Our client recently hired a sales manager who used to work for a competitor. The competitor immediately sued, claiming that our client had misappropriated a number of trade secrets when it hired the new employee. Here’s how we got the case dismissed.
Employees often have access to their employer’s most valuable trade secrets and may be tempted to use them at their next job. Examples of such trade secrets may include geological surveys, customer lists, or software code. This information is of vital importance and should be protected from theft or unauthorized use by former employees, especially when they leave to work for a competitor. In some instances, however, a company will claim its trade secrets are being used by a competitor without any evidence to support these allegations.
For example, our client’s competitor alleged that it hired a former manager to gain access to its valuable trade secrets in an attempt to drive them out of business. We vigorously defended the case and got the plaintiff’s claims dismissed before trial by arguing that the plaintiff could not prove it owned any trade secrets or that our client had used them in its business.
What is a trade secret?
In order to prevail, the plaintiff must establish that the information in question meets the definition of a trade secret. A trade secret is “any formula, pattern, device, or compilation of information which is used in one’s business and presents an opportunity to obtain an advantage over competitors who do not know or use it.”[i] To determine whether a trade secret exists, Texas courts weigh six nonexclusive factors:
(1) the extent to which the information is known outside of the business;
(2) the extent to which it is known by employees and others involved in the business;
(3) the extent of the measures taken to guard the secrecy of the information;
(4) the value of the information to the business and its competitors;
(5) the amount of effort or money expended in developing the information; and
(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.[ii]
No evidence of a trade secret
We successfully argued that the plaintiff failed to identify any information that met the definition of a trade secret. This requires a showing that the information is not generally known or readily ascertainable by independent investigation. Consistent with this concept of secrecy, a former employee may use the general knowledge, skills, and experience acquired during employment to compete with a former employer.[iii] The plaintiff’s vague and conclusory allegations that information about its customers or general business practices are trade secrets did not satisfy its burden.
No evidence of use
The plaintiff must also prove that its trade secret was used by the defendant. In our case, however, there was no evidence that the plaintiff’s former employee had imparted any trade secrets to our client. In addition, the plaintiff could not identify a single sale that it lost as a result of the alleged misappropriation. In the absence of such evidence, the plaintiff’s case was dismissed.
Lessons learned
Employers should develop written employment policies to prevent the unauthorized use of trade secrets by new employees. This effort should be coupled with a drive to educate all employees on the legal definition of trade secrets and the potential consequences of using trade secrets retained from a former job. If another company alleges trade secret misappropriation, legal counsel with experience in intellectual property and employment law should be retained to investigate the allegations and negotiate a resolution.
