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.

 

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.

Why Trade Secrets Protection is Even More Important in the Strong Economy

downloadIt is a well-known fact that when the economy improves, employee mobility rises as well. The most valuable employees – those with a specialized skill set and many years of experience in a particular industry – tend to stay within that industry while moving among competitors. Since such employees are usually given access to confidential information as part of their job duties, their move to a rival company often raises a concern of whether they will be sharing that information with their new employer. 

As 2016 was drawing to a close, a number of nationally known companies filed lawsuits to prevent their former employees from working for their competitors and/or sharing their confidential information. In December, Carolina Herrera sued Oscar De La Renta for hiring Herrera’s former Senior VP of Design despite her 6-month non-compete with Herrera. In January, Aria sued its Las Vegas rival, Cosmopolitan, and a former executive, alleging that she took confidential information about Aria’s high-roller clients in order to solicit them for Cosmopolitan. Earlier that month, Zynga, a mobile app gaming power house and creator of Farmville, sued two of its former employees for allegedly taking 14,000 files related to a new game Zynga was developing before going to work for its competitor. These are just a few examples that have received attention in the media.  In reality, similar situations develop all over the country on a daily basis.

In short, in the current market, any successful business, regardless of its size or industry, may be subject to trade secret theft not from foreign entities, but from its own departing employees. To prevent theft, or minimize the inherent damage that it carries with it, companies must have a process in place for protection of trade secrets and a plan of action for when theft is detected.

I have previously written about the simple steps any company can take to protect its trade secrets. In addition to these preventative steps, companies should be prepared to act quickly if a trade secrets theft is detected or suspected as time is of the essence, and not only from the practical standpoint of preventing dissemination of trade secrets, but from the legal standpoint as well. The more time passes between a company’s discovery of trade secret theft and any legal action, the less likely is the company to obtain an order from the court prohibiting the thief from using or disseminating the information.  Thus, being prepared to act quickly and having the resources to do so, can make e a difference in the company’s ability to stop the thief from sharing its confidential information with others.

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.

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.

To Protect Trade Secrets, Make Sure the Temporary Injunction Explains What They Are

When a company learns that its former employees are releasing or using the company’s trade secrets, it needs to act fast. No company, therefore, wants to spend precious time and money trying to obtain a temporary injunction preventing the release of the confidential information, only to have it overturned by a Court of Appeals because it was not detailed enough. Yet, that’s exactly what happened in Ramirez, et al. v. Ignite Holdings Ltd., et al.where the Texas Fifth Court of Appeals reversed a temporary injunction because it failed to describe specifically what trade secrets and proprietary information the company’s former employees were prohibited from releasing.

In RamirezStream Energy, a provider of electricity and natural gas, and its marketing subsidiary, Ignite Holdings, employed independent sales associates, who had signed non-compete and non-solicitation agreements. When Stream Energy and Ignite found out that Ramirez and several other sales associates were working for their competitors, they fired them and, shortly thereafter, filed a lawsuit. The companies had no trouble obtaining a temporary injunction because of plentiful evidence of violations, but the sales associates appealed the injunction under Texas Civil Practice and Remedies Code Ann. § 51.014(a)(4), arguing that it was not detailed enough.

Most of the restrains in the temporary injunction had expired by the time the appellate court considered them, but the following provision remained in force, prohibiting defendants from: “possessing, disclosing to any third party, or using for their own benefit or to the detriment of Ignite and Stream Energy any of Ignite’s or Stream Energy’s Proprietary Information/Trade Secrets (including but not limited to proprietary information, confidential information, training materials, templates, or sales or customer lists.)”  The injunction defined “Proprietary Information/Trade Secrets” as “valuable business, training, and sales techniques, methods, forms, materials, guides, lists, downline associate and customer lists, including personal identifying information, and other confidential and proprietary information as discussed above.”

The Court of Appeals found that this prohibition failed to pass the muster under the Texas Rule of Civil Procedure 683, which requires an injunction to “describe in reasonable detail and not by reference to the complaint or other document, the act or acts sought to be restrained,” and reversed and remanded the injunction to the trial court.  The ruling explained that “techniques,” “materials,” “proprietary information,” and “confidential information” were too broad and general to give the sales associates adequate notice of the type of information they were restrained from releasing or using.  In contrast, the categories of information such as “downline associate and customer lists” and “organizational reports” were detailed enough to meet the requirements of Rule 683.  The Court of Appeals explained that the broad description of the types of the information that the sales associates were prohibited from releasing required them to infer whether any particular information or item in their possession was “proprietary information” or “confidential information” covered by the injunction, and this was “impermissible.”

Since this ruling, the Texas Uniform Trade Secrets Act (TUTSA) has become effective.  It now provides a definition of “trade secrets” as “information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers.”  It appears that under Ramirez, simply including the TUTSA definition of a trade secret in an injunction will most likely not meet the requirements of Rule 683.

CONCLUSION: If you do not want your injunction reversed on appeal, make sure to specify in detail the categories of trade secrets you want to be protected.  Broad phrases such as “confidential information,” “proprietary information,” or “trade secrets” will most likely result in a reversal of the injunction, and even if they do not, they will be useless when it comes to determining whether a party is complying with the injunction. The Texas Courts of Appeals have found that attaching a customer list or an example of protected trade secret to an injunction meets the requirements of Rule 683. Any confidentiality concerns associated with such practice, may be assuaged by using the TUTSA‘s new “preservation of secrecy” procedures under Section Sec. 134A.006, which authorizes courts do what is necessary to preserve the secrecy of 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.  His practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.