Misappropriation of Trade Secrets

Many businesses have spent substantial time and revenue to create their own devices, formula, and the like, which gives them an advantage over their competitors.  Unfortunately for businesses, when an employee leaves his or her current employer and begins working for a competitor, the prior employee takes devices, formulas, and the like, to her or her new employer.  Obviously, this can be very damaging – on many fronts – to the business that created that important information.  When such a situation occurs the prior employer may consider taking legal action against that ex-employee and perhaps that person’s current employer.

Misappropriation of trade secrets is a common-law tort cause of action.  To establish a cause of action for trade-secret misappropriation, the plaintiff (the prior employer) must plead and prove the following elements: (1) the existence of a trade secret; (2) the breach of a confidential relationship or improper discovery of a trade secret; (3) the use of the trade secret; and (4) damages.

1.      Existence of a Trade Secret

For purposes of a misappropriation claim, a “trade secret” consists of any formula, pattern, device, or compilation of information that is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. However, the trade secret must possess at least that modicum of originality that will separate it from everyday knowledge. The putative trade secret must be used in the plaintiff’s trade or business and it must give the plaintiff a competitive advantage.  The mere fact that a company is not utilizing information at the present time does not prevent that information from being a trade secret subject to protection.

An analysis of factors is used to determine if something is a “trade secret.”  Those factors are as follows:

(1) the extent to which the information is known outside of business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of the measures taken by to guard the secrecy of the information; (4) the value of the information to and to competitors; (5) the amount of effort or money expended by in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

2.      Breach of Confidential Relationship

The plaintiff must also show that there was a confidential relationship between the defendant (the ex-employee) and the plaintiff and that the defendant’s conduct breached the trust created by that relationship.   Such a relationship includes one arising between an employer and employee:

Upon the formation of an employment relationship, certain duties arise apart from any 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. This obligation survives termination of employment. Although this duty does not bar use of general knowledge, skill, and experience, it prevents the former employee’s use of confidential information or trade secrets acquired during the course of employment. In Texas, courts condemn the employment of improper means to procure trade secrets.

When a claim of improper disclosure or use of trade secrets arises from a confidential relationship, such as between an employer and an employee, the injured party is not required to rely upon an express agreement that the offending party will hold the trade secret in confidence. Likewise, the absence of an ulterior or improper motive in entering into the relationship will not preclude relief for an injured party.

Additionally, a breach of that confidential relationship occurs when the defendant uses or discloses a trade secret that was revealed to him during the course of his employment and that he knows was meant to remain secret.

3.      Use of the Trade Secret

The plaintiff must also show that the defendant disclosed the wrongfully obtained trade secrets or that the defendant used those secrets to gain a competitive advantage over the plaintiff.  The plaintiff is not required to prove that the defendant is actually using the information; it need only prove that he is in possession of the information and is in a position to use it.

4.      Damages

Finally, the plaintiff must show that it suffered damages as a result of the defendant’s wrongful conduct.  On this point, the plaintiff would have to show the court that it lost business/money as a result of the misappropriation of its trade secrets.  An example of this would be if the ex-employee goes to work for a competitor of his or her prior employer, and the ex-employee uses trade secrets to be awarded a contract/bid for work, which absent the misappropriation would have awarded to the plaintiff.

Finally, I suggest that any business take the appropriate steps to secure its trade secrets, as it should be a great help in the event they are misappropriated.