Is a Client List a Trade Secret in Texas?

0e348adfa4295fa0fabe78ead1d69672--lawyer-humor-job-humorI’ve been contacted by many a business owner saying, “my employee left, he had a confidentiality agreement, and now he is contacting my customers on behalf of his new employer. Can I stop him?”. The answer to that question, of course, depends on several factors. One of them is whether the business owner’s client list qualifies as a “trade secret” in Texas. 

Under the Texas Uniform Trade Secrets Act (“TUTSA”), a “list of actual or potential customers or suppliers” of a company qualifies as a trade secret as long as: (1) its owner, i.e. the company, took reasonable measures to keep it secret and (2) the list has an economic value because it is not generally known and cannot be easily determined by another person. 

Thus, a client list is not automatically a trade secret. Instead, a company must establish certain things at the temporary injunction hearing in order to get a court order prohibiting a former employee from contacting its clients on the ground that its client list is a trade secret.  

Recently, a Texas Court of Appeals in Cooper Valves, LLC, et al. v. Valvetechnologies, Inc., dissolved an injunction that prohibited a former employee from “possessing, copying, selling, disclosing, or using” any information about his former employer’s 1800 customers listed on the exhibit attached to the injunction order. The employer in that case, submitted under seal a list of all of its customers and asked the court to order the former employee not to use any information about those customers in his new job. The list, however, included only the names of the companies, and not the names and contact information for the key decision-makers.  It also included many pre-existing customers of the former employee’s new employer.

The Court of Appeals voided the injunction finding that it was overboard and that the company did not prove that company names qualified for trade secret protection. Thus, the owner of the client list failed to prove that his particular client list, consisting of just the company names, was a trade secret. 

BOTTOM LINE: Business owners in Texas should make sure that they take reasonable measures to protect the secrecy of their client lists and, when push comes to shove and they must seek a court order preventing a former employee from using such a list in their new job, must be ready to establish the necessary requirements under the Texas law proving that the information contained in their client lists qualifies for trade secret protection. 

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

Employees’ Unauthorized Copying of Electronic Files is Not Theft in Texas

1sbkpi.jpgWhen a company learns that an employee took or copied confidential materials, it’s not unusual for the company to sue the employee for misappropriation of trade secrets and theft of trade secrets under the Texas’s civil theft statute.   A recent federal court decision out of the Southern District, however, serves as a reminder that employers should carefully analyze what exactly the employee took and/or copied before tacking on a claim under the Texas Theft Liability Act (TTLA) to their lawsuit.

In BHL Boresight, Inc. v. Geo-Steering Sols. Inc., BHL accused the defendants of stealing: (1) software; (2) bitlocks; (3) data; and (4) user guides for BHL’s software program.  It claimed that these items constituted “property” under Texas Penal Code §33.03 and that defendants committed civil theft of this property by  unlawfully appropriating it without BHL’s effective consent.

Defendants argued that the civil theft claim must be dismissed because “general theft applies to unique documents and not copies of documents,” and the district court agreed finding that “consensus appears to be that if the plaintiff continues to possess and control originals of the subject property, he cannot show that the defendant possessed the requisite intent to deprive” the owner of its property.  And without intent, there is no claim for theft.

The district court ruled that because BHL retained the originals of its user guides and the software program, its theft claim related to these two items failed. However, bitlocks and the data generated by the software were a different matter.  Because bitlocks were physical USB devices that allowed users to access BHL’s software, they were neither “documents” nor “originals” and, therefore, when the defendants took them, they had the intent to deprive BHL of these devices.  Similarly, the data generated by BHL’s software was unique because the software generated different data depending on which oil & gas well it was applied to.  Therefore, the court did not dismiss BHL’s claim with respect to the theft of bitlocks and the software data.

BOTTOM LINE FOR COMPANIES:  Before pleading a Texas Theft Liability Act claim against an employee for stealing the company’s data, information, documents, or other property, the company should make sure that there is at least some evidence of the employee’s intent to deprive the company of its property.   While unauthorized copying of information or files may not be sufficient to bring a theft claim, the company may have other claims under Texas and federal law that it may use to remedy the harm from the employee’s actions.

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries in federal and state courts. For a consultation regarding a dispute involving a noncompete agreement or misappropriation of trade secrets, contact Leiza at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108 or fill out the form below.

What Should a Company do When it Suspects That an Employee Stole Its Trade Secrets?

preciousEmployees take their employers’ trade secrets all the time. It’s a fact of life.  No matter what systems an employer has in place, sooner or later a key employee will depart and take some trade secret information, data, or documents with them. Most employees take trade secrets because that information will help them land a better job or open a competing business. Some take it because they believe that the information belongs to them since they worked on it or created it. Whatever their reasons may be, the loss of competitive advantage resulting from the disclosure of trade secrets to competitors or release of that information in the open market may cause significant, and often irreparable, damage to the former employer.

So, what should a company do if it suspects trade secrets theft by a former employee?

First, the company should identify and collect all of the employee’s electronic devices in its possession – desktop computers, laptops, tablets, company-issued phones, and any other devices that the employee used during his work and that may contain company information.

Second, the company should have a qualified forensic examiner image the devices to preserve the relevant electronic evidence that may show whether the employee used any of these devices to copy or transfer the trade secret information and then search such devices for relevant evidence.  This should be done pursuant to a protocol devised by the examiner and a legal counsel to ensure that the evidence will later hold up in court.

Third, the company should search the employee’s emails for any evidence of trade secrets transfer.

Fourth, the company should interview its employees and/or third parties who may have relevant information.

** The company must move quickly and have an attorney supervise and coordinate the above efforts to make sure the collected evidence can later be used in court (i.e. is admissible) and to make sure the relevant communications are protected by the attorney-client privilege.

Fifth, if the company discovers evidence of trade secrets theft, it should file a lawsuit and seek a temporary injunction – a court order – prohibiting the former employee and anybody else acting on his/her behalf from using or disclosing the company’s trade secrets.  While this may be costly, this is the only effective way to stop the employee before he or she uses or discloses the trade secrets or does significant damage to the company.

Here is a real-life example where the above steps worked and helped a company stop a former employee from opening a competing business using the company’s trade secrets. 

Earlier this year, I wrote about a case that involved a Texas employer who followed the above steps and was able to obtain a temporary injunction and then a permanent injunction shutting down a competing business that a former employee opened using the gym’s trade secrets.  In that case, a Houston gym filed a lawsuit against its former regional vice president and his wife claiming that they took the gym’s confidential information and opened their own competing gym and medspa.  The gym obtained a temporary injunction against the former employee and his new company within four days of filing the lawsuit because it had emails and other electronic evidence establishing the trade secrets copying and transfer by the VP.

Just recently, the court in that case issued a permanent injunction prohibiting the former VP from opening or operating any new locations of his gym and medspa through September 2017 and from opening any gyms within a seven-mile radius of any of Life Time’s 123 existing locations, as well as employing or attempting to employ any current or former Life Time employees.

Additionally, within 20 days of the court order, the VP and his wife were required to return or destroy all of the gym’s documents and information still in their possession. After no more than 25 days, they had to provide the court with a declaration confirming that all sensitive data has been secured. Finally, between 20 and 90 days after the ruling, a forensic computer specialist “[had] the right to inspect and audit any computer systems” belonging to the VP, his wife, his business associate, and their gym to ensure that they had destroyed or permanently deleted the gym’s trade secrets.  This outcome would not have been possible, had the company  not followed the steps outlined above.

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.

Texas Supreme Court Rules Competitors Can be Excluded from the Courtroom

cartoonUntil recently, companies suing for trade secret theft ran a risk of having to disclose to their competitors in open court certain aspects of their trade secrets in order to prove their claim. The companies often argued that they shouldn’t have to give up their trade secrets in order to pursue their legal rights.  On the other hand, defendants argued that they cannot defend against a claim when they don’t know what they are accused of taking. Last month, the Texas Supreme Court clarified how such dilemma is to be resolved. 

The Court ruled that a company suing for trade secret misappropriation may exclude its competitor’s representatives from the courtroom when their trade secrets are discussed, leaving only the lawyers and independent outside experts of the competitor to hear such testimony. This way, a defendant can learn the information it needs to defend against the claims brought against it, but the information cannot be used outside of the lawsuit. 

Under TUTSA, trial courts are required to take “reasonable measures” to protect trade secrets during litigation, including, among other things, “holding in camera hearings” i.e. hearings that are closed to the public because they will involve discussion of trade secrets.  TUTSA does not specifically define the term or explain exactly who may or may not be present during in camera hearings.  Recently, NOV and M-I Swaco battled in court over whether NOV’s corporate representative could be present at a hearing where M-I Swaco offered testimony about what trade secrets its former employee took from it and gave to NOV.

In In Re M-I, LLC d/b/a M-I Swaco, NOV argued that as a party to the lawsuit where it was accused of stealing trade secrets from M-I Swaco, it had a right to be present at a temporary injunction hearing and hear what trade secrets M-I Swaco claimed NOV misappropriated.  The Texas Supreme Court did not buy into this argument finding that in camera hearings could include hearings where a party or its representatives (but not its attorneys) could be excluded.

The Supreme Court explained that when a trial judge is faced with the decision on whether to exclude a corporate representative from the courtroom during testimony about trade secrets, which he might not already know by virtue of misappropriation, the judge must balance (1) the “degree of competitive harm” the party would have suffered from the disclosure of its trade secrets to the other party’s corporate representative and (2)  the degree to which a party’s defense of a trade secrets case might be impaired if its corporate representative is excluded from the courtroom.

To make this determination regarding the degree of competitive harm, the court must consider the relative value of the party’s trade secrets to its competitor as well as whether the corporate representative acts as a competitive decision-maker at his company.  If he does, disclosure of alleged trade secrets would “necessarily entail greater competitive harm” because, even when acting in good faith, the corporate representative would not be able to resist acting on what he or she may learn during the hearing. To determine whether a party’s defense might be impaired, the court should consider whether a corporate representative possess unique expertise that a party may not find in outside experts.

Takeway:  The Texas Supreme Court has made it clear that a company wishing to prosecute theft of trade secrets can do so without having to disclose its trade secrets to a competitor in an open court.  If the disclosure of such information in open court will harm the company, it may ask the judge to remove its competitor’s representatives from the courtroom when critical proprietary information is discussed, leaving it up to the other sides’ lawyers and experts to analyze the testimony or evidence.  While this will certainly increase the cost of trade secrets litigation, it will also ensure that a competitor cannot use the courtroom to get to the “secret sauce.”

Leiza litigates non-compete and trade secrets lawsuits in a variety of industries, 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.

Trade Secrets Litigation is About to Change with the Passage of the Federal Defend Trade Secrets Act

trade secrets label on folder

The federal Defend Trade Secrets Act (DTSA), that has been subject of rigorous debate over the past few years, is just days away from becoming the law of the land. 

On April 4, 2016, the Senate passed the DTSA bill with a vote of 87-0 (S-1890). Yesterday, the House passed the bill by a vote of 410-2. The bill will now move to the White House, but given that the Obama Administration has already voiced strong support in its favor, it is expected that President Obama will sign the bill into law in the next several days. 

The DTSA amends the Economic Espionage Act of 1996 to create a federal civil remedy for stealing trade secrets.  Currently, trade secrets are governed by a patchwork of 50 state trade secrets statutes.  The DTSA will provide an additional uniform federal statute that trade secrets owners may use to protect themselves and fill the perceived gaps in the state statutes. 

One of the most salient features of the DTSA that has received a lot of attention is a provision that allows a plaintiff in a trade secrets lawsuit to obtain an ex parte seizure order “only in extraordinary circumstances” of the “property necessary to prevent the propagation or dissemination of the trade secret that is the subject of the action.”  I foresee many litigants in the future arguing over what constitutes “extraordinary circumstances” that justify seizure of somebody’s phone, computer, or other property, in order to prevent further dissemination of trade secrets. 

Stay tuned for a detailed analysis of the statute once it becomes the law…

Leiza litigates non-compete and trade secrets lawsuits on behalf of COMPANIES and EMPLOYEES in a variety of industries, and has advised hundreds of clients regarding non-compete and trade secret issue. 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.

Two Common (and Costly) Mistakes in Trade Secrets Litigation


kkTrade secrets litigation can be expensive, and if you can avoid it by implementing the measures that I’ve previously described here, then you are off to a good start.  But if your trade secrets have been misappropriated and you have no choice but to go to court, here are two important issues that are often not given enough attention until much later into a lawsuit, when it’s, often, too late.

How will your company’s trade secrets be protected during the lawsuit?

Typically, when sensitive information is going to be exchanged by the parties to a lawsuit during litigation, both parties will ask the court to enter, what is called, an “agreed protective order,” which describes how the parties will handle the confidential information that they receive from each other. It also imposes restrictions on how a party in a lawsuit may use the information or with whom it can share it.  Such an order is, basically, a contract between the parties, blessed by the court.

In my experience, however, a standard protective order used in many business litigation cases does not address many of the issues that arise in a litigation battle between two direct competitors, where the risk of confidential information being misused by the other side is magnified in comparison to a typical business case. Some standard protective order provisions are not restrictive enough, while others are so restrictive that the parties may run into roadblocks during discovery, increasing the costs of the lawsuit and frustrating the discovery of relevant documents.

Therefore, when deciding how to proceed with a trade secrets lawsuit, a company and its litigation counsel should discuss the specific aspects of a protective order and consider whether additional above-the-board protections should be put in place once the lawsuit is filed.  Since an agreed protective order is viewed by courts as a contract between the parties, the courts are often reluctant to change their terms unless both parties agree, which can make it difficult to add protections down the road if the other side objects to them.  Thus, it pays to analyze what trade secrets are likely to be disclosed during the litigation and what a provisions a protective order should include to ensure the preservation of their confidential nature during the discovery stage and trial. 

How will you calculate and prove the damages your company suffered from the misappropriation?

Many companies spend a lot of money and time proving that their trade secrets were taken and used by a competitor, only to receive a big fat “zero” in damages from the jury or to have a judge throw out their expert’s opinion regarding the damages the company suffered as being too “speculative” or “unreliable.”  

Sometimes, all that a company wants is for the person or entity that took the trade secrets to return them and/or a court order restraining that person or company from using the information they took. However, if the cat is out of the bag, so to speak, and the information has already been used by the time the company finds out that something was stolen, then the company might want to seek monetary compensation. In that case, analyzing what type of damages a company might be able to recover and how such damages may be proven must be done before the lawsuit is filed or shortly thereafter. Knowing whether a company might have a problem showing the amount of damages or linking such damages to the misappropriation can help the company set a realistic litigation budget and devise a settlement strategy.

Bottom line is that the two issues identified above should be addressed and analyzed early on, rather than in the middle of a costly litigation battle, when substantial funds and resources have been invested by the plaintiff and a non-suit might no longer be an option. 

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. Contact Ms. Dolghih for a confidential consultation at Leiza.Dolghih@lewisbrisbois.com or (214) 722-7108.