Texas Business Dispute Blog

Monday, August 1, 2016

Texas Supreme Court’s Recent Decision Helps Business Owners Keep the Wraps on Company Trade Secrets During Litigation

By Ladd Hirsch

Ensuring that Trade Secrets Stay Secret

One of the NFL’s most legendary football coaches, Vince Lombardi, is known for fiery speeches extolling his players that “Winning isn’t everything, it’s the only thing.”  Yet, when triumph on the battlefield is so costly it actually destroys the “winner,” it is known as a “Pyrrhic victory,” named in honor of Greek King Pyrrhus, who lost most of his army in two “successful” battles with the Romans.

This prospect of a Pyrrhic victory – a success that rings hollow – is something that business owners in Texas faced until recently when they filed lawsuits to protect their company’s trade secrets from misuse by former employees and competitors.   The danger was posed because the company was generally required to disclose its trade secrets during discovery in the lawsuit to permit the competitor to mount a defense to the company’s claims.  Thus, in fighting to protect trade secrets from misuse by competitors, the business owner was given the Hobson’s choice of foregoing legal action or filing a lawsuit in which the company would be required to reveal its trade secrets to a business rival.  To a business owner, winning the legal battle to protect the company’s trade secrets could often feel like losing the war. 

The Texas Supreme Court recently waded into the trade secret arena to establish a new, more even-handed balance between the parties in trade secrets litigation.  The new procedure the Court created allows business owners to file a lawsuit to protect their company’s trade secrets, but does not require them to disclose their trade secrets directly to their business rival. See In re M-I L.L.C. d/b/a M-I Swaco, 2016 WL 2981342 (Tex., May 20, 2016).

Lawsuits Should Protect Trade Secrets, Not Reveal Them

In the M-I Swaco case, the Supreme Court held that companies can keep certain of their records and testimony secret by requesting the trial court to limit access to the company’s trade secrets to the general public and opposing parties.  A delicate balance needed to be struck, because the trade secret owner desires to protect the company’s trade secrets from disclosure, but the party sued for allegedly stealing trade secrets is fully entitled defend itself, which requires disclosure of what it allegedly stole from the plaintiff. 

The Supreme Court struck this balance by holding that the trade secret owner needed to disclose information about the trade secrets in the lawsuit – but not directly to the competitor.  Instead, the Court called for the trade secret information to be disclosed solely to the attorneys for the competitor and to the experts retained by the competitor.  The Court’s holding will keep the trade secrets out of the hands of competitors of the trade secret owner, while at the same time allowing the competitor to mount a strong defense to the business owner’s claims.  

This M-I Swaco decision is good news for business owners who take legal action to protect their trade secrets.  The Court’s holding, however, does not come close to offering a complete solution to business owners who want to make sure that their company’s trade secrets remain confidential and protected from competitors.

The Courts Should Be The Cavalry, Not The Front Line

A business owner who has to resort to the filing of a lawsuit in response to the theft and/or misuse of the company’s trade secrets by a competitor has already suffered injury.  The goal of the litigation, therefore, is to secure a remedy for the harm the company has suffered.  There is considerable danger here for the company in bringing a lawsuit, however, because a court may determine that the company’s information is not a trade secret that is worthy of protection, which will invalidate the company’s trade secrets.  Therefore, it is far better for the business owner, if possible, to prevent the theft and misuse of the company’s trade secrets in the first place. 

The following is a short list of steps for the business owner to consider implementing to protect the confidentiality of the company’s trade secret and business sensitive information.

Checklist for Protecting Trade Secrets

  • The first step is for the business owner to clearly define the company’s protectable trade secrets, which provide the company with a competitive advantage in the marketplace. The business owner should therefore carefully describe the company’s trade secrets in writing, and explain how they provide the company with a competitive advantage. This writing should include a description of where the trade secrets are located.
  • Once the trade secrets have been defined, the company needs to take proactive steps to preserve the confidential nature of both online information, through cyber protection, and company files in hard copy format. These security protocols should be developed with help from IT professionals and physical security experts.
  • Clients, vendors and third parties should be excluded from secure environments that are maintained at the company.
  • All company employees should be required to sign confidentiality agreements.
  • Where appropriate, confidentiality/non-disclosure agreements should be entered into with clients, vendors and business partners.
  • When employees leave the company, they should be reminded of their duties under the confidentiality agreements they signed.
  • When the company is going through a business divorce, and the business owner is parting ways with partners in the business, the company needs to critical to define who holds the rights to use the company’s trade secrets going forward.

Conclusion

The foregoing list of safeguards is a starting point in the process of safekeeping trade secrets, but the goal of protecting the company’s trade secrets should be given high priority.

Despite the company’s best efforts to maintain trade secrets in confidence, if the company learns that its trade secrets have been taken by a former employee or by an unscrupulous competitor, it is imperative for the company to take prompt, decisive action. A pointed demand letter issued by the company’s counsel to the offender may be enough to secure a corrective response, but if not, legal action may be required.  In the event that litigation does become necessary, the balance of rights established by the Supreme Court’s recent M-I Swaco decision will help protect the trade secret owner’s rights and the confidentiality of the trade secrets in the ensuing litigation.


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