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.

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. 

Non-Compete and Confidentiality Issues to Watch in 2017

Non-Compete Issues to WatchIn 2016, there have been some major developments involving confidentiality and non-compete agreements law, which are likely to have some repercussions in 2017. Here’s a summary of the most important issues that companies should be aware of going into the new year.

1. The Federal Defend Trade Secrets Act.  This statute, enacted in May 2016, creates a federal question jurisdiction for misappropriation of trade secrets, allows companies to seize their trade secrets out of the hands of competitors in some circumstances, and provides whistleblower protection to employees when certain conditions are met.  In 2017, as companies begin to take advantage of the statute, the courts will begin creating a new body of law interpreting its provisions.

2. SEC Enforcement. The SEC will continue to go after the companies whose confidentiality agreements and policies they may find to violate the SEC’s whistleblowing rules.  Making sure that confidentiality agreements include the language specified in the federal Defend Trade Secrets Act may help with SEC’s scrutiny.

3. Choice of Law Issues.  Choice of law issues in interstate non-compete and confidentiality disputes will continue to be of major concern to companies who have out-of-state employees. A number of states in 2016 passed statutes dramatically limiting non-competes and California passed a statute that prohibits application of other states’ laws to its employees’ non-compete agreements. Business owners should make sure that their non-competes are enforceable in the jurisdictions in which they intend to enforce them.

4. Disclosure of Trade Secrets During Litigation.  This will continue to be a major point of dispute in trade secrets and non-compete lawsuits. For example, earlier this year, the Texas Supreme Court addressed what a trial judge must consider before allowing a competitor’s corporate representative in the courtroom during the testimony that might reveal the adverse party’s trade secrets. Thus, in 2017, those companies that are engaged in trade secrets misappropriation litigation in Texas will need to consider how this balancing test will apply in their particular circumstances. Many other states’ courts faced a similar issue in 2016 and have fashioned their own rules regarding when the disclosure of trade secrets in litigation is appropriate. 

TexasBarToday_TopTen_Badge_VectorGraphicLeiza 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.

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.