Misappropriation of Trade Secrets Explained
Trade secrets are vital to a business’ success, which is why it becomes critical to protect information, customer lists, contract terms, designs, processes, and formulas that have value for competitors who do not know or use them. It is also important to protect trade secrets in the event that they are wrongfully obtained and used, or misappropriated.
Because there are laws protecting commercial privacy, businesses that develop useful information that gives them a competitive advantage have available remedies should anyone obtain or disclose them. In Texas, trade secrets are governed and protected by the Texas Uniform Trade Secrets Act (TUTSA). In addition to defining trade secrets, TUTSA also creates injunctive relief (court orders that stop specific acts) and civil liability when trade secrets have been misappropriated.
At Hendershot, Cowart & Hisey, P.C. our Houston business lawyers help businesses create and enforce trade secret protection. Because we draw from over two centuries of combined experience, we have the ability and expertise to handle a range of issues involving trade secrets, including pro-actively protecting trade secrets through enforceable agreements and trade secret litigation.
Pro-Actively Protecting Trade Secrets
Because plaintiffs in trade secret misappropriation cases must demonstrate that they took “reasonable measures” to maintain secrecy, protecting against misappropriation of trade secrets begins with creating safeguards.
These safeguards commonly include steps to inform contractors, vendors, employees, and others involved in a business about confidential information, and notification of a contractual agreements that prohibit disclosure. These safeguards commonly include steps to inform contractors, vendors, employees, and others involved in a business about confidential information, and notification of a contractual agreements that prohibit disclosure.
Safeguards against trade secret theft can include:
- Nondisclosure agreements
- Non-compete agreements
- Work for hire agreements
- Confidentiality agreements
- Non-solicitation agreements
Clarity of confidentiality provisions is crucial, and it must be ensured that guidelines are clearly defined. This consists of establishing why information is considered confidential, as well as how that information should be treated.
Businesses can also take further reasonable measures to protect trade secrets, including:
- Labeling confidential documents or materials
- Restricting access to physical or digital files
- Securing a premises and creating procedures for visitors
- Issuing employee identification badges
- Including trade secret policies in employee handbooks
- Classifying applicants and employees according to their access for protected information
Theft of Trade Secrets
Even when reasonable measures are taken to protect trade secrets, theft and misappropriation can still occur. Fortunately, Texas law provides remedies to businesses that can help them take civil legal action. Texas enforces laws that defer those charged with misappropriation to criminal penalties, should they obtain trade secrets through dishonest or wrongful means, or conspire with or bribe others to provide them when secret information.
If you find yourself the victim of misappropriation of trade secrets, you can fight back in one of three ways:
- Get a big red stop sign from the judge.
One way to stop it is through an "injunction" - a big red stop sign issued by the judge, which orders the competitor or former employee to stop what they're doing.
- Get your money back from the pickpocket.
When your trade secrets are stolen or misappropriated, you may have "actual loss," a legal term for the calculated impact on your bottom line. Picture a pickpocket ordered to return the $10 he stole from your wallet - that is monetary damages for actual loss.
In addition, the monetary damages to which you may be entitled include those for the "unjust enrichment" that occurred when the competitor, after having misappropriated your trade secrets, did an end-run around the R&D that you originally invested to develop the product in the first place.
- Enforce your right to fish in the stream.
Oftentimes, those products or services that constitute trade secrets are licensable; therefore, the misappropriation has deprived you of the revenue that you would have earned based on a licensing agreement. In some cases, you can obtain reasonable royalty streams as a way to compensate you for the misappropriation.
As criminal proceedings only concern whether a defendant is guilty of a crime, businesses will need to pursue action in the civil justice system. Our attorneys are adept in helping clients navigate misappropriation of trade secret torts, breach of contract and, when necessary, litigating their case aggressively through trial or arbitration. In order to bring a valid claim under TUTSA, trade secrets must provide a competitive advantage and businesses must have taken reasonable measures to protect them.
Protecting Trade Secrets
Protecting your trade secrets with the right agreements is the right idea, but as effective as these agreements can be, your trade secrets can still be misappropriated.In that case, the TUTSA provides for a variety of remedies, including:
- Injunctive relief, i.e. putting a stop to the unauthorized use of trade secrets
- Actual damages, i.e. what the misappropriation cost you in the marketplace
- Damages for unjust enrichment, e.g. when a competitor reverse engineers your product without having to spend any R&D dollars
- A reasonable royalty fee, based on the unauthorized use
- Exemplary damages for willful and malicious misappropriation
- Recovery of attorney fees
TUTSA allows plaintiffs to bring action when misappropriation actually occurs, or when it has been threatened, provided that:
- Improper means were used to acquire the trade secret
- A trade secret was used or disclosed without consent
Typically, a trade secret misappropriation case will consist of three general phases:
- Filing of a lawsuit and application for a temporary restraining order
- Temporary injunction that stops the defendant from a specific act
- Litigation for the recovery of damages
In addition to injunctive relief, businesses are also entitled to a recovery of any damages resulting from misappropriation. This includes actual losses and unjust enrichment, or royalties for the unauthorized use or disclosure of a trade secret. In cases where misappropriation was willful and malicious, exemplary damages may also be awarded against the defendant.
If you have questions about misappropriation of trade secrets, intellectual property assets, or any other business law matter, Hendershot, Cowart & Hisey, P.C. is readily available to help. Call (713) 909-7323 to schedule a consultation.