5 Tips for Minimizing Trade Secrets Theft by Clients, Contractors and Vendors

Watching YouThe business world is littered with the carcasses of companies which, after they shared their confidential information and trade secrets with a non-competitor, such as their client, supplier, or vendor, were undercut by that party, who all of a sudden realized that they could profit from the information by cutting out the middle-man.

How can companies prevent this from happening? Here are the five basic tips on avoiding being blindsided by your own business partners:

  1. Never share your entire confidential information or trade secrets with anyone, no matter how sure you are that they won’t compete with you in the future.  This is a no-brainer, but limiting the access to the confidential information on a “need-to-know” basis is the easiest, yet the most underutilized, protection measure.
  2. Only disclose the information once the vendor/supplier/client signed a non-disclosure agreement. Simply put, do not share any sensitive information under you have a signed NDA in hand.  The NDA should state, among other things, that the vendor/supplier/client will make sure its employees are bound/will obey the NDA.
  3. Only share the information through a virtual data room, which allows you to track who accessed the information, when they did so, and what they did with it.  Some virtual data rooms allow you to set alerts for when a large amount of data is downloaded or printed. Such virtual data rooms also allow you to control the various permission settings to prohibit or limit the download or copying of the information and to limit access to certain individuals, rather than the entire companies or departments.
  4. Consider using software that allows you to track the information once it leaves the virtual data room. Some programs on the market allow you to track who has access to your information and what they do with it even after it leaves the virtual data room.  For extremely sensitive information, such measures may be worth the extra cost.
  5. Use data encryption when sharing confidential information outside the virtual data room. The encryption can now be done automatically and it prevents anyone who does not have an encryption key from reading the message – all they will see is a random collection of characters.

BOTTOM LINE:  In Texas, to claim trade secret protection, the owner of trade secrets must show that he/she took “reasonable measures” under the circumstances to keep the information secret. What constitutes “reasonable measures” is often a point of contention in lawsuits involving trade secrets misappropriation.  As the owner of trade secrets, you never want to be in a position where you cannot point to at least some measures you took to protect the confidential information.  Thus, the above steps are not only a great business practice, but they can also help in court if a company ends up suing its vendor/supplier/client for misappropriation of its trade secrets.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.

 

Proving Lost Profits in a Trade Secrets Case – An Expensive Lesson from a Texas Court of Appeals

think memeWhat the jury giveth, the judge may taketh away. Memes aside, any company that is thinking of filing a trade secrets misappropriation case, must be ready to prove both: that its trade secrets were taken and the amount of damages that the taking caused.

A recent ruling from the Dallas Court of Appeals demonstrates how a company’s verdict can be taken away by the court due to the party not having sufficient evidence of damages. 

In Radiant Financial v. Bagby, the company, which structures and sells fractional interests in life insurance policies referred to as life settlements, sued its former sales agent for breaching her non-disclosure agreement and trade secrets misappropriation.  Radiant alleged that Bagby persuaded 19 investors who had previously placed money into escrow with Radiant, to take their money out and invest it with a Radiant’s competitor.  In the process, she allegedly provided some of Radiant’s proprietary forms and the information filled out by the investors to Radian’t competitor.

The jury awarded Radiant $152,916 in damages, $150,000 in punitive damages, and $600,000 in attorneys fees in response to the question to “[c]onsider the profit that Radiant Financial lost” as a result of Bagby’s failure to comply with her non-disclosure agreement and misappropriation of Radiant’s trade secrets.  

The trial court, however, refused to award these damages after concluding that Radiant did not prove that the 19 investors that left would have invested with it but for Bagby’s actions. 

During  the trial, Bagby introduced evidence that: (1) the 19 investors had specific investment requirements; and (2) at the time when they left Radiant, it offered no policies that met these investors’ requirements. Radiant argued that its track record showed that it “had always been able” to find appropriate policies for its investors.  Thus, it would have been able to find appropriate policies had Bagby not taken the investors to a competitor.  The trial court rejected Radiant’s lost profits damages model finding that it would require the court to “stack assumption upon assumption,” and took away the jury damages award.  The Dallas Court of Appeals upheld the court’s decision.

Bottom Line:  Before filing a trade secrets case, the company bringing the lawsuit should always consider the following questions: (1) what damages did it suffer? (2) how does it calculate such damages? (3) how can it prove such damages in court?  While the answer might not be obvious in the beginning of the lawsuit, waiting to ask such questions until the lawsuit is well underway can result in the company spending thousands of dollars in attorney’s fees on a lawsuit where the monetary damages are speculative or non-existent.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108. 

Why the Appointment of Jeff Sessions as the New Attorney General May Lead to More Trade Secrets Litigation

jeff-sessions-827pngOn Friday, President-elect Donald Trump named Alabama Sen. Jeff Sessions as his pick for the next Attorney General. Sessions is a former U.S. attorney and current senator with lengthy experience with the Justice Department. He is also known as a pro-business conservative, who on numerous occasions has expressed a favorable view of corporate indictments of executives marred in white-collar crimes. 

Sessions co-sponsored the Federal Defend Trade Secrets Act, which became the law this year. The statute allows civil lawsuits to prevent or redress theft of trade secrets in addition to already-existing criminal penalties under 18 U.S.C. § 1832.  His previous publicly expressed views suggest that he will not shy away from indicting big companies and individuals for white-collar crimes, which include theft of trade secrets.  

For example, in 2010, during a confirmation hearing for the U.S. deputy general, Sessions questioned the candidate about the “dangerous” philosophy of not charging companies criminally because of concerns regarding the effect of such charges on employees and shareholders and stated that he “was taught that if they violate a law, you charge them.” 

Trade secret theft indictments have been on the rise over the past several years, prompting an almost unanimous passage of the Federal Defend Trade Secrets Act in the beginning of this year. The uptick in criminal litigation has been accompanied by a blooming civil litigation of trade secrets theft on state and federal level as well.  

Given Sessions’ prior remarks regarding his preference for corporate indictments in lieu of settlements or payment of penalties, as well as his expressed support towards protection of trade secrets, we can expect a rise in corporate indictments arising out of theft of sensitive information (especially when it is shared with foreign companies or states). This will put the spotlight on the rise of trade secrets theft in the country, will garner more publicity for such acts, and will in turn educate the US companies and business owners as to legal remedies available to them in the civil court to remedy trade secret theft.  

In short, Sessions’ expected tough stance on corporate crime, including trade secrets theft and the accompanying publicity will likely result in an increase in civil litigation in that arena as well. 

Leiza litigates unfair competition, non-compete and trade secrets lawsuits on behalf of companies and employees, and has advised hundreds of clients regarding non-compete and trade secret issues. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

5 Common Mistakes That Companies Make With Non Disclosure Agreements

imagesWhether you are talking to a potential buyer of your company, an interested investor, or a joint venture partner, before any confidential information is shared with that person, they should execute a Non Disclosure Agreement, often referred to as “NDA.”  The NDAs are very popular and come in a variety of shapes and length. Their main purpose is to protect the confidentiality of information shared with a company outsider. Not having a signed enforceable NDA may result in a major headache down the road when the information that was meant to be confidential falls into the wrong hands. In my experience, here are the most common mistakes that companies make when it comes to non disclosure agreements:

Mistake No. 1: Not specifying what information will be covered and for how long. 

A non disclosure agreement should describe: (1) what type of information is being disclosed; (2) whether the NDA covers only written disclosures or also oral disclosures; (3) how will this information be disclosed; (4) how may this disclosed information be used by the recipient; and (5) how long will the recipient have to maintain the confidentiality of the information.  A NDA missing one or more of these terms may cause problems between the parties  when they actually begin to disclose confidential information to each other.

Mistake No. 2: Not specifying when or how disputes related to the NDA will be determined. 

A good NDA will have a clause that will specify where and how any disputes related to the NDA will be resolved – whether it’s through mediation, arbitration or litigation.  It should also specify what law will govern the agreement.

Mistake No. 3: Not keeping an electronic copy of a signed NDA.

It’s 2016 so this advice might seem painfully obvious.  However, it happens more often than you would think – a hard copy of a signed NDA somehow disappears or “walks away” and nobody can find an electronic copy with all the signatures. To prevent this from happening, a company should always designate one person to be in charge of collecting all the necessary signatures and saving the NDA somewhere where it can be easily found should a problem arise.

Mistake No. 4: Not designating the disclosed information as “Confidential.” 

Any information shared under the NDA should be marked as “Confidential” or “Highly Confidential.” Many companies mistakenly believe that once a party signed a non disclosure agreement, they are automatically protected. That is not the case.  Failing to designate all shared information as confidential may lead to future disputes as to whether certain data or information was meant to be confidential.   Moreover, should a problem arise with the NDA agreement, such as a missing signature, the confidentiality stamp will provide a back-up protection.

Mistake No. 5:  Not limiting the scope of what you are disclosing to the party who signed the NDA.

A party should always limit the scope of what it is disclosing to only that which is absolutely necessary for the other party to know related to the purpose of the NDA. The costs of enforcing or attempting to enforce an NDA may be significant, so limiting the disclosure of information may help a party avoid the risk and expense of litigation.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

Small Business Corner: Limiting Competition Through Contract Provisions

download (1)Whether you are hiring a new employee or entering in a contract with your vendor or supplier, if you are planning on giving these persons access to your business’ confidential information, such as customer lists, financial information, proprietary training materials, etc., you should make sure that the person you are sharing it with is not going to take that information and use it to compete against your business. There are several tools available to business owners to make sure that this does not happen.

When properly drafted, the following contractual provisions will serve to protect a business owner from unfair competition by a former employee or business partner:

  • Non-compete clause.  This clause prevents current employees or business partners from joining or forming a competing business after the end of their employment or business relationship with your company.  It is enforceable in Texas when certain conditions are met.
  • Non-solicitation of clients clause.  This clause prevents current employees or business partners from taking the company’s clients with them after their employment or business relationship with that company ends.
  • Non-solicitation of employees a.k.a anti-raiding clause.  This clause prevents current employees or business partners from poaching their former employer’s or business partner’s employees after the end of their employment or business relationship.
  • Non-disclosure clause.  This clause prohibits employees or business partners from using or disclosing confidential information that a company shared with them during their employment or business relationship.

To be enforceable, each clause has to be drafted specifically for your business.  There are some contract clauses that stay the same no matter what the substance of the contract or the business is – these are not those clauses.

A lot of business owners will adopt a friend’s or a former employer’s non-compete and non-solicitation agreements for their own use, or copy an agreement they found online.  However, those agreements usually work only until a company attempts to enforce them, leaving a business owner exposed to unfair competition at the precise moment when it needs the protection the most.

These copycat restrictive covenants often fail because a company that attempts to enforce them in court must show why a particular geographic area or a specified time period is reasonable for a particular employee, and explain exactly what is included in the definition of “confidential information” included in the non-disclosure clause.  This is virtually impossible to do if the agreement that the company is seeking to enforce was catered to a different company’s business, with different types of confidential information, and different employee structure.

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and knows how such disputes typically play out for both parties. If you need assistance with a non-compete or a trade secret misappropriation situation, contact Leiza for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

How to Protect Your Intellectual Property When Getting Involved in a Startup

kkOne of the factors that distinguishes successful startups from those that fail, is not just a great idea, but an idea that’s legally protected from theft. A source code that solves a major need in the market place is worthless unless the inventor can show that he is the legal owner of the code and can prevent others from copying it or using it without authorization.  There is a reason, after all, that Mr. Wonderful on Sharktank always wants to know if the invention that’s being pitched has been patented.

Think about it this way. When you buy a car, you want to know who owns it and you want to see the registration and the certificate of title before you give the seller money. If the person selling the car does not have the proper paperwork or there are multiple people claiming ownership of that car, you are probably going to walk away. Intellectual property is no different. Whether you are trying to sell it or get somebody to invest money in it, you are going to have to show that you own it.

I have previously explained the four different ways of protecting intellectual property here. Each type of intellectual property protection is designed to protect a different aspect of a product or invention, and a combination of these methods of protection can increase the value of a startup and the product it offers many times over.

Thus, for any startup owner, partner, contributor, or anybody who is involved in developing or improving a product offered by a startup, it is important to understand what rights each person or entity involved has with respect to that product.

Patent Ownership

As a default matter, unless there is an agreement to the contrary, each inventor is considered to be a co-owner of the patent. This means that each joint owner may make, use, sell, and import into the US the entire invention without seeking the permission of the other inventors and without accounting to the other inventors for any profits. If several inventors are listed on a patent application, it would be wise to have an agreement that assigns their ownership or licenses the patent to the startup, so that the startup entity and not individual patent-holders decide when or how to use, market or sell the invention in question.

Copyright Ownership

Just like patents, a copyrighted work which consists of parts that the authors intended to be merged, is co-owned by each author, absent an agreement to the contrary.  Thus, any co-owner of a copyright can use or license the entire work without the permission of other owners. However, unlike patents each co-owner must account to the other owners for any profits they receive.  This arrangement may be changed by the parties’ agreement and often is changed so that the copyright is assigned to the startup entity by individual authors so that the company controls who or when can use the copyrighted material.

If a startup employs independent contractors to create distinct parts of a product, their employment or independent contractor agreements should have an assignment of work clause so that there is a clear understanding that the finished product belongs to the company and not the independent contractor.

Trade Secrets

As I have explained before, in Texas, “trade secrets” are defined very broadly and may include any confidential information of a startup as long as it (1) has economic value because it is not generally known and (2) is subject to efforts to maintain its secrecy that are reasonable under circumstances. Thus, even those ideas and business processes that do not qualify for patents, copyright or trademark protection, can be protected by the owner as trade secrets. In Texas, this includes a “negative know-how,” which is information about what business processes or product development ideas have failed in the past.

Whereas an application for a patent or copyright forces startup owners to define their invention or idea for purposes of obtaining legal protection, trade secrets protection does not require an owner to put down on paper what he or she claims as a trade secret. Thus, an idea of a trade secret is a lot more amorphous and very few startup owners try to identify what type of trade secrets they have until it is too late – such as when they are embroiled in a litigation with a competitor or a former employee or partner.  Non-disclosure and non-compete agreements are a great tool for protection of trade secrets, but must be drafted carefully so as to make them enforceable in Texas.  Identifying what is a “trade secret” early on in a startup life is key to being able to protect such trade secrets down the road.

CONCLUSION:  While intellectual property law is a complicated area that many lawyers, much less startup owners, know little about, implementing certain basic measure at the beginning of a startup, can drastically decrease the chances of a lawsuit over the ownership down the road and significantly increase the chances of obtaining investment capital. Spending just a few hours on identifying all the existing and possible sources of intellectual property within a startup and then deciding on how to protect them will pay 10-fold down the road.

Leiza litigates non-compete and trade secrets cases in federal and states courts around Texas, and frequently advises business owners and startups on how to protect their trade secrets against misappropriation by competitors and employees and can be contacted at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.

A 10-Step Guide to Protecting Your Company’s Trade Secrets

Under the Texas Uniform Trade Secrets Act (TUTSA), information is not considered a trade secret unless its owner took “reasonable efforts under circumstances to maintain its secrecy.”  So, what efforts should a business be taking to protect its proprietary and confidential information and trade secrets? Here’s a quick step by step checklist.

1. Identify Your Trade Secrets and Proprietary Information.  Before you start implementing any security measures, you need to identify what information you are trying to protect. Ask yourself two questions:  (1) what information do I have that gives my business a competitive advantage? and (2) is this information publicly available? By way of example, under TUTSA, a trade secret can include: “formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  This information, however, is not likely to qualify as proprietary if it is “commonly known” or if it is available in the public domain.

2. Implement Access System on the “Need to Know Basis.” If the information you are seeking to protect is stored on paper, make sure your documents are stored in a secure cabinet or a room, which only few key employees can access. If the information is stored electronically, make sure that each employee has a separate log in account and that you keep track of who accessed the information, when, for how long, and what changes were made to such information. If possible, a company should consider having a pop-up window or a reminder that notifies its employees each time they access the program or the database that contains confidential information that such information is proprietary and may not be shared with third parties.

3. Require Key Employees to Sign Non-Disclosure Agreements (NDAs). Employees with access to confidential and proprietary information should be required to execute NDAs prior to receiving access to such information. A typical NDA will require an employee (a) not to disclosure the company’s confidential information to third parties; and (b) to assign all “rights, title, and interest” in the employee’s inventions to the company if they are developed in the scope of his or her employment. The NDA can be part of an offer letter or employment agreement or it can be a free-standing NDA contract.  Make sure that the NDAs are filled out correctly, are current, are consistently being executed by each key employee, and are stored in safe location.

4. Require Third Parties to Sign Non-Disclosure Agreements.  If you are sharing your business’s proprietary information with another party, such as your supplier, marketing agent, insurance company, etc., make sure that they execute a NDA as well.  Ideally, you should not be sharing your proprietary information with anybody who has not executed a NDA.

5. Have a Written Confidentiality Policy. Your employee handbook and/or company policy should contain a statement regarding what information the company considers to be confidential, prohibition of disclosure of such information, description of the consequences of such disclosure, such as disciplinary action, and a requirement that all key employees execute a NDA.

6. Provide Training Regarding the Confidentiality Policy. Among other things, such training can serve to remind employees not to discuss the confidential information in public, not to access such information from public computers, and alert them regarding various ways of inadvertent disclosure that they can encounter in their day-to-day lives.

7. Enforce the Confidentiality Policy.  It is not enough to have NDAs and confidentiality policies, but the employer should monitor employees’ compliance and conduct periodic audits. The rules and contracts are worthless unless the employer consistently enforces them.

8. When Key Employees Leave, Have Them Sign A Non-Disclosure Confirmation Form, Obtain Information About Their New Company, and Conduct Forensic Imaging of Their Computers.  When key employees leave, during the exit interview have them sign a statement in which they acknowledge that they have not taken any of your confidential information.  You should also ask them about where they are going, what duties they will be performing there and other information that will help you assess the likelihood of them using the company’s confidential information at their new company.  Finally, it is worth paying a few hundred dollars to have their computers, iPads, etc., forensically examined to make sure that they have not printed, emailed themselves or otherwise took any of the company’s proprietary information.

9. If You Suspect That an Employee Is Stealing or Has Stolen Your Trade Secrets, Act Quickly. The more time passes between you discovering that your employee has taken or is using your confidential information and your actions, the less likely a court is to find that the information was a “trade secret.” In other words, if you are not trying to prevent other parties from using your information, then why should the court do so?  I have previously written about the typical enforcement actions for violation of non-competition agreements by departing employees here.  A similar analysis will apply to trade secret misappropriations.

10. Be Proactive, Not Reactive in Protecting The Information That Is at The Heart of Your Business.  Many businesses make sure that they protect their tangible assets such as office furniture, equipment, computers, etc., but they often fail to put security measures in place to protect the intangible assets – the information, knowledge, and skills that make their business successful.  Do not wait until an unscrupulous employee, a subcontractor, or a business associate decides to take your proprietary information – protect yourself by implementing the above-described measures.

CONCLUSION:  While following the above steps does not guarantee that your trade secrets will remain confidential, it does provide two advantages. First, from a business stand point, implementing the measures on this list will make it less likely that your employees or third-parties will be successful in stealing your business’s trade secrets. Second, from the legal standpoint, if you end up in court, proving that misappropriated information was a “trade secret” under the TUTSA will be easier.

This list is general guide.  Consider consulting with an attorney to come up with a specific security framework that adequately protects your particular business.  For more information regarding trade secret misappropriation claims in Texas and protection against such misappropriation, contact Leiza Dolghih.