Podcast Episode 18—Trade Secret Protection in the Absence of a Confidentiality Agreement with Employees

Podcast Episode Timestamps

00:00 — What if your worker leaves with your trade secrets and you don’t have a confidentiality agreement in place?
00:06 — Intro
00:30 — There is trade secret protection under TUTSA and the DTSA when the statutory requirements are satisfied.
01:01 — Both statutes require taking “reasonable measures” to keep the information a secret. A signed confidentiality agreement can be an example of a reasonable measure to keep the information a secret. But, a signed agreement is not absolutely necessary.
01:40 — The longer answer to the question.
01:43 — The essential elements of a trade secret misappropriation cause of action.
03:50 — What about misappropriation in the absence of a signed agreement? This is a question about element two of the cause of action.
04:26 — A discussion of the public policy balancing act to help understand why things are the way they are.
06:11 — Use of information acquired during employment.
07:40 — Important reasons to have confidentiality agreements with your employees.
0 9:45 — How a signed confidentiality agreement might stop a problem before a lawsuit becomes necessary.
11:38 — Why, as a practical matter, it’s important to be able to attach liability to the new employer, if possible.
12:05 — Recovering attorney’s fees in the context of a trade secrets misappropriation lawsuit under TUTSA and DTSA.
16:00 — Recovering attorney’s fees in the context of a breached contract—including a breached confidentiality agreement.
16:57 — Other potentially available causes of action in a trade secrets misappropriation context.
19:07 — The takeaways from this episode.
20:03 — Outro

The Question

I was recently talking to a friend who wondered how protected a company’s trade secrets are in the absence of a confidentiality agreement.  This post and related podcast episode are aimed at answering this question.

The Short Answer

Yes.  Trade secrets are protected under Texas’s Uniform Trade Secrets Act and the federal Defend Trade Secrets Act (though a Venn diagram of what the statutes protect may not perfectly overlap) when the statutory requirements are satisfied.  A written agreement is not required to satisfy the statutory requirements.  The statutes are aligned when it comes to the requirement that owners of trade secrets must take reasonable steps or “reasonable measures” to keep the information secret.  One such reasonable measure to keep the information secret is to have recipients of the information sign an agreement prior to receipt of the information (though better late than never).  There are benefits to confidentiality agreements that I’ll go over later in this post, but they are not absolutely necessary in the employment context in order to have trade secret protection.

Now, I’ll move into the longer answer.

The Cause of Action

Under Texas law, the trade secret misappropriation cause of action has four primary elements that must be proven by a plaintiff.  The plaintiff must prove elements (1) that the misappropriated information is a trade secret as defined by the applicable statute; (2) the trade secret was improperly acquired through a confidential or contractual relationship or by other improper means; (3) the defendant used the trade secret without plaintiff’s authorization; and (4) the plaintiff sustained damages as a result of the misappropriation.

What About Misappropriation in the Absence of a Signed Agreement?

This is really a question about element two of the cause of action—whether the trade secret was improperly acquired through a confidential or contractual relationship or by other improper means.  When there is no signed agreement, such as a confidentiality or nondisclosure agreement, the question becomes whether the trade secret was improperly acquired through a confidential relationship or by other improper means. In this situation the “or contractual relationship” is generally removed as an option (but talk to your attorney about the possibility of an implied contract).

Keep These Things in Mind

A little discussion of public policy could be helpful here to provide a wider view of the trade secret landscape when it comes to former workers.  Our society embraces and encourages competition—including competition by former employees with their former employers.  This allows for innovation which can maximize value to society.  It’s common for employees to leave calcified companies when they see that things can be done better and they can’t (or don’t want to) get traction with their ideas within their employer’s company.  But, it’s a public policy balancing act.  We don’t want to disincentive investments by established companies due to the threat that if their investments result in a marketplace hit, their employees will leave with the benefits of these hard-earned innovations and undercut their former employers. Aiming to avoid these negative unintended consequences of unfettered competition, Texas statutes provide for trade secrets protection and narrowly tailored noncompete agreements.

Use of Information Acquired During Employment

In Texas, an employee is under an obligation not to divulge or use the trade secrets of the employer except for the employer’s benefit, not only during employment but after the employment ends.  However, a former employee may compete with the former employer using the general knowledge, skills, and experience acquired during employment, as well as any information learned in employment that is not subject to a duty of nondisclosure, so long as that competition is fairly and legally conducted. 

Unless otherwise agreed, after the termination of employment, an employee has no duty not to compete with the former employer, but has a duty to the former employer not to use or to disclose to third persons, for the benefit of the employee or others, in competition with (or other harm to) the former employer, trade secrets, written lists of names, or other similar confidential matters given to the employee only for the employee’s use or acquired by the employee in violation of a duty.  If the defendant is merely using a skill developed while working for the plaintiff, later use of those skills is not unlawful.

Two Reasons for a Written Confidentiality Agreement

Two of the most important reasons to have a written confidentiality agreement with your employees is to (1) demonstrate that your business took reasonable steps to protect its trade secrets (this is part of the statutory definition of “trade secret”); and (2) to educate your employees about what your business considers its trade secrets.  Best practice is to get this written agreement in place before providing your trade secrets to your new worker.  But, regardless of when you put this agreement in place, its existence makes it more difficult for your worker to later argue that they had no idea that, for example, your business considered its customer list a trade secret.   

Educating Your Competitor About Your Former Employee’s Continuing Obligations

Another helpful aspect of a written confidentiality agreement is the ability to attach it to correspondence to your former worker’s new employer to put them on notice of the fact that your former worker had access to your business’s trade secret information and that they have continuing duties to protect them.  Then, in the event of a misappropriation, the new employer may be complicit in misappropriation and may also be in the cross-hairs of a tortious interference with existing contract cause of action for facilitating your former worker’s breach of their confidentiality agreement with you.  This can have the impact of preventing a problem in the first place, which is always best, or increasing the chances of making you whole on the backend if a lawsuit does become necessary.

A Note on Attorney’s Fees Recovery

Recovery of attorney’s fees in a trade secrets misappropriation lawsuit can be affected by whether there is a written agreement in place.

When it comes to attorney’s fees in Texas lawsuits, each side pays their own attorney’s fees unless there is a contractual or statutory exception to this general rule.  Both the state and federal trade secrets statutes permit recovery of attorney’s fees—but only in very limited circumstances.  Both statutes allow for recovery of attorney’s fees when either (1) the lawsuit is proven to have been brought in bad faith; (2) a defendant’s motion to terminate an injunction was made (by the defendant) or resisted (by the plaintiff) in bad faith; or (3) the misappropriation was willful and malicious.  These are high bars to clear.  To recover attorney’s fees it isn’t enough to simply prevail in the lawsuit.

On the other hand, a prevailing plaintiff can recover attorney’s fees in a misappropriation case when there is a confidentiality or nondisclosure agreement if the contract explicitly allows for recovery of attorney’s fees.  Even if the contract doesn’t have an attorney’s fees provision, chapter 38 of the Civil Practice and Remedies Code allows a prevailing party to recover their attorney’s fees from an individual or corporation defendant when they breach the contract.

Other Potential Legal Theories

When a lawsuit is filed, it’s common for a plaintiff to assert all available causes of action. In a misappropriation of trade secrets context, the following causes of action may be available, depending on the circumstances.

• Misappropriation of trade secrets;
• Breach of contract;
• Breach of confidential or fiduciary duty;
• Common law misappropriation (for products developed through extensive time labor skill and money);
• Tortious interference with existing contracts (the “existing contracts” here may include confidentiality agreements with workers, nondisclosure agreements with vendors, or customer contracts);
• Tortious interference with prospective business relations;
• Unfair competition by misappropriation;
• Fraud by nondisclosure;
• Texas Theft Liability Act;
• Idea submission; and
• Civil conspiracy or other participatory liability theories.

There may also be criminal liability. Theft of a trade secret in Texas is a felony.  The definition of trade secret in criminal law is more limited than in civil law: “the whole or any part of any scientific or technical information, design, process, procedure, formula or improvement that has value and that the owner has taken measures to prevent from becoming available to persons other than those selected by the owner to have access for limited purposes.”  Theft of a trade secret may violate a number of federal criminal laws as well.

Takeaways

Although your business’s trade secrets may be protectable in the absence of written agreements, there are significant benefits to having written agreements in place.  The cost of these agreements pales in comparison to the cost of protecting your trademarks in court.  Although there is no guarantee that confidentiality and nondisclosure agreements will prevent an eventual need to go to court, in most situations having them will put your business in a significantly stronger position in a lawsuit.  Such agreements can also provide your attorney with tools that may nip in the bud problems before they cause any true harm to your business.

On the other side of the coin, it makes sense to conduct due diligence to ensure that your new workers are not bringing your competitors’ trade secrets with them.  And, if you receive a notice letter from your competitor’s attorney pertaining to your new worker, you should consult with your attorney to take steps to minimize your business’s liability exposure.

Disclaimer: This audio and blog post are for informational purposes only and should not be misinterpreted as legal or other professional advice. If you have a legal question, you should consult with an attorney in your jurisdiction. Thank you for tuning in to Keith Law, PLLC.

(Photo by kira schwarz from Pexels)