Avoiding the Theft of Trade Secrets Trap

By Ted Anderson, Esquire, and Ashley Tremain, Esq., Kilgore & Kilgore PLLC

If you are a key employee who decides to leave your company and go to work for a competitor or start a competing business, the question is increasingly when, not if, your former employer will file a theft of a trade secret claim against you and your new employer.

This is a function of both human nature and perceived business necessity. First of all, the business world knows no fury like that of a CEO scorned by an employee who walks across the street and offers his or her services and inside industry knowledge to a competing company. But most importantly, a company’s survival may depend on maintaining the confidentiality and competitive advantage provided by the trade secrets it owns.

Every company is therefore highly motivated to go to great lengths not only to legally protect its trade secrets, but also to muscle competing companies into thinking twice before hiring any employee who has access to its trade secrets. Filing a lawsuit, or threatening to file a lawsuit, against both the ex-employee and the new employer is one of the strongest methods of accomplishing these goals.

Therefore, if you are thinking of leaving your company and joining a competitor, you should become well-versed in the law of trade secrets and well-advised about how to insulate yourself against a lawsuit. That way you can take protective measures that will hopefully convince your former employer that filing a theft of trade secrets claim would be a futile waste of time and money.

The first step is to understand the law. In order to win a theft of trade secrets case, your former employer would have to prove the following:

  • The former employer owned a trade secret;
  • The ex-employee used or disclosed the trade secret;
  • The ex-employee disclosed the trade secret in violation of a duty not to do so, or acquired the trade secret by improper means; and
  • The former employer suffered harm because of the ex-employee’s use or disclosure of the trade secret.
Ownership of a Trade Secret

A trade secret is any confidential formula, pattern, device, or compilation of information that a company uses (or has the right to use) in its business that gives it a competitive advantage (actual or potential) over others in the industry.

To be protectable, the information must in fact be secret. This means that the information cannot be generally known in the industry, readily available to the public, or ascertainable by inspection or independent investigation. Therefore, abstract ideas and methodologies, general skills, or accumulations of information in the public domain are generally not protectable.

Examples of information that is normally deemed a protectable trade secret include: chemical formulas and ingredients, computer programs, customer information and lists, manufacturing processes and procedures, marketing and pricing data, supplier and vendor lists and terms, and technical drawings.

However, even in the case of a secret formula or design, the company must normally take reasonable measures to restrict access to those employees, independent contractors, and business partners who need to know the information, with non-disclosure agreements in place where appropriate. If the company fails to do so, the court may deem the information not substantially secret and therefore, not protectable.

Use or Disclosure of a Trade Secret

In the context of trade secret law, “use” must be commercial use—meaning use by which a party seeks to earn a profit. For example, “commercial use” of a trade secret would include using the information to design a new product or improve an existing product, identify and contact potential new customers, improve a manufacturing process, or obtain financing.

“Disclosure” simply means making the information publicly known outside the company holding the trade secret. Among other commercial harms, this would damage the company holding the trade secret by destroying the “secrecy” requirement and precluding the company from protecting the information as a trade secret in the future.

Duty to Keep Trade Secrets Confidential

In order for the use or disclosure of a trade secret to constitute theft, there must have been a duty to keep the information confidential. With respect to employees, such a duty can arise both from the fiduciary relationship between employees and employers and from any existing and enforceable contract they have entered into.

During their term of employment, employees have a fiduciary duty to act in the interests of their employer. Disclosing trade secrets which they learned by reason of the employment relationship would violate that duty. In addition, while most aspects of an employee’s fiduciary duty terminate when employment ceases, the duty not to disclose trade secrets continues. However, ex-employees are free to use the knowledge, skills, and experience they gained during employment, even when competing against their former employer. This begs the question of how to distinguish between a trade secret and industry knowledge gained through experience, and the answer is not always clear.

In order to provide further protection against disclosure of trade secrets and to protect confidential information that may not meet the strict legal test of what constitutes a trade secret, some employers require their employees to sign confidentiality and non-disclosure agreements that extend beyond the term of employment. As with non-compete agreements, the key question will be enforceability, because attempts to bar an ex-employee from using his or her acquired experience (without disclosing trade secrets) could amount to a de facto non-compete.

Acquiring Trade Secrets by Improper Means

With respect to ex-employees going to work for a competitor, the “improper means” test arises most often in two scenarios. The first is when an ex-employee who was not granted access to a trade secret obtains the information by improper means, or is provided the information under circumstances indicating that the disclosure was a mistake or itself improper.

The increasingly common scenario, however, is when a person discloses a trade secret to his or her new employer, and that new employer knows or should know that its new employee is violating a duty of confidentiality in disclosing the trade secret.

Since every employer who receives trade secrets of a competitor from a new hire should be aware that it is receiving proprietary information, most theft of trade secret lawsuits are filed not only against the ex-employee who allegedly disclosed the secret, but also against the new employer who uses the information to earn a profit. For example, in May 2011, PayPal sued Google claiming that Google hired two of its former executives to obtain trade secrets for its “eWallet” mobile transactions project.

Harm Due to the Use or Disclosure of a Trade Secret

To recover monetary damages in a theft of trade secrets case, the company holding the secret must show that the injury caused by the use or disclosure of the secret can be calculated. The monetary remedies available to a successful plaintiff include:

  • The value of what the trade secret owner has lost as a result of the theft;
  • The value of what the ex-employee or the new employer has gained as a result of the theft;
  • The value that a reasonable investor would have paid for the trade secret;
  • Prejudgment and post-judgment interest; and
  • Court costs and/or attorneys’ fees.

There has been a raft of recent theft of trade secret cases where the jury has awarded the company holding the trade secret large amounts in damages from both the ex-employee and the new employer.i

For example, in 2009, DuPont sued a competitor who had hired certain employees in possession of trade secrets related to its Kevlar product, and won a $920 million verdict. And in 2011, MGA Entertainment won a $309 million verdict against Mattel for theft of trade secrets relating to its toy designs and marketing plans. In addition, in 2010, Starwood Hotels obtained a $150 million settlement from Hilton Hotels after the latter hired two Starwood executives who brought with them thousands of documents amounting to a blueprint for starting a luxury hotel chain.iv

When companies claiming theft of trade secrets have won their lawsuits, it has typically been the case that computer files, hard copies of documents, or other material have been removed from company premises and used after the employment relationship has terminated. In other cases, employees were actively helping their future employer even before leaving their old companies. Juries tend to come down hardest in situations such as this, where active deception and clear bad faith are involved.

Be aware that some companies are not even waiting to find evidence that their trade secrets are being used before filing suit. Rather, they are claiming in court that when a key employee with knowledge of trade secrets is hired by a competitor, the secret will “inevitably” be disclosed and used, and therefore the ex-employee should be prevented from working for the competitor.

The Texas Supreme Court has never recognized the “inevitable disclosure” doctrine. However, Texas Instruments filed suit in 2009 based on the inevitable disclosure theory and the Texas Court of Appeals issued a temporary injunction preventing a former Texas Instruments employee from working at Qualcomm, its chief competitor, for a period of one year.v

The parties settled before a final ruling on the issue was made, and it remains to be seen whether the Texas Instruments case is an aberration or a foreshadowing of a shift in the law. Collectively, however, Texas courts may be trending toward a watered-down version of the “inevitable disclosure” doctrine, and have on occasion relied on a variation of the doctrine to grant injunctive relief when “probable disclosure” has been demonstrated.v

The size and prevalence of the jury awards, taken together with the potential widening of allowable claims, means that special care should be taken when going to work for a previous competitor. While it may be very tempting, and potentially quite lucrative, to furtively use trade secrets obtained from a previous employer, there is great legal danger in doing so. Even the appearance that trade secrets are being used may present substantial risk.

Therefore, it is important to develop a pre-emptive strategy when going to work for a competitor that demonstrates clean hands. Such a strategy would definitely entail identifying what trade secrets you had access to at your previous employer, returning all physical and digital copies of information containing trade secrets, and abstaining from discussing any secret information with customers and suppliers of your new company. It may also include abstaining from business discussions with fellow employees at your new company where such trade secrets could potentially come into play.

The bottom line is that in order to avoid a potentially career-threatening claim that you have stolen trade secrets from a previous employer, you should be well-informed and pro-active, because the best defense to a theft of trade secrets lawsuit is one that is created before a claim is filed.

Kilgore & Kilgore has attorneys who are experienced in these matters and willing to help you devise a strategy and/or defend against a claim. If you would like our assistance, feel free to contact Bess at DEM@kilgorelaw.com for more information.

In addition to those cases listed in footnotes ii and iii below, recent high profile cases where the jury found that a theft of trade secrets had occurred include the following:

1. Alamo Packing Corp. vs. Victory Packaging, L.P., et al.

  • Location: Bexar County, Texas
  • Verdict Date: July 29, 2008
  • Jury Award: $2.14 Million ($223,208 in lost profits; $1,030,257 in lost market value; $460,000 in attorney fees; $308,000 in pre-Judgment interest; $1,000 in additional damages)

2. Baker Hughes, Inc. v. Varel Holdings, Inc., et al.
  • Location: Houston, Texas
  • Verdict Date: April 29, 2010
  • Jury Award: $25.2 million—The jury found that Varel earned $5.9 million in profits from the stolen trade secrets, and avoided $1.5 million in research and development costs. Jurors also awarded exemplary damages of $17.8 million, or triple the profit figure, after finding that Varel acted with malice.

3. Innovative Techs. Corp. v. Kenton Trace Techs
  • Location: Ohio
  • Verdict Date: January 4, 2008
  • Jury Award: $17 million in punitive damages and $5.7 million in compensatory damages. In addition, the employees were ordered to return the salary earned in their final year working for ITC, close to $300,000.

4. Farm Bureau Life Insurance Co, et al v. American National General Insurance, et al.
  • Location: Southern District of Utah
  • Verdict Date: January 2009 (approx.)
  • Jury Award: $3.6 million in compensatory damages and $62.7 million in punitive damages (subsequently reduced by the Court to $3.6 million)

5. TIG v. FusionStorm, et al.
  • Location: California Superior Court
  • Verdict Date: July 15, 2010
  • Jury Award: $9.36 million (plus $1.525 million in punitive damages from the court).

6. RRK Holding Co. v. Sears, Roebuck & Co.
  • Location: Northern District of Illinois
  • Verdict Date: November 19, 2007
  • Jury Award: $21.5 million ($13.5 million for lost profits and an additional $8 million in punitive damages).

ii E.I. du Pont de Nemours & Co. v. Kolon Industries Inc.
  • Location: Eastern District of Virginia
  • Verdict Date: September 14, 2011
  • Jury Award: $920 Million

iiiMGA Entertainment v. Mattel, Inc. (aka “Bratz v. Barbie”)
  • Location: Santa Ana, California
  • Verdict Date: April 21, 2011
  • Jury Award: $309 Million

ivHilton Hotels v. Starwood Hotels
  • Settlement Date: December 2010
  • Settlement: $75 Million Cash + $75 Million in Contracts. Hilton is also prohibited from introducing any “lifestyle” hotel chains for two years. Two court-appointed monitors will supervise Hilton’s operations to ensure it complies.

vTexas Instruments v. Rajendra Talluri, Collin County District Court, Texas.

viIn 1999, the Dallas Court of Appeals stated: “this Court has recognized that a former employee may be enjoined from using or disclosing the former employer’s confidential or proprietary information if the employee is in a situation where use or disclosure is probable.” Conley v. DSC Communs. Corp., No. 05-98-01051-CV, 1999 Tex. App. LEXIS 1321 (Tex. App. Dallas — 1999, no pet.)(not published). The opinion stated, however, that the Dallas court was not adopting the inevitable disclosure doctrine. Whether “probable disclosure” is actually a viable theory under Texas law remains unresolved by the Texas Supreme Court.