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.

 

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.