and treat them as such. The Texas Uniform Trade Secret Act defines a trade secret as:

A formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that: (1) 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 (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

So, if the information is not readily available and the employer protects it, they may have an argument that there is a trade secret. The interesting thing about the statute is it covers customer or supplier lists which could potentially impact a wide range of sales and other positions.

The statute provides for some other items including a presumption in favor of granting protective orders, allowing injunctions that protect the secrecy of trade secret information to last the life of the trade secret, and allowing plaintiffs to seek damages for the actual loss caused by misappropriation. Exemplary damages and attorney’s fees are available where there is willful and malicious misappropriation of trade secrets. If a claim of trade secret misappropriation is made in bad faith, attorney’s fees are available for the defendant meaning there is a loser pays provision.

So what happens now? Plaintiffs will now begin to use the statute as a new cause of action with another grounds for attorneys’ fees. The use of the statute will also be a basis for injunctive relief as plaintiffs attempt to demonstrate that are likely to prevail on their lawsuit because of violations of the trade secret act. It will take several years for these types of cases to make their way through the courts and for appellate decisions to interpret the statute. In the meantime, it is likely that practitioners will use cases from other jurisdictions to support their arguments in court. The statute only applies to misappropriation that takes place from September 1 forward.

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Trade Secrets

Why you should scrub departing employees’ emails.

October 22, 2010

In a recent entry in the Delaware Employment Law blog, Molly DiBanca recounts the story of a employee who gives two weeks notice of intent to resign and then proceeds to email confidential and proprietary information to his new employer from his work email account. Note to employers, lock down or at least seriously monitor a departing employee’s work email account. If they are going to take information they may be emailing it from their work account to a hotmail account. Of course, this employee was audacious enough to actually send the email from the work account to the competitor.

What about when email is not used? Can the IT department monitor flashdrive downloads or printouts or in the middle of the night ? IT can and should monitor this type of strange activity. At the same time also monitor the employee’s whereabouts if entry (or exit) into the workplace requires some type of access card or other device. I don’t mean to sound like big brother, but we are talking about protecting business assets..

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Trade Secrets

Hurd, HP, and Inevitable Disclosure

September 8, 2010

As you probably know, HP filed a lawsuit against former CEO Mark Hurd in California seeking to prevent him from going to work for competitor Oracle. The Wall Street Journal has a solid account of the lawsuit and analysis of the claims.

The lawsuit asserts causes of action against Hurd for breach of contract and and threatened misappropriation of trade secrets. California law disfavors non-compete agreements, unlike Texas, so Hurd’s employment agreements are not called non-competes but have the same effect. The “Protective Covenants” section of his employment agreement prevent Hurd from disclosing trade secrets and soliciting HP customers, employees, and suppliers. There is also a provision which has the net effect of a non-compete:

(a) No Conflicting Business Activities. I will not provide services to a Competitor . . . that would involve Conflicting Business Activities in the Restricted Geographic Area (but while I remain a resident of California and subject to the laws of California, the restriction in this cause . . . will apply only to Conflicting Business Activities in the Restricted Geographic Area that will result in unauthorized use or disclosure of HP’s confidential information).

The crux of HP’s claim is that because Hurd was exposed to trade-secrets and business strategies while CEO for HP he will disclose or use that information while working for Oracle – this sounds like the inevitable disclosure doctrine but is styled as threatened misappropriation of trade secrets. What is the doctrine? Here is Linda Stevens take:

There are circumstances in which trade secrets inevitably will be used or disclosed, even if the defendant swears that he or she will keep the information confidential. Courts applying the doctrine have differed over its reach and the circumstances required for its application, but, generally speaking, the doctrine applies when a defendant has had access to trade secrets and then defects to the trade secret owner’s competition to perform duties so similar that the court believes that those duties cannot be performed without making use of trade secrets relating to the previous affiliation.

Texas Court do not recognize the inevitable disclosure doctrine but have come close – California does not appear to either. HP now seeks an injunction to prevent Hurd from working for Oracle based on his contractual obligations and threatened misappropriation of trade secrets.

Hurd was forced out at HP after a sexual harassment scandal, but he was paid millions of dollars. It will be interesting to see how the Judge balances the equities on this case. Is the protective covenant enforceable under California law? (I’ll leave that to a California lawyer to determine.) Will the Court consider the fact Hurd has been paid a significant amount of money to sign these agreements? Most importantly, will the Court believe he will disclose HP trade secrets at Oracle? We will keep you posted.

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Trade Secrets

The Phone Book Defense

September 28, 2009

As discussed previously, in some situations Texas courts will afford customer lists trade secret protection. In most non-solicit/non-compete cases, the departing employee doesn’t walk out with the company customer list. In some cases that list doesn’t exist. In other cases the former employee will simply reconstruct the customer list from memory, contact information they maintain, or even the phone book – the "phone book defense".

Texas courts have held that "A customer list of readily ascertainable names and addresses will not be protected as a trade secret." So if a departing employee sells construction equipment there is a limited number of potential customers like contractors and sub-contractors. Those trades advertise in the phone book on the internet and in trade publications. As a result the customer list can be reconstructed quite easily and will little effort.

In most circumstances the employer simply can’t rely on protecting their business by identifying their customer lists as a trade secret. They will also need a robust and enforceable non-compete and non-solicit.

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Trade Secrets

Are customer lists trade secrets? Sometimes.

August 24, 2009

In a breach of non-compete or non-solicit lawsuit, the former employer will almost always claim their customer lists are trade secrets. Texas Courts consider the following factors when determining if something is a trade secret:

(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and others involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

Texas Courts have found that customer lists can be trade secrets:

The Texas Supreme Court has noted that merely because a trade secret can be discovered by fair and lawful means does not preclude its owner of the right to protection from those who would secure possession of it by unfair means. See K & G Oil Tool & Serv. Co. v. G & G Fishing Tool Serv., 314 S.W.2d 782, 788 (1958). This general rule applies to customer lists. See American Precision Vibrator Co., 764 S.W.2d at 278. Therefore, although a customer list may be considered a trade secret, to be entitled to the protection of the court, the proprietary information must be more than merely of a kind and character encompassed by the definition. The information must not be publicly available or readily ascertainable by independent investigation. (citations omitted) A corollary to this is when a customer list is not considered to be a trade secret and its contents are readily ascertainable from sources other than the employer’s records, the former employee may legitimately compete with his former employer for those customers.

Adco Indus. v. Metro Label Corp., 2000 Tex. App. LEXIS 5644 (Tex. App. Dallas Aug. 23, 2000).

An employer claiming a customer list is a trade secret must treat it as such. Lists should not be "floating" around the office and should be protected via a computer password or some other type of precaution. The employer should also be a able to document and demonstrate the origins of the list (i.e. developed over many years) and should identify it at as a trade secret in any non-compete, non-disclosure, or non-solicit agreement. This will not guarantee trade secret protection but is a good start.

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Trade Secrets

Prosecuting A Trade Secret Theft Claim – Part II

June 4, 2009

A flash drive is a convenient way to take trade-secrets.

Picking up on last week’s entry:

Upon receiving the case, Eagle began an analysis of what documents Jones and Francis had accessed or stolen. The Court ordered the defendants to turn over any flash drives or laptops that they had. With the help of a former Treasury agent, Taylor and Walton found numerous documents Jones had taken on a flash drive. The most important item was an Eagle business plan that Paper Tiger took and simply changed the name. Walton paraded this document in front of the jury throughout the trial. Besides the documents that were produced, Eagle’s case also focused on documents that were not produced. He prepared a spoliation scorecard identifying all the documents that were missing. Walton and Taylor successfully tried the case in front of a jury and obtained a multi-million dollar verdict that is now on appeal.

With respect to maintaining the integrity of trade secrets, Walton makes the following recommendations: (1) image the laptops or computers of any departing employees to determine what they have on their computers; (2) have policies in place that restrict access to company trade-secrets; (3) have a relationship with a vendor to perform any type of imaging or forensic services the company needs; and (4) don’t leave these tasks to the company IT person. With respect to new employees, Walton recommends that new employees sign off on some type of document that indicates they are not using former employers’ trade secrets.

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Trade Secrets

Prosecuting A Trade Secret Theft Claim – Part I

May 27, 2009

Dave Walton of Cozen O'Connor Dave Walton is a labor and employment attorney with Cozen O’Connor and is based in West Conshohocken, Pennsylvania.

Last year Dave and Seattle lawyer Ed Taylor obtained a multi-million dollar jury trial verdict in a theft of trade secrets case. The case is instructive on how to employ and use electronic discovery to trace trade-secret theft and then present that evidence to a jury. I have changed the names of the parties and altered some of the facts to preserve some anonymity.

The Facts

Eagle Distributor is a Richmond based distributor of Liquid X. Liquid X is used in all sorts of applications including tooth-paste, car lubricants, and even motor oil. It is produced on the outskirts of Shanghai, China by a company called Paper Tiger. Eagle has two divisions, sales and supply. Sales, as you might expect, handles customer accounts throughout the United States. Supply handles negotiations with Paper Tiger and ensures delivery of product to the U.S. for distribution.

Rick Jones and Susan Francis were at one time employees of Eagle. Rick worked in sales and handled the Texas market. Susan was in supply and primarily handled negotiations with Paper Tiger. In June 2006 Rick announced he was moving to Nova Scotia to take care of his sick mother. Around that same time, Susan announced she was leaving the company after 25 years so she could take time off and receive treatment for a health condition. She even accepted Eagle’s offer to remain on the payroll so she could secure health benefits and receive treatments for her condition. Eagle did not know at that point that, within a few days of their resignations from Eagle, Rick and Susan traveled overseas to secretly help Paper Tiger set up a competing company.

In September 2006, Paper Tiger and Eagle began negotiations over pricing for Liquid X for the first quarter of 2007. Generally the negotiations took place through phone calls and follow up emails. For the first time, Paper Tiger requested information regarding Eagle’s customers and two new individuals names appeared on the cc line of the various emails, Sydney and James. Rick and Susan were using these aliases at Paper Tiger so they could secretly review emails from Eagle and hide their involvement with Paper Tiger. Later, during a meeting with Paper Tiger, Eagle was told that Paper Tiger would no longer supply Liquid X to Eagle and that Paper Tiger was going to compete directly against Eagle. At the time, Paper Tiger denied that they had hired any former Eagle employee to help them with this new competing venture.

Later, Eagle discovered that Paper Tiger had secretly hired Rick and Susan. Management then began a review of former employees access to documents over the past few months. It turned out that Susan accessed and took company information several days before she left. Similarly, Rick refused to return a flash drive containing an extensive amount of Eagle’s confidential information. There was no need for them to have the information and of course the access took place at odd times during the day. Management called their lawyers.

(Part II will appear next week.)

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Trade Secrets

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The NRLB Chimes in on Non-Competes

My Attorneys’ Fees Please (Texas Trade Secrets)

The Fifth Circuit Chimes In on Inevitable Disclosure

Texas Employers and the Trade Secrets Act

Why you should scrub departing employees’ emails.

Hurd, HP, and Inevitable Disclosure

The Phone Book Defense

Are customer lists trade secrets? Sometimes.

Prosecuting A Trade Secret Theft Claim – Part II

Prosecuting A Trade Secret Theft Claim – Part I

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Robert Radcliff

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