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FREQUENTLY ASKED QUESTIONS
ABOUT TRADE SECRETS

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• What is a trade secret?

 Under Texas law, a trade secret may consist of any formula, pattern, device, or compilation of information which is used in one’s business, and which gives one an opportunity to obtain an advantage over competitors who do not know or use it.

To determine whether a trade secret exists, Texas courts typically apply a six-factor test:

• the extent to which the information is known outside of the business;
• the extent to which it is known by employees and others involved in the business;
• the extent of the measures taken by the person or company to guard the secrecy of the information;
• the value of the information to the business and to its competitors;
• the amount of effort or money expended by the person or company in developing the information; and,
• the ease or difficulty with which the information could be properly acquired or duplicated by others.

However, a trade secret need not necessarily satisfy all six factors, because trade secrets do not fit neatly into each factor every time. The courts typically weigh the factors in the context of the surrounding circumstances to determine whether the information at issue is a trade secret.

• What is the difference between a trade secret and a patent?

There are many differences between a trade secret and a patent. For example, unlike a patent, a trade secret need not be novel or non-obvious. Many people mistakenly believe that a trade secret has to be non-obvious to qualify for legal protection. To the contrary, many trade secrets, once disclosed, may seem very obvious. Also, unlike a patent, a trade secret cannot be publicly disclosed. If it is, then, by definition, it is no longer a trade secret. With trade secrets, unlike patents, there is no formal application that must be filed, and no governmental agency issues any acknowledgement of the existence of a trade secret. In some cases, a company may not know for sure whether something qualifies as a trade secret until a judge or jury says it does. Finally, trade secrets do not expire after a specified amount of time. Instead, a trade secret theoretically can last forever, provided its secrecy is maintained. These are just some of the differences between trade secrets and patents. But importantly, the law of trade secrets can provide valuable protection to intellectual property that is not protected by a patent.

• What is the difference between a trade secret and a copyright?

As a general rule, a copyright protects only the manner of expression, but not the content. For example, you can copyright your company’s sales forecast for the next quarter, but the copyright won’t prevent a competitor from using the data. A trade secret, on the other hand, can provide legal protection of the content as well as the manner of expression. Also, a copyright cannot protect a concept or an idea. Typically, a copyright protects the expression of an idea or concept, as may be found in compilations of information, musical works, pictorial works and sound recordings, just to name a few. But a concept or an idea can be a trade secret. If an idea or a concept otherwise qualifies as a trade secret, the only additional requirement is that it be kept secret.

• How are most trade secrets lost or stolen?

There are many ways trade secrets can be lost or stolen. According to some surveys, trade secrets are most commonly lost or stolen through departing or disgruntled employees. This could be intentional, as when, for example, an employee intentionally copies data and takes it with him or her. Or, it can be “inevitable,” where the departing employee only takes what is in his head, but, perhaps unintentionally, puts that knowledge to use at his new employment.

Sometimes, however, a company is accused of misappropriating a trade secret from an inventor. For example, in 2004, a vacuum cleaner manufacturer reportedly paid $30,000,000 to settle a lawsuit in which an inventor claimed the vacuum cleaner manufacturer stole his design and made estimated sale profits of $100,000,000. The inventor and the vacuum cleaner manufacturer had reportedly signed non-disclosure agreements covering the design to allow the inventor to present the design to the company. The vacuum cleaner manufacturer even obtained a patent on the design one year after the inventor disclosed the design to them.

• Are non-compete agreements (covenants not to compete) enforceable in Texas?

The enforceability of a non-compete agreement depends on the language of the agreement and the circumstances in which the agreement was executed. But, yes, they can be enforceable under the proper circumstances. However, many are not enforceable. Keep in mind that the factual circumstance of every case is different and requires independent analysis to determine the enforceability of such agreements.

In Texas, the Covenants Not to Compete Act provides two criteria for the enforceability of a covenant not to compete. The covenant must (1) be ancillary to or part of an otherwise enforceable agreement at the time the agreement was made and (2) contain limitations as to time, geographical area, and scope of activity to be restrained that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest of the promisee. TEX. BUS. & COM. CODE ANN. § 15.50 ( Vernon Supp. 1997). The enforceability of the covenant not to compete is a question of law for the court.

a. Limitations of Time

The Texas courts have upheld restrictions ranging from two to five years as reasonable time limitations, but every case depends on its own facts.

b. Limitations of Geographic Area

The Texas courts have stated that a reasonable area is considered to be the territory in which the employee worked during his employment. But again, each case depends on its own facts.

c. Scope of Activity to be Restrained

This factor is too factually dependent to be susceptible to generalized descriptions.

• What can I do if I believe that a former employee may disclose my company’s trade secrets?

Although the factual circumstances of each case will dictate the appropriate action to take if your company suspects a former employee is (or inevitably will) disclose trade secret information, the Restatement of Unfair Competition provides that a former employee can be restrained from working for a competitor when there is a “substantial risk of disclosure” of the former employer’s trade secrets. Moreover, under Texas law, a former employee can be restrained if, even assuming the best of good faith, he would have difficulty preventing the knowledge of his former employer’s trade secrets from infiltrating his work.

Depending on the facts of the specific case, other causes of action, if appropriate, may be pursued for money damages in addition to any other relief.

• When is a former employee liable for misappropriation of trade secrets?

Generally, an employee is liable for misappropriation of trade secrets if the employer demonstrates:

• that a trade secret existed;
• the trade secret was acquired through a confidential relationship;
• the employee used the trade secret without the employer’s consent; and
• damages were suffered.

Some Texas courts have held that, to form the basis for a lawsuit, the use of the trade secret must be a commercial use through which the defendant seeks to profit from disclosing or using the trade secret.

• Can an employee be liable for misappropriation of Confidential Information?

 Certain duties may arise upon the formation of an employment relationship, even without a written contract. One of those duties forbids an employee from using confidential or proprietary information acquired during the relationship in a manner adverse to the employer. Some courts have held that this obligation survives termination of employment. Although this duty does not bar use of general knowledge, skill, and experience, it may prevent the former employee's use of confidential information acquired during the course of employment.

DISCLAIMER:

The answers to the above questions are intended only as general informational guidelines, and are not intended as a substitute for legal advice regarding a specific factual situation. If you believe you have an issue regarding trade secrets or confidential information, you should consult competent legal counsel. No Attorney-Client relationship is created unless and until we formally accept representation of you. Please contact us for further information at (512) 225-5800.

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