FUNDAMENTAL PRINCIPLES OF TRADE SECRET LAW AND LITIGATION

FUNDAMENTAL PRINCIPLES OF TRADE SECRET LAW AND LITIGATION

WILLIAM M. PARRISH H. CARL MYERS

Winstead, PC 401 Congress Avenue, Suite 2100

Austin, Texas 78701 Telephone: 512-370-2869 Facsimile: 512-370-2850 [email protected]

State Bar of Texas 30TH ANNUAL ADVANCED

CIVIL TRIAL COURSE August 29-31, 2007 - Dallas

October 17-19, 2007 - Lost Pines November 7-9, 2007 - Houston

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William M. Parrish (Bill) Shareholder, Winstead P.C. 401 Congress Suite 2100 Austin, Texas 78701 512.370.2869 Direct 512.370.2850 Fax [email protected] Bill Parrish has over twenty-eight years of experience in complex commercial

litigation. His experience includes jury trials, bench trials and appellate proceedings in both state and federal court, AAA and private arbitrations, and numerous mediations. Although his practice has involved a wide spectrum of commercial cases, the emphasis has been upon intellectual property disputes (e.g., trade secret, trademark, trade name, trade dress, copyright, and patent disputes) business torts (e.g., unfair competition, deceptive trade practices, tortious interference with actual and prospective contracts and/or business relationships, fraud, breach of fiduciary duty, unfair advertising practices, etc.) and breach of contract claims. He also has extensive experience in representing companies and individuals in connection with claims brought by various regulatory bodies, including the Attorneys General of over 20 different states, the Federal Trade Commission, and the U.S. Postal Service. In addition to litigating cases, he is a mediator. Education

University of Texas School of Law J.D., 1978 Center for Public Policy Dispute Resolution, The University if Texas School of Law; Mediator Training, 2004 University of Texas B.A., with honors, Plan II, 1975 Phi Beta Kappa; Friar Society; named The University of Texas Outstanding Student (1974) Edward S. Guleke Student Excellence Award (1976) Awards & Recognition

The Best Lawyers in America, 2007 (Intellectual Property and Commercial Litigation); Super Lawyers, Texas Monthly, 2006 (Intellectual Property Litigation and Business Litigation) Representative Trade Secret Cases

• Representation of a high tech equipment manufacturing firm as plaintiff in a suit against five former employees and two competing companies who misappropriated trade secrets and other confidential information of the client. The case ultimately settled with the client recovering approximately $50 million. The suit was in state district court in Austin and a companion suit was in state district court in California.

• Representation of a national roofing supply company as plaintiff in a suit against former employees who hired away other key employees then started a competing business. The client alleged misappropriation of trade secrets, tortious interference with contract and other causes of action. After obtaining a highly contested TRO and a hotly contested preliminary injunction, the client recovered $1 million in a settlement.

• Representation of a securities brokerage firm in a dispute with a competing brokerage firm and former employees over theft of trade secrets and other claims. Resulted in recovery of over $1 million for the client. The suit was in an NASD arbitration.

• Representation of a computer software company in the automobile industry accused of stealing trade secrets of a competing company. Resulted in dismissal of plaintiff’s claims prior to trial.

• Representation of a start up company formed to exploit a new fuel technology, two individual officers of the start up company and an established manufacturing company that loaned substantial funds to the start up in defense of a suit brought by the purported inventor of the technology, who was also a shareholder in the newly formed corporation. One of the principal questions in the suit revolved around who had equitable ownership of certain patents, trade secrets, trademarks and other intellectual property related to the technology. The purported inventor sued for breach of contract, theft of trade secrets, slander of title to the intellectual property, conversion, breach of fiduciary duty, tortious interference with contract, deceptive trade practices, unfair competition and other claims. The Plaintiff alleged one billion dollars in damages. The start up sued the purported inventor for breach of his contract to transfer the technology to the company and for fraud and breach of fiduciary duty, among other claims. Resulted in favorable settlement for the client before trial.

• Representation of a nationally-known manufacturer of hair care products in a trade secret dispute with one of its largest competitors. The competitor filed suit seeking to enjoin the client from marketing a new product in particular packaging. The competitor filed suit in Georgia seeking injunctive relief (which would have delayed the client getting the product to market at a critical time and which could have severely damaged the client’s business) and sought over $30 million in damages. Filed a suit in Texas on behalf of the client in which we sought a declaratory judgment, injunctive relief, and damages for tortious interference. Represented the client in both the Georgia and Texas actions. The cases were successfully resolved with the client being allowed to go forward with the marketing of its product in a timely fashion and recovering damages from the competitor.

• Representation of a food manufacturing company in a several-week jury trial in which the client: obtained a declaratory judgment upholding the client’s construction of an international distribution agreement involving sale of the product to Japan; obtained a jury verdict and recovered substantial dollars against the distributor for breach of contract; and successfully defended the client against multi-million dollar counterclaims alleging trademark infringement, conversion of trade secrets, product defects, breach of contract, deceptive trade practices, tortious interference with actual and prospective business relations, breach of confidential relationship, and numerous other claims.

• Defense of a U.S. manufacturing company who purchased the assets of another U.S. manufacturing company in a lawsuit brought by a Japanese competitor who alleged that the client’s product was based upon engineering drawings that the Japanese company claimed were its trade secrets which had been stolen by officers and employees of the client’s predecessor (who were former employees of the Japanese company). The case involved: (i) issues of whether the design elements were capable of trade secret protection; (ii) whether the design elements in the allegedly copied engineering drawings were actually trade secrets stolen from the Japanese company or were the result of legal reverse engineering by the client’s predecessor; (iii) whether certain customer information provided to the client’s predecessor constituted trade secrets; and (iv) whether or not the Japanese company’s claims were enforceable against a bona fide purchaser for value.

Professional Memberships & Affiliations

Admitted: U.S. District Courts for the Northern, Southern, Western and Eastern Districts of Texas and the U.S. Courts of Appeal for the 5th and 11th Circuits; Robert W. Calvert Inn of Court, (President- 2004/2005 Term and Executive Committee Member, 2000–2007); American Bar Association (Litigation and Intellectual Property); State Bar of Texas (Litigation, Intellectual Property, and Computer Law); Austin Bar Association (Litigation and Intellectual Property); Dallas Bar Association (Business Litigation)

Fundamental Principles Of Trade Secret Law And Litigation Chapter 26

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TABLE OF CONTENTS

I. "TRADE SECRET" DEFINED ..................................................................................................................... 1 A. Uniform Trade Secrets Act (UTSA)....................................................................................................... 1 B. Restatement of Torts (1939). .................................................................................................................. 1 C. Restatement (Third) of Unfair Competition (1995). .............................................................................. 1 D. Texas Case Law...................................................................................................................................... 1 E. Economic Espionage Act of 1996, 18 U.S.C. § 1839: ........................................................................... 2 F. Texas Penal Code § 31.05(a)(4). ............................................................................................................ 2 G. Examples of information that has been protected as Trade Secret ......................................................... 2

II. DETERMINING IF A TRADE SECRET EXISTS ....................................................................................... 2 A. Substantial Secrecy Required. ................................................................................................................ 2

1. Implied Duty of Non-Disclosure. ................................................................................................... 3 2. Independent Invention. ................................................................................................................... 3

B. Factors Considered. .................................................................................................................................. 3

III. SPECIAL PROTECTIONS AFFORDED TO TRADE SECRETS............................................................... 6 A. Texas Rule of Evidence 507................................................................................................................... 6 B. Protection from Disclosure Pursuant to Open Records. ......................................................................... 6 C. Waiver. ................................................................................................................................................... 6

IV. UNIQUE ASPECTS OF TRADE SECRETS................................................................................................ 7 A. Novelty not required............................................................................................................................... 7 B. No protection against independent creation. .......................................................................................... 7 C. No time limitation. ................................................................................................................................. 7 D. Patent Publication may destroy trade secret. .......................................................................................... 7

V. TRADE SECRET MISAPPROPRIATION ..................................................................................................... 7 A. Texas Standard for Misappropriation. .................................................................................................... 7

1. "Improper Means." ......................................................................................................................... 7 2. "Breach of Confidence."................................................................................................................. 7

a. Express Agreements. .............................................................................................................. 7 b. Common Law Duties. ............................................................................................................. 8

i. Employees....................................................................................................................... 8 ii. Confidential Relationships.............................................................................................. 8

3. Receiving Trade Secret with Knowledge that it was Obtained by Improper Means or Transmitted by Mistake. ..................................................................................................................................... 8

B. Cause of Action for Trade Secret Misappropriation. ............................................................................. 8 1. Basic Elements. .............................................................................................................................. 8 2. "Use" or "Disclosure" ..................................................................................................................... 9 3. "Use" of Negative Know-How (What not to do)............................................................................ 9

C. The "Discovery Rule" and the Statute of Limitations. ........................................................................... 9 D. Other Causes of Action to Consider. ...................................................................................................... 9

1. Breach of Contract.......................................................................................................................... 9 2. Breach of Fiduciary Duty. .............................................................................................................. 9 3. Tortious Interference with Contract or Interference with Prospective Relations. .......................... 9 4. Texas Theft Liability Act. .............................................................................................................. 9

VI. COMPETITORS WHO HIRE EMPLOYEES WITH KNOWLEDGE OF TRADE SECRETS................. 10 A. Deliberate Raiding May Constitute "Acquiring by Improper Means." ................................................ 10 B. Knowingly Accepting Trade Secrets. ................................................................................................... 10 C. The Doctrine of Inevitable Disclosure ................................................................................................. 10

1. PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir. 1995). ..................................................................... 10 2. Texas law...................................................................................................................................... 11 3. California has expressly rejected the doctrine of inevitable disclosure, requiring party seeking

relief to prove actual use, not mere threat..................................................................................... 11


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4. Injunctive Relief May Be Appropriate to Prevent “Potential” Disclosure or Use........................ 11

VII. REMEDIES FOR MISAPPROPRIATION OF TRADE SECRETS ........................................................... 11 A. Injunctive Relief ................................................................................................................................... 11

1. Preliminary Injunction. ................................................................................................................. 11 2. Permanent Injunction vs. "Head Start" Injunction........................................................................ 12 3. Strategic Implications. .................................................................................................................. 12

B. Damages ............................................................................................................................................... 12 1. The Value of the Secret to the Plaintiff. ....................................................................................... 12 2. Unjust Enrichment, or the Value of the Secret to Defendant. ...................................................... 13 3. Reasonable Royalty Measure. ...................................................................................................... 15 4. Hybrid Measures........................................................................................................................... 16

VIII. POTENTIAL CRIMINAL IMPLICATIONS............................................................................................. 16 A. Texas Penal Code. ................................................................................................................................ 16 B. Federal Statute. ..................................................................................................................................... 16 C. Criminal Penalties Imposed in the Foiled Coke Heist.......................................................................... 17


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FUNDAMENTAL PRINCIPLES OF TRADE SECRET LAW AND LITIGATION1 I. "TRADE SECRET" DEFINED

The term "trade secret" is one of the most elusive and difficult concepts in the law to define. —Lear Siegler, Inc. v. Ark-Ell Springs, Inc., 569 F.2d 286, 288 (5th Cir. 1978).

In a nutshell, a trade secret is information that has commercial value to a business that is kept reasonably confidential. A number of different sources provide authority on trade secret law, and each defines the term "trade secret" in a slightly different way. While the number of potentially applicable definitions may seem daunting, every definition of "trade secret" requires actual or potential commercial value based on the prevention of disclosure to or the lack of discovery by competitors or the general public. A. Uniform Trade Secrets Act (UTSA). The Uniform Trade Secrets Act, or some variation thereof, has been adopted by over 40 states. Section 1(4) provides the following definition of trade secret:

[I]information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value, actual or potential, from not being generally known and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use, and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

B. Restatement of Torts (1939). Section 757, comment b, provides another definition commonly cited in trade secret cases: 1 Full treatises have been written on the fundamentals of trade secret law and trade secret litigation. One of the best is Trade Secret Litigation in an Information Age by Gale R. Peterson. Gale R. Peterson, TRADE SECRET PROTECTION IN AN INFORMATION AGE (1997). Then there is, of course, Milgrim on Trade Secrets. Roger M. Milgrim, MILGRIM ON TRADE SECRETS (2006). This article is intended to be only a brief overview of the highlights.

A trade secret may consist of any formula, pattern, device or compilation of information which 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. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the protection of an article. It may, however, relate to the sale of goods or to other operations within the business such as a code for determining discounts, rebates or other concessions in a price list or catalogue, or a list of specialized customers or a method of bookkeeping or other office management.

C. Restatement (Third) of Unfair Competition

(1995). The cause of action for misappropriation of trade secrets has been moved from the Restatement of Torts to the Restatement (Third) of Unfair Competition. Section 39 contains its own definition:

A trade secret is any information that can be used in the operation of a business or other enterprise that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

Comment b to Section 39 illustrates, with a non-exclusive list, the scope of information that may qualify for trade secret status:

A trade secret may consist of a formula, pattern, compilation of data, computer program, device, method, technique, process, or other form or embodiment of economically valuable information. A trade secret may relate to technical matters such as a composition or design of a product, a method of manufacture, or the know-how necessary to perform a particular operation or service. A trade secret may also relate to other aspects of business operations such as pricing and marketing techniques or the identity or requirements of customers.

D. Texas Case Law.

Unlike the majority of states (40+), Texas has not adopted the Uniform Trade Secrets Act (UTSA). For a number of years, Texas applied the definition found in


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the Restatement of Torts. See, e.g., Sikes v. McGraw-Edison Co., 665 F.2d 731, 736 (5th Cir. 1982)("Georgia, like Texas, recognizes the Restatement [of Torts] definition of trade secret…")(emphasis added); E.I. DuPont de Nemours & Co., Inc. v. Christopher, 431 F.2d 1012, 1014 (5th Cir. 1970)("[I]n Hyde Corporation v. Huffines [located at 314 S.W 2d 763 (Tex. 1958)] . . . the Texas Supreme Court specifically adopted the rule found in [Section 757 of] the Restatement of Torts.").

After the cause of action for misappropriation was moved to the Restatement (Third) of Unfair Competition, the Texas Supreme Court supplied the following 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.

Computer Assocs. Int'l v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996). There are a number of factors that Texas courts will consider in determining whether information meets this definition and constitutes a trade secret (explored in detail in the next section). E. Economic Espionage Act of 1996, 18 U.S.C. §

1839:

(3) [T]he term "trade secret" means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if— (A) the owner thereof has taken reasonable

measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public …

F. Texas Penal Code § 31.05(a)(4). Texas also penalizes theft of trade secrets under criminal law, providing its own definition:

Trade secret means the whole or any part of any scientific or technical information, design, process, procedure, formula or improvement that has value and that the owner has taken measures to prevent from becoming available to persons other than those selected by the owner to have access for limited purposes.

G. Examples of information that has been

protected as Trade Secret

1. Formulas. "The formula for Coke is the most famous trade secret." Chico Harlan, Trade Secret Plot Pulls Coke, Pepsi Together, PITTSBURGH POST-GAZETTE, July 07, 2006, quoting David Tungate, associate professor of law at Carnegie Mellon University's School of Business.

2. Computer Hardware 3. Computer Software 4. Technical Specifications 5. Product Designs 6. Blueprints & Drawings 7. Processes and Technical Procedures 8. Machines and Machine Modifications 9. Know How 10. "Negative Know-How"—information

about what not to do. Called into doubt by Hurst v. Hughes Tool Co., 634 F.2d 895, 898 (5th Cir. 1981)(though information was of some value, information about what not to do was not actionable); but cf. T-N-T Motorsports, Inc. v. Hennessey Motorsports, Inc., 965 S.W.2d 18, 28 (Tex.App.—Houston [1st Dist.] 1998; n.w.h.)(learning what did and did not work enabled former employees to achieve identical results more quickly).

11. Customer lists 12. Business Methods 13. Pricing Information 14. Marketing Tactics and Research 15. Strategic Plans

Note that this is a non-exclusive list. Virtually anything may be a trade secret, from a method for adjusting a jet engine, to a list of clients, to the 'secret recipe' for barbeque sauce at the local dive. II. DETERMINING IF A TRADE SECRET

EXISTS A. Substantial Secrecy Required. By definition, information must be "secret" to constitute a trade secret. If the information is common or widespread knowledge, if the information is


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commonly known within a particular industry, or if the putative trade secret can be learned by examining the product itself, it cannot constitute a trade secret and is not entitled to protection.

The subject matter of a trade secret must be secret. Matters of public or general knowledge in an industry cannot be appropriated by one as his secret. Matters which are completely disclosed by the goods which one markets cannot be secret. Substantially, a trade secret is known only in the particular business in which it is used.

RESTATEMENT OF TORTS § 757, comment b (1939) (emphasis added). But most trade secrets must be disclosed to some people in order to obtain a commercial advantage—whether in the factory, the board room, or the accounting department, the owner of a trade secret will generally need to share its secret to some degree. The Restatement and case law recognize the need for limited disclosures. Id. ("It is not requisite that only the proprietor of the business know it. He may, without losing his protection, communicate it to employees involved in its use.") Similarly, a trade secret owner may need to discuss her "secret" with others outside the company in order to obtain materials, engage in business with others, or manufacture its product. Such disclosure does not forfeit trade secret protection if there is an agreement or implied obligation not to further disclose the information. Id. ("[One] may likewise communicate [a trade secret] to others pledged to secrecy."). 1. Implied Duty of Non-Disclosure.

A court may imply such a pledge of secrecy in certain contexts—e.g., a due diligence review in connection with a merger and acquisition, or in an employment relationship. See H.E. Butt Grocery Co. v. Moody's Quality Meats, Inc., 951 S.W.2d 33, 36 (Tex.App.—Corpus Christi 1997, pet. denied) (negotiations relating to sale of a business constituted confidential relationship); see also Miller Paper Co. v. Roberts Paper Co., 901 S.W.2d 593, 600-01 (employee has a continuing duty not to disclose trade secret information where the employee knows or should know that employer wants information kept secret); Hewlett-Packard Co. v. Byd Sign, Inc., 2007 U.S. Dist. LEXIS 5323 at *26-27 (E.D.Tex. 2007) (misappropriation of employer's proprietary information with intent to use in competition can support breach of fiduciary duty claim).

A prudent practitioner should not rely on such implied duties, which inject an unnecessary series of fact questions into an attempt to protect trade secrets. See American Derringer Corp. v. Bond, 924 S.W.2d 773, 777 (Tex.App.—Waco 1996, no writ) (plaintiff must prove "the offending party abused the trust that was reposed in him incident to a confidential relationship with the injured party"). The best practice is to make the pledge of secrecy explicit by a non-disclosure agreement and to implement security measures to protect the information.

2. Independent Invention. No matter how secretive and diligent a trade

secret owner may be, there is always one potential avenue for the information to be known outside the business. Someone else may independently acquire the same "secret"—for example, adding a particular ingredient to a formula, adopting a similar manufacturing process, or designing a similar software module—without consulting the trade secret owner or even knowing of the owner's knowledge. Such independent development does not eliminate trade secret status, so long as the information is kept secret by the other developer. Id. ("Others may also know of [the subject matter of a trade secret] as, for example, when they have discovered the process or formula by independent invention and are keeping it secret."). RESTATEMENT OF TORTS § 757, comment b.

While these limited types of disclosures or discoveries will not void trade secret status, "a substantial element of secrecy must exist, so that, except by improper means, there would be difficulty in acquiring the information." Id. (emphasis added). Texas case law has adopted these principles of substantial, if not absolute, secrecy. A trade secret need not be entirely secret. E.g., H.E. Butt Grocery Co. 951 S.W.2d at 35. However, there must be a substantial element of secrecy, and the owner of a trade secret must take reasonable steps to protect the information claimed to be a trade secret. E.g., J.C. Kinley Co. v. Haynie Wire Line Serv., 705 S.W.2d 193, 196 (Tex.App.—Houston [1st] 1985, writ ref'd n.r.e.). B. Factors Considered.

In determining whether information should be accorded trade secret status, courts often look to the factors that were set forth in Comment b to the Restatement of Torts § 757. The Texas Supreme Court reiterated these six factors in 2003:

(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;


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(4) the value of the information to [the business] and to…competitors;

(5) the amount of effort or money expended…in developing the information;

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

In re Bass, 113 S.W.3d 735, 739 (Tex. 2003); see also Triple Tee Golf Inc. v. Nike, Inc., 485 F.3d 253, 267 (5th Cir. 2007) (reciting Texas' six-factor test). In Bass, the Texas Supreme Court clarified an issue that had caused some inconsistency in trade secret case law. Texas courts had differed in the relative weight of these factors and whether all six factors were required to be met in a particular case. Id. The Texas Supreme Court held that information did not need to satisfy all six factors in order for trade secret status to apply. Id. ("We agree…that the party claiming a trade secret should not be required to satisfy all six factors because trade secrets do not fit neatly into each factor every time."). The Fifth Circuit had long before held that a trade secret might exist where some factor was unmet. Metallurgical Industries, Inc. v. Fourtek, Inc., 790 F.2d 1195, 1201 (5th Cir. 1986) (applying Texas law). While the Bass and Metallurgical opinions illustrate the fact-specific nature of trade secret status, these factors continue to provide guidance for courts and practitioners. 1. The Extent to Which Information is Known

Outside the Business As discussed in II(a) above, substantial secrecy is required for trade secret protection. Disclosure outside the company pursuant to a non-disclosure agreement, or where there is an implied obligation of confidentiality, does not void trade secret status. Nor does a competitor's knowledge of the information due to independent invention. On the other hand, the information can not be "of public or general knowledge in the industry." Courts will examine the degree to which the purported trade secret is known outside the business in determining trade secret status. 2. The Extent to Which Information is Known By

Employees and Others In the Business This factor illustrates the importance of caution in

sharing trade secret information—even with those who might have an express or implied duty to maintain its secrecy. Courts look not only to the extent a trade secret is shared with others outside the business but will consider the way the information was distributed inside the business. Was the information available to all employees, even if it was not necessary for the employee's job performance? If so, the company has weakened its claim for trade secret protection.

Compare In re Bass, 113 S.W.3d at 742 (upholding trade secret protection where access limited to 4 employees) with Auto Wax Co. v. Byrd, 599 S.W.2d 110, 112-13 (Tex.App.—Dallas 1980, n.w.h.) (formulas shared with several employees and kept in unlocked cabinet). In evaluating the extent to which the information is known by employees and others in the business, a court will likely consider the following types of questions:

(a) Are employees and/or third parties required to sign confidentiality/non-disclosure agreements before they have access to trade secret information?

(b) Are statements of confidentiality/non-disclosure policies in employee manuals or are confidentiality policies posted on the premises?

(c) Do employees have access to trade secret information only on a need to know basis? (d) Do different employees or levels of employees have different “security clearance” or document and information access levels? (e) Do employees/visitors wear identification badges?

(f) Are employees required to participate in exit interviews upon termination/resignation to remind employee of obligations, obtain acknowledgment of obligations and confirm that all confidential information have been returned?

Taking these types of measures will demonstrate to a court that the information is treated with secrecy within the company, helping meet the first factor in evaluating trade secret status. 3. The extent of the measures taken to guard the

secrecy of the information This factor concerns the security measures taken by the business to safeguard the information claimed to be trade secret. This factor involves the company's efforts to protect information within the company as well as its efforts to prohibit its disclosure to others outside the company. Courts are more likely to confer trade secret status where a business can demonstrate that it has taken careful security measures to ensure its secrecy. Courts may consider questions like the following in evaluating the security measures taken to protect the information alleged to be a trade secret:

Physical Security (a) Are doors to facilities where trade secret

information is kept locked or are security guards in place?


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(b) Are fences or other physical barriers in place to keep trade secrets from view?

(c) Are computer back-up tapes containing trade secret information maintained in a secure area?

(d) Are computer discs containing trade secret information kept in locked files?

Controlled Access (a) Are employees and/or visitors required to

sign in and sign out when entering or exiting facilities containing sensitive information?

(b) Are there separate areas within the facility, with restricted access, where trade secret operations are carried out or where secrets are in view?

(c) Are file cabinets containing trade secrets kept locked and is access to those files restricted?

(d) Are these restrictions on employees taking trade secret information off the premises or putting trade secret information on home computers?

(e) Are there restrictions on copying documents or computer files containing trade secret information?

(f) Are restrictions on computer access in place? (g) Are restrictions placed on accessing trade

secret information from remote locations? (h) Are code words used in documents and

computer files containing trade secret information?

(i) Are passwords required to access trade secret information in the computers?

(j) Are notices put on computer screens and programs that advise of confidential nature of information and restrictions on use?

Monitoring (a) Are there log out and log in procedures for

checking out documents or files containing trade secrets?

(b) Is there a system by which documents containing trade secret information are numbered or coded to allow control and tracking of all copies?

(c) Are programs in place to track copying of computer information containing trade secrets?

(d) Is there a procedure for checking to insure policies regarding treatment of confidential information are followed - e.g., security protocol to insure confidential material is out of public view and in secure, locked cabinets, drawers, etc.?

Retrieval or Destruction (a) Is there a procedure in place for retrieval of

drafts or documents which have been disseminated with confidential information?

(b) Is there a policy relating to shredding or destruction of documents or information?

Obviously, this is a non-exclusive list of the measures a company might take to protect its confidential information, and it is probable that many companies do not take all of these measures to protect the information they consider their trade secrets. However, this list suggests some of the measures (beyond simply stamping documents confidential) that a company should consider taking. If information is subject to these types of security measures, a court is far more likely to recognize information as a trade secret. (4) The value of the information to the business

and to competitors. One of the definitional requirements of a trade secret is that it confer some type of actual or potential competitive advantage to those who know or use it. It is not surprising, then, that a court will consider the value of the information in determining trade secret status. Does it provide the owner a competitive advantage? Courts in some states have suggested that the information needs to be “vital” to the business of the person seeking to protect it as a trade secret, while other courts have upheld trade secret protection when the information provided only a slight economic advantage. Comment e to the Restatement (Third) of Unfair Competition (1995) indicates that it is sufficient if the secret is “of more than trivial value”. (5) The amount of effort or money expended in

developing the information. Evidence of extensive time or money spent in developing the information can help support a finding that the information is entitled to trade secret protection. (6) The ease or difficulty with which the

information could be properly acquired or duplicated by others.

This element considers the likelihood that a competitor or person without knowledge of the information claimed to be a trade secret could duplicate or recreate it by proper means. (Note the UTSA's definition, which indicates that a trade secret has the characteristic of "not being readily ascertainable by proper means.") Information which can be discovered by proper means and readily duplicated without involving considerable time, effort and expense generally will not be afforded trade secret


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protection. Two examples of the types of information that may be duplicated through proper means include:

(a) Public Sources. Information that is readily available from public sources will not receive protection; nor will information that can be readily discovered or duplicated. But, if the matter alleged to be trade secret is comprised of multiple elements, some of which are in the public domain, it is possible under some circumstances to protect it as trade secret. See e.g., Imperial Chemical Indus., Ltd. v. National Distillers & Chem. Corp, 342 F.2d 737 (2nd Cir. 1965) (trade secret found even though 9 out of 10 elements were in public domain).

(b) Obvious Design. Where the alleged secret relates to the design of an item and that design is apparent from simple observation, is based on familiar mechanical means and principles, or involves the application of common skills, courts have declined to find a trade secret.

However, the fact that the secret could have been discovered by proper means, may not be a defense if the defendant used improper means to discover it. (Improper means is discussed in more detail in Section V below.) III. SPECIAL PROTECTIONS AFFORDED TO

TRADE SECRETS A. Texas Rule of Evidence 507. The Texas Rules of Evidence explicitly grants privileged status to trade secret information:

A person has a privilege, which may be claimed by the person or the person's agent or employee, to refuse to disclose and to prevent other persons from disclosing a trade secret owned by the person, if the allowance of the privilege will not tend to conceal fraud or otherwise work injustice. When disclosure is directed, the judge shall take such protective measure as the interests of the holder of the privilege and of the parties and the furtherance of justice may require.

Ample Texas case law reinforces this privilege, allowing a requesting party to discover trade secret information only where it can demonstrate a "need-to-know" basis. See, e.g., In re Continental Gen. Tire, 979 S.W.2d 609, 610 ("[W]hen a party resisting discovery establishes that the requested information is a trade secret under Rule 507, the burden shifts to the requesting party to establish that the information is necessary for a fair adjudication of its claim or

defense."). Even where trade secret information is ordered produced, it will be subject to a protective order to prevent destruction of the trade secret. A protective order may provide for tiered levels of confidentiality, in some cases permitting only attorneys and experts to review certain information, subject to non-disclosure provisions that forbid them from sharing that information even with their own clients. Such an arrangement is particularly appropriate where the parties are direct competitors. B. Protection from Disclosure Pursuant to Open

Records. In some cases, a party may be required to disclose trade secret information to a governmental entity. Texas statutes provide that, in such cases, a party who provides such material is entitled to object to its production to a member of the public pursuant to a request under Texas public information laws. The Texas Government Code protects a "trade secret" from disclosure as well as information that "would cause substantial competitive harm" if disclosed:

552.110. Exception: Trade Secrets; Certain Commercial or Financial Information

(a) A trade secret obtained from a person

and privileged or confidential by statute or judicial decisions is excepted…

(b) Commercial or financial information for which it is demonstrated based on specific factual evidence that disclosure would cause substantial competitive harm to the person from whom the information was obtained is excepted…

Tex. Govt. Code. § 552.110. Open Records Decision No. 426 (1985) establishes that decisions as to whether information constitutes a trade secret are to be made by relying on the six criteria originally set forth in the Restatement of Torts and subsequently reiterated by the Texas Supreme Court's Bass decision in 2003. See Section II above. C. Waiver. Like other privileges established by the Texas Rules of Evidence, trade secret protection may be waived. Practitioners must be cautious to protect their clients' proprietary interests in confidential information, particularly in the litigation context. While a protective order helps accomplish this goal, lawyers must be wary of inadvertent disclosure that can result in waiver. See, e.g., Mugworld, Inc. v. G.G. Marck & Associates, Inc., 2007 US Dist. LEXIS 43543 (E.D.Tex., June 14, 2007) (denying motion for protective order requesting to redact allegedly trade


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secret information based on unqualified production in discovery and subsequent use in deposition without objection). Compare to In Re: Ford Motor Co., 211 S.W 3d 295, 301 (Tex. 2006) (maintaining protection after clerk released information to public and media in violation of protective order).

IV. UNIQUE ASPECTS OF TRADE SECRETS Information constituting a trade secret is entitled to unique protections that differ significantly from the protection afforded to intellectual property protected by patent or trademark. A. Novelty not required. Novelty, as that term is used in patent law, is not required to achieve trade secret protection. "A trade secret may be a device or process which is patentable; but it need not be that. It may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement that a good mechanic can make. Novelty and invention are not requisite for a trade secret as they are for patentability." See RESTATEMENT OF TORTS § 757, Comment b, (1939). B. No protection against independent creation. Unlike a patent, which grants a monopoly to a patent holder, ownership of a trade secret does not provide any cause of action against third parties who acquire the information through proper means. C. No time limitation.

Other types of intellectual property rights, notably patent and copyright, have a maximum duration. One particularly notable feature of trade secrets is that, so long as they are adequately protected from disclosure to competitors or the public to retain substantial secrecy, they never automatically "expire." (The recipe for Coca-Cola, for example, has remained an enforceable trade secret for over 100 years). D. Patent Publication may destroy trade secret. While it may seem ironic, patent publication can eviscerate an otherwise protectable trade secret due to the destruction of secrecy. See, e.g., Luccous v. J.C. Kinley Co., 376 S.W.2d 336, 340 (Tex. 1964); Clearvalue, Inc. v. Pearl River Polymers, Inc., 2007 U.S. Dist. LEXIS 46919 at *5 (E.D.Tex. June 28, 2007) (Commenting that Plaintiff "destroyed any trade secret protection that existed for the . . . technologies when he disclosed them in U.S. Patent App."). V. TRADE SECRET MISAPPROPRIATION A. Texas Standard for Misappropriation. One who discloses or uses another’s trade secret, without privilege to do so, is liable to the other if:

(a) he discovered the secret by improper means, or

(b) his disclosure or use constitutes a breach of confidence reposed in him by the other in disclosing the secret to him, or

(c) he learned the secret from a third person with notice of the fact that it was a secret and that the third person discovered it by improper means or that the third person’s disclosure of it was otherwise a breach of his duty to the other, or

(d) he learned the secret with notice of the fact that it was a secret and that its disclosure was made to him by mistake.

RESTATEMENT OF TORTS § 757. The Texas Supreme Court employed this provision in the seminal case Hyde Corp. v. Huffines. 314 S.W.2d 763, 769 (Tex. 1958).

1. "Improper Means."

Improper means encompasses activity that is not inherently illegal. The Restatement of Torts defines the term as “Means which fall below the generally accepted standards of commercial morality and reasonable conduct.”§ 757, Comment f. The following are a few examples of "improper means:"

(a) fraudulent misrepresentation to induce

disclosure; (b) tapping of telephone wires; (c) eavesdropping or other espionage; (d) bribery; (e) flying over chemical plants under

construction to take pictures to discover secrets (even though in legal air space);

(f) acquiring a copy of pirated code from an ex-employee of a competitor.

See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 745-76 (1974); Petersen, TRADE SECRETS IN AN INFORMATION AGE, §2.3 (1997).

2. "Breach of Confidence."

Disclosure is improper where it constitutes a breach of confidence. Such a breach may occur where the disclosing party is violating an express contract or an implied obligation pursuant to a fiduciary or confidential relationship.

a. Express Agreements.

These may include agreements of non-disclosure, non-competition agreements, and prohibitions against the solicitation of customers of customers or employees.


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b. Common Law Duties. i. Employees.

Even in the absence of an express contract, an employee is under a common law duty not to disclose or use trade secrets of his employer except for the employer’s benefit. This duty exists during and after employment. See Section VI above. However, an employee may use the general knowledge, skills, and experience acquired during employment. (The degree to which courts permit an employee to use the skills acquired on the job when subsequently working for a competitor is discussed in Section __ below.)

The Restatement (Third) of Unfair Competition expressly notes the continuing obligation of an employee not to use or disclose an employer's trade secrets:

An employee or former employee who discloses or uses a trade secret owned by the employer or former employer in breach of a duty of confidence is subject to liability for appropriation of the trade secret under the rule stated in § 40.

RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 42.

ii. Confidential Relationships. A variety of other relationships may imply obligations of confidentiality.

A duty of confidence owed to the trade secret owner for purposes of the rules stated in § 40 is created by: … (b) a disclosure of the trade secret under circumstances in which the relationship between the parties or other facts surrounding the disclosure justify the conclusions that, at the time of the disclosure, the recipient knew or had reason to know that the disclosure was intended to be in confidence and that the trade secret owner was reasonable in inferring that the recipient consented to an obligation of confidentiality.

RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 41 (1995). Examples of confidential relationships (outside the employment context) that may imply duties of confidentiality include:

a. Licensor-licensee relationships. E.g., Hyde

Corp, 314 S.W.2d at 769-70. b. Parties to negotiations for a merger or

acquisition. E.g., H.E. Butt Grocery Co., 951 S.W.2d at 36.

c. Other fiduciary relationships. Texas law will impose fiduciary obligations in a variety of contexts. These fiduciary obligations can support a cause of action for misappropriation of trade secrets. See Welex Jet Servs. V. Owen, 325 S.W.2d 856, 858 (Tex.App.—Fort Worth 1959, writ ref'd n.r.e.).

As a practical matter, trade secret owners should

not rely on these common-law duties. Doing so will require the party to demonstrate that the employee or former employee knew or should have known that the information used or disclosed was a trade secret. See Furr's, Inc., 385 S.W.2d at 459-60 (requiring proof that the disclosing party was aware that the information shared was intended to remain confidential).

3. Receiving Trade Secret with Knowledge that it

was Obtained by Improper Means or Transmitted by Mistake.

Notably, a party may be liable for using or disclosing a trade secret that it obtains with knowledge that the trade secret was obtained by improper means. This has significant implications for companies hiring new employees. Additionally, liability may be imposed if a party uses or discloses trade secret information that was transmitted by mistake. B. Cause of Action for Trade Secret

Misappropriation. 1. Basic Elements. To maintain a cause of action for the wrongful use or disclosure of a trade secret, a plaintiff in Texas must prove the following:

a. The existence of a trade secret. See Section II above for the factors a court will consider.

b. The defendant acquired the trade secret through improper means, in breach of an express or implied duty of confidence, or with knowledge that the trade secret was improperly obtained, impermissibly disclosed, or inadvertently revealed. See subsection A above.

c. The defendant used or disclosed the information.

d. The use or disclosure of the trade secret information resulted in damage to the Plaintiff or benefit to the defendant. See, e.g., AMX Corp. v. Pilote Films, 2007 U.S. Dist. LEXIS 40684 at *88-89 (Granting summary judgment because evidence was "insufficient to establish that [Defendant] benefited from the use of the customer list or that [Plaintiff] suffered harm as a result.").


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2. "Use" or "Disclosure" A significant feature of trade secret misappropriation is that disclosure alone, even without use, may impose liability. Further, it is not necessary for a party to actually achieve a financial benefit to be liable for trade secret misappropriation (though that fact may be relevant to determination of damages). See, e.g., Garth v. Staktek Corp., 876 S.W.2d 545, 548 (Tex.App.—Austin 1994, writ dism'd) (holding that using trade secret to develop design for which defendant sought patent constituted "commercial use."). Similarly, a defendant is liable for using less than the entire trade secret—whether it employs only some portion of the information or makes modifications or improvements prior to use. See generally RESTATEMENT OF TORTS § 757, comment c. 3. "Use" of Negative Know-How (What not to do) One type of information presents unique questions with respect to the "use" of a trade secret—what constitutes "use" of information about what does not work to achieve a particular result? The applicability of trade secret protection to this type of information was cast strongly into doubt by the Fifth Circuit's 1981 decision in Hurst v. Hughes Tool Co. (holding that the use of information concerning what not to do could not constitute trade secret misappropriation). In the authors' opinion, this holding is questionable. In many industries, businesses may spend large amounts of money researching and developing new technology. Even unsuccessful efforts require significant time and expense. For a competitor to have the benefit of these unsuccessful attempts, without being required to expend the resources its competitor employed, provides an unfair advantage. (For example, knowledge of chemical compounds or combinations that do not work helps focus on others that might.) The law should not permit such an advantage where the information was acquired without the owner's permission. In fact, at least one Texas court has hinted that information about what not to do may indeed constitute a trade secret. Cf. T-N-T Motorsports, Inc. v. Hennessey Motorsports Inc., 965 S.W.2d 18, 23 (Tex.App.—Houston [1st Dist.] 1998, pet. dism'd) (Affirming relief and holding that defendant, "through years of trial and error" while employed by plaintiff, learned "which components work and which do not."). C. The "Discovery Rule" and the Statute of

Limitations. In 1996, the Texas Supreme Court held that the discovery rule did not apply to a cause of action for theft of trade secrets. See Computer Associates International, Inc. v. Altai, Inc., 918 S.W.2d 453 (Tex. 1996). Sufficient security measures, the court reasoned, would lead to the discovery of the theft of

trade secrets within the statutory limitations period; accordingly, the court would not extend the period under the discovery rule. Fortunately for trade secret plaintiffs, the legislature had a different opinion, enacting Civil Practice and Remedies Code § 16.010, effectively applying the discovery rule to trade secret claims. See TEX. CIV. PRAC. & REM. CODE § 16.010(a) ("A person must bring suit for misappropriation of trade secrets not later than three years after the misappropriation is discovered or by the exercise of reasonable diligence should have been discovered."); see also Baker Hughes, Inc. v. Keco R. & D., Inc., 12 S.W.3d 1, 3 (Tex. 1999)(holding that enaction of statute did not apply to trade secret misappropriation prior to adoption). D. Other Causes of Action to Consider. 1. Breach of Contract. A written agreement, such as a non-disclosure provision, may provide an avenue for a plaintiff to pursue a breach of contract claim. One notable advantage of pursuing trade secret claims in this manner is the Texas statutory provision for a prevailing party to recover its attorney fees. See TEX. CIV. PRAC. & REM. CODE 38.001. (Notably, a cause of action for misappropriation of trade secrets does not include such a provision). 2. Breach of Fiduciary Duty. As discussed in above, many of the parties who receive confidential information do so in the context of a fiduciary or confidential relationship. In such cases, a common-law claim of breach of fiduciary duty may be appropriate. 3. Tortious Interference with Contract or

Interference with Prospective Relations. Where the wrongful acquisition of trade secret information directly impacts the trade secret owner's business relations, particularly where the defendant is actively engaged in direct competition with the plaintiff, this common-law cause of action can provide additional leverage. This cause of action may prove particularly useful where the defendant is using trade secret information to lure away existing or potential customers (for example, using customer lists or pricing information) or where the defendant is intentionally "raiding" the plaintiff's employees in order to acquire trade secret information. 4. Texas Theft Liability Act. The Texas Civil Practice and Remedies Code provides a special cause of action for the theft of property. TEX. CIV. PRAC. & REM. CODE §§ 134.001-134.005. Theft of trade secrets in violation of Texas Penal Code § 31.05 is explicitly included as one of the types of theft that will support a cause of action


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pursuant to this statute. One of the advantages of an action pursuant to the Theft Liability Act is the potential recovery of attorney fees—even where there is no contractual provision that would otherwise permit such recovery. See TEX. CIV. PRAC. & REM. CODE § 134.005(b). A successful plaintiff may also recover actual damages and court costs. VI. COMPETITORS WHO HIRE EMPLOYEES

WITH KNOWLEDGE OF TRADE SECRETS As discussed above, owners of trade secret information, as a practical matter, generally must disclose that information to some employees. When employees who have received this confidential information leave the business, particularly in order to work for a competitor, how does an employer maintain its confidential advantage? As discussed above, a contract with an employee may impose non-disclosure obligations, and Texas imposes continuing common-law duties of non-disclosure. Additionally, an employer may consider a cause of action against a competitor who hires employees for the purpose of acquiring trade secret information (raiding) or who knowingly receives trade secret information from the new hire. A. Deliberate Raiding May Constitute "Acquiring

by Improper Means." A competitor's action of hiring key employees with the intent to gain knowledge of the former employer's trade secrets is an example of the "improper means" that may support a cause of action for theft of trade secrets. See Bryan v. Kershaw, 366 F.2d 497 (5th Cir. 1966) (injunction to prevent defendant company from using "illegally gained" information acquired through plaintiff's former employee). Of course, proving such intent directly is generally difficult, if not impossible. Courts will therefore permit a plaintiff to prove such intent by circumstantial means. See, e.g., Hunter v. Shell Oil Co., 198 F.2d 485, 489-90 (5th Cir. 1952) ("Such activities are sometimes not susceptible of direct proof . . . Like a conspiracy, they may be established by circumstantial evidence."). B. Knowingly Accepting Trade Secrets. As discussed in the previous section, a party that uses or discloses trade secret information with knowledge that the information was obtained through improper means or subject to duties of confidentiality may be liable for misappropriation of trade secrets. Again, proving this state of mind on the part of the new employer is no easy task, and the plaintiff will need to use the same types of circumstantial information to demonstrate the new employer's knowledge. As a precautionary measure, prudent employers should consider informing any competitors who hire departing employees of: (1) the employee's role within the

company and the resulting knowledge of the company's trade secret information (without disclosing the substance of that information) and (2) the existence of the employee's express or implied obligation to maintain the secrecy of such information. Sending a certified letter with that information, attaching a copy of any non-disclosure or non-competition agreement, will help a plaintiff demonstrate that its competitor was on notice of the departing employee's knowledge of trade secrets and obligation to keep such information in confidence. C. The Doctrine of Inevitable Disclosure In light of the potential claims against the new employer, how does a business avoid liability when it is simply trying to hire the most qualified people? While a contractual agreement with new employee not to disclose or use the prior employer's trade secrets may help, it is not necessarily sufficient. 1. PepsiCo v. Redmond, 54 F.3d 1262 (7th Cir.

1995). In some circumstances, an employee—even

acting in good faith—may not be able to avoid using or disclosing the former employer's trade secrets. As the court in PepsiCo noted, "it is very difficult for the human mind to compartmentalize" such information. Where the former job and the new job are very similar, even good faith is not enough to protect the former employer from disclosure of its confidential information. In Redmond, Pepsi's obtained a preliminary injunction prohibiting the former General Manager of its Northern California Business Unit from working with Quaker Oats Company. Pepsi's products—notably drinks produced in conjunction with Lipton and Ocean Spray—were direct competitors of Quaker's Gatorade and Snapple. Pepsi sought to prevent Redmond from working for Quaker based on his high position within the company and his inside information to their trade secrets. Redmond had signed a confidentiality and non-disclosure agreement with Pepsi, and he had further signed an agreement with Quaker "preventing him from disclosing 'any confidential information belonging to others.'" Id. at 1266. Though there was no evidence that Redmond did disclose or intended to disclose any of Pepsi's trade secret information, Pepsi argued (and the Seventh Circuit agreed) that Redmond would inevitably disclose Pepsi's trade secret information to Quaker based on his "substantial input as to Gatorade and Snapple pricing, costs, margins, distribution systems, products, packaging, and marketing…" Id. The Seventh Circuit upheld the preliminary injunction, holding that "a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant's new employment will inevitably lead him


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to rely on the plaintiff's trade secrets." Id. at 1270. Even in good faith, the court reasoned, Redmond could not compartmentalize the information he had gained while working for Pepsi to avoid using it. The Seventh Circuit commented that Pepsi "finds itself in the position of a coach, one of whose players has left, playbook in hand, to join the opposing team just before the big game." Id. Despite the attempted assurances offered by Redmond and Quaker, the Seventh Circuit refused to let Redmond take the field. 2. Texas law To date, Texas has not expressly adopted the inevitable disclosure doctrine. However, as a practical matter, a number of courts have effectively employed it by other names. See, e.g., Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 241 n. 12 (Tex.App.—Houston [1st Dist.] 2003, no pet.); T-N-T Motorsports, 965 S.W.2d at 24 (Granting injunction with finding that "The record indicates that appellants possess appellee's confidential information and are in a position to use it to compete directly with appellee. Under these circumstances, it is likely appellants will use the information to appellee's detriment."); Rugen v. Interactive Bus., 864 S.W.2d 548, 552 (Tex.App.—Dallas 1993, no writ)(employee's position made the use of prior employer's confidential information likely); but see, e.g., Cardinal Health Staffing Network, Inc. v. Bowen, 106 S.W.3d 230, 242 (Tex.App.—Houston [1st Dist.] 2003, no pet.) (Noting that "[w]e have found no Texas case expressly adopting the inevitable disclosure doctrine…" and declining to adopt "the doctrine as stated in . . . Rugen."). 3. California has expressly rejected the doctrine

of inevitable disclosure, requiring party seeking relief to prove actual use, not mere threat.

In California, at least, the inevitable disclosure has been explicitly rejected. To enforce a non-competition provision based on a trade secrets where California law applies, the plaintiff will be forced to prove actual disclosure or use of the trade secret information. See Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443, 125 Cal.Rptr.2d 277, 294 (Ct. App. 2002) ("the inevitable disclosure doctrine can not be used as a substitute for proving actual or threatened misappropriation of trade secrets."); but see Bourns, Inc. v. Raychem Corp., 331 F.3d 704 (9th Cir. 2003)(permitting instruction that jury " may find misappropriation where it is inevitable that a former employee would use his or her former employer's trade secrets in working for a competitor" in conjunction with instruction that "[s]imply because an employee works in a similar position for a competitor of [its] former employer does not by itself prove misappropriation . . .").

4. Injunctive Relief May Be Appropriate to Prevent “Potential” Disclosure or Use.

Until the Sheshunoff decision, non-compete agreements were widely invalidated in the case of at-will employment. Their validity may still be questionable in many cases. Just the same, the potential use or disclosure of trade secret information might provide an avenue for injunctive relief to prevent a former employee from going to work for a competitor. E.g., EDS v. Powell, 524 S.W.2d 393 (allowing employee to work for competitor but in a different area). It is particularly noteworthy that a number of Texas decisions have enjoined former employees from working for a competitor—even while invalidating a non-competition agreement. E.g., Rugen, 864 S.W.2d (granting injunction despite recognizing unenforceability of non-compete). Texas courts may enjoin the actual or threatened use or disclosure of trade secrets. VII. REMEDIES FOR MISAPPROPRIATION OF

TRADE SECRETS The aim of trade secret remedies is to restore the

parties to the position they would have been in but for the misappropriation. Injunctive relief may be appropriate to accomplish this goal where the defendant has not disclosed the trade secret. Additionally, or alternatively, to head start injunctive relief, a plaintiff may seek monetary compensation for sales made by the defendant.

A. Injunctive Relief 1. Preliminary Injunction.

A plaintiff may pursue a temporary restraining order or a preliminary injunction. Generally, the requirements for such relief are the same as in other contexts:

a. Immediate threat of irreparable harm; b. Likelihood of success on the merits; c. No adequate remedy at law; d. Balancing of the harm to plaintiff if the

preliminary relief is not granted, versus the harm to the defendant if it is granted.

A bond is typically required. A preliminary injunction or temporary restraining order should preserve the status quo until the dispute can be resolved, and it may prevent further damage to the trade secret owner's proprietary interest. An advantage of this form of relief is that it is available before the resolution of potentially lengthy litigation, providing leverage for the plaintiff and potentially encouraging a mutually satisfactory settlement.


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2. Permanent Injunction vs. "Head Start" Injunction. A court may issue an injunction of permanent or

limited duration. In some cases, the defendant may be enjoined for a period of time representing the “head start” in time-to-market that was unfairly obtained--(i.e., long enough to eliminate the competitive advantage, such as the time it would have taken to reverse engineer the item in order to discover its secret.) See 11 A.L.R.4th 12 (1982). This injunction of limited duration is fashioned to prevent the party who improperly acquired the trade secret information from introducing a competing product sooner than it might have if it had developed the information independently through legitimate means. A head start injunction will last until disclosure destroys the information's secrecy or until the defendant could have independently developed the information.

3. Strategic Implications. While the remedy of injunctive relief is appealing, particularly prior to the use or disclosure of trade secret information, a party needs to weigh the costs and benefits of pursuing an injunction. This is particularly important where a party hopes to recover damages, as injunctive relief may limit or eliminate damage claims. See NextLevel Comms. v. DSC, 179 F.3d 244, 249-57 (5th Cir. 1999) (denying injunction based upon jury award of past and future damages). B. Damages2 It is important to note that trade secret remedies are state-specific. Whether in federal or state court, the law of the state that will be applied must be considered before evaluating the merit of any specific damage model. Courts applying Texas law take a flexible approach to determining damages; “most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation.” Univ. Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974). There are three basic measures of damage in trade secret misappropriation cases: • Value of the trade secret to the plaintiff. This

method consists of profits lost on sales diverted from the plaintiff by the appropriation, and can encompass more than the goods or services embodying the secret(s). This measure can

2 The authors wish to acknowledge that much of this section comes from “Making the Most of Your Trade Secrets,” Texas Bar Intellectual Property 2007 by William Parrish of Winstead, PC and Andrew DiNovo and Adam Price of DiNovo, Price & Ellwanger.

approach or e equivalent to the value of the trade secret if it has been destroyed through public disclosure by the defendant.

• Unfair gain to the defendant. This method awards to the plaintiff the defendant’s profits earned on sales that are attributable to the trade secret. It can also include the cost savings to the defendant attributable to the misappropriation of the trade secret.

• Reasonable royalty standard. This method seeks to award damages for a “hypothetical” negotiation between a willing buyer and willing seller for the information at the time of misappropriation for the use made of the trade secret by the defendant, a familiar concept in patent law.

See RESTATEMENT 3D OF UNFAIR COMPETITION § 45 cmt.d. Courts will sometimes apply a hybrid approach and combine the first two measures. 1. The Value of the Secret to the Plaintiff. One way courts have measured damages is by determining the loss suffered by the plaintiff from the defendant’s use or disclosure of the trade secret. See University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 535-36 (5th Cir. 1974), (applying Georgia law); Zoecon Indus. V. Am. Stockman Tag Co., 713 F.2d 1174, 1180 (5th Cir. 1983) (stating that actual damages are available when a plaintiff has sustained economic injury from the use of its trade secrets). This is usually measured by the Plaintiff’s lost profits. Jackson v. Fontaine’s Clinics, Inc., 499 S.W.2d 87, 89-90 (Tex. 1973). The battle to recover damages often centers on the question of whether the alleged lost profits can be proven with reasonable certainty or whether they are merely speculative. Under Texas law, lost profits (past and/or future) must be shown by competent evidence with reasonable certainty. A determination of what constitutes “reasonably certain” evidence of lost profits is fact intensive. Holt Atherton Ind. U.S.. Inc. v. Heine, 835 S.W.2d 80, 84 (Tex. 1992); Knox v. Taylor, 992 S.W.2d 40 (Tex. App. – Houston [14th Dist.] 1999, no pet.). The recovery of lost profits does not require that the loss “be susceptible to exact calculation,” however, a plaintiff must do more than demonstrate that it suffered some lost profits. See id. Rather, the plaintiff must establish the amount of its loss by competent evidence with “reasonable certainty.” Id. See also Ishin Speed Sport, Inc. v. Rutherford, 843 S.W.2d 343, 350-51 (Tex. App. – Ft. Worthy, 1996, no writ); Vingcard A.S. and Vingcard Sys., Inc. v. Merrimac Hospitality Sys., Inc., 59 S.W.3d 847, 864 (Tex. App. – Ft. Worth, 2001, no pet.). The more subjective or unestablished a trade secret’s value, the more difficult it is to meet this legal


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standard. It is much easier for a plaintiff to prove lost profits with reasonable certainty if it has a history of using the trade secret to generate a profit: In Texas Instruments v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276, 279 (Tex. 1994):

[w]here a business is already established and making a profit at the time the tort is committed, pre-existing profit, coupled with other facts and circumstances, indicate with reasonable certainty the amount of profits lost…Opinions or estimates of lost profits must be based upon objective facts, figures or data from which the amount of lost profits can be ascertained.

In Texas Instruments v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276, 279 (Tex. 1994), however, the requirement of reasonable certainty may be met even where the subject matter of the trade secret has not yet resulted in an exiting profit – for example, in the case of a product which has not reached the market. See Grain Processing v. American Maize Prod., 185 F.3d 134 (Fed. Cir. 1999).

In D/FW Comm. Roofing Co., Inc. v. Mehra, 854 S.W.2d 182, 187 (Tex. App. – Dallas 1993, no writ):

Lost profits damages may be supported by “…either a history of profitability or the actual existence of future contracts from which lost profits can be calculated with reasonable certainty. Furthermore, Texas cases have permitted recovery for lost profits in reliance on routinely kept business records so long as the evaluation of the business’s decreased profitability is based on objective facts.”

In D/FW Comm. Roofing Co., Inc. v. Mehra, 854

S.W.2d 182, 187 (Tex. App. – Dallas 1993, no writ), the Texas Supreme Court has explicitly recognized the need for flexibility in proving lost profits. Texas Instruments, 877 S.W.2d at 279. (“The requirement of “reasonable certainty” is intended to be flexible enough to accommodate the myriad of circumstances in which claims for lost profits arise.”). It is important to consider the entire impact of the misappropriation when developing a damage model. In assessing the loss suffered by the plaintiff due to the misappropriation, it may in some circumstances be appropriate to consider goods or services that do not embody the misappropriated secrets. In patent infringement cases, under the “entire market value rule,” a plaintiff is often entitled to recover lost profits on the sale of unpatented components which accompany the sale of patented components where, in reasonable probability, the patent owner would have

made the convoyed sales which the infringer made. Similarly, a plaintiff in a trade secret case should argue that she is entitled to recover the “entire market value” of her loss or the defendant’s wrongful gain. 2. Unjust Enrichment, or the Value of the Secret

to Defendant. In some cases, the defendant may use the trade secret to its advantage with no obvious effect on the plaintiff with the exception of the parties’ relative competitive positions. Absent proof of specific injury such as lost profits, damages are difficult to calculate based on the measure of plaintiff’s losses. Often, due to this limitation, the better measure of damages for misappropriation is the defendant’s gain. As noted, Texas courts take a flexible approach to determining damages; “most courts adjust the measure of damages to accord with the commercial setting of the injury, the likely future consequences of the misappropriation, and the nature and extent of the use the defendant put the trade secret to after misappropriation.” University Computing Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974). The law is clear, however, that: “[i]f the defendant enjoyed actual profits, a type of restitutionary remedy can be afforded the plaintiff – either recovering the full total of defendant’s profits or some apportioned amount designed to correspond to the actual contribution the plaintiff’s trade secret made to the defendant’s commercial success.” Id. at 539; see also Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 408 (1940) (“Equity is concerned with making a fair apportionment so that neither party will have what justly belongs to the other.”) (emphasis added). Moreover, uncertainty in damages does not preclude recovery; as the court in University Computing stresses, “the plaintiff should be afforded every opportunity to prove damages once the misappropriation is shown.” University Computing, 504 F.2d at 539. If the plaintiff cannot prove its specific injury and the trade secrets have not been entirely destroyed, damages may be measured by the actual value of the trade secrets as used by defendant. See University Computing, 504 F.2d at 536 (“[The value of the secret to the defendant] is usually the accepted approach where the secret has not been destroyed and where the plaintiff is unable to prove specific injury.”); see also Metallurgical Indus., Inc. v. Fourtek, Inc., 790 F.2d 1195, 1208 (5th Cir. 1986), quoting University Computing, 504 F.2d at 537, “[T]he trier of fact, should it find [the defendant] liable, must determine ‘the actual value of what has been appropriated.”] The correct amount of damages is then “not what plaintiff lost, but rather the benefits, profits, or advantages gained by the defendant in the use of the trade secret.” University Computing, 504 F.2d at 536; see also, Int’l


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Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696, 699 (3d Cir. 1957)) (providing that in the absence of plaintiff establishing its specific injury, the value of the trade secret to the defendant serves as a proper measure of damages in trade secret misappropriation cases); Sikes v. McGraw-Edison Co., 665 F.2d 731, 737 (5th Cir. 1982) (finding infringement injury and unjust enrichment compensable in trade secret cases even if such remedies are inappropriate in breach of contract cases). The plaintiff may likewise recover for any losses it has incurred as a result of the misuse of its trade secrets as long as doing so does not constitute double recovery. See Sikes, 665 F.2d at 736-37 (finding remittance of unjust enrichment in addition to actual infringement damages did not constitute double recovery in a trade secrets case). The Restatement and the Uniform trade Secret Act both support measuring damages based on the defendant’s unjust gains. The Restatement (Third) of Unfair Competition § 45(1) (1995) permits recovery for “the pecuniary loss to the [the trade secret owner] caused by the appropriation or for the actor’s own pecuniary gain resulting from the appropriation, whichever is greater, unless such relief is inappropriate under subsection (2)).” Comment e of Section 757 of the Restatement of Torts (First) also supports awarding damages on the basis of ill-gotten gains in trade secret matters. Comment e states:

One who has a right under the rule stated in this Section is entitled to a remedy or remedies appropriate under the circumstances. He may recover damages for past harm, or be granted an injunction against future harm by disclosure or adverse use, or be granted an accounting of the wrongdoer’s profits, or have the physical things embodying the secret, such as designs, patters and so forth, surrendered by the wrongdoer for destruction. Moreover, he may have two or more of these remedies in the same action if the court is competent to administer them. Defenses generally available in tort actions and actions for injunctive relief are also available here, insofar as they are applicable.

restatement (first) of torts § 757 cmt. E (1939). Likewise, Section 3(a) of the Uniform Trade Secrets Act, which has not been adopted by Texas, permits recovery for damages “caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss.” A defendant’s costs savings resulting from misappropriation are properly considered as the defendant’s unjust enrichment or illicit benefit and are properly recovered as such. See restatement (third) of

unfair competition § 45, Comment d (1995). Courts often compare the defendant’s profits – if the defendant is selling something using the trade secret – or the defendant’s cost savings – if the defendant is using the trade secret in some other way – to what those amounts would have been if the defendant did not have the benefit of the misappropriated trade secret. International Indus., Inc. v. Warren Petroleum Corp., 248 F.2d 696 (3rd Cir. 1957). Courts applying Texas law have approved of the benefit conferred on the defendant as a proper measure of damages. See Elcor Chemical Corp. v. Agri-Sul, Inc., 494 S.W.2d 204 (Tex. App. – Dallas 1973, writ ref. n.r.e.); Molex, Inc. v. Nolen, 759 F.2d 474, 478-79 (5th Cir. [Tex.] 1985) (upholding award of damages to reasonably compensate the plaintiff for its loss or for the defendant’s profits); American Precision Vibrator Co. v. National Air Vibrator Co., 764 S.W.2d 274, 279 (Tex. App. – Houston [1st Dist.] 1988) (affirming a damages calculation when an expert testified that it “is a measurement of the financial result directly attributable to” “the defendant’s use of plaintiff’s trade secret), as modified 771 S.W.2d 562 (Tex. App. – Houston [1st Dist.] 1989, n.w.h.). (Opinion subsequently withdrawn for reasons relating to appellant’s pending bankruptcy.) The courts recognize several methods for determining the value a Defendant has gained through misappropriation of another’s trade secret. One measure is the Defendant’s actual profit resulting from use of the secret. Elcor, 494 S.W.2d at 214; University Computing, 504 F.2d at 536. A second measure is the value that a reasonably prudent investor would have paid for the trade secret. See Precision Plating & Metal Finishing, Inc. v. Martin Marietta Corp., 435 F.2d 1262, 1263-64 (5th Cir. 1970). A third measure is the cost that the Defendant saved by using the trade secret, e.g., saved development costs. See University Computing, 504 F.2d at 538-39; Boarus, Inc. v. Raychen Corp., 331 F.3d 704, 709-10 (9th Cir. 2003) (affirming award of $9 million measured by saving three years of development time). Another measure of the value of the secret to a defendant is a reasonable royalty rate, addressed in more detail below. Often times, the plaintiff is challenged in determining what portion of the profits earned on the defendant’s sales is attributable to the misappropriated trade secret. The Restatement offers some relief in this regard:

“The plaintiff has the burden of establishing the defendant’s sales; the defendant has the burden of establishing any portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits.”


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restatement (third) of unfair competition § 45, Comment f (1995). This burden-shifting authority from the Restatement is particularly useful when the plaintiff is not in a position to determine the amount of sales not attributable to the trade secret. Such information is generally exclusively in the possession of the defendant, and may not be fully discovered at the time that plaintiff is required to submit its expert report on damages. As such, the Restatement shifts the burden on the defendant to establish the “portion of the sales not attributable to the trade secret and any expenses to be deducted in determining net profits.” No Texas case, however, has been located that addresses this burden shifting component of the Restatement. 3. Reasonable Royalty Measure. Texas cases have held that a plaintiff in a trade secret case can seek damages measured by a “reasonable royalty.” Elcor Chem. Corp. v. Agri-Sul, Inc., 494 S.W.2d 204, 214 (Tex. App. – Dallas 1973, writ rf’d n.r.e.); Metallurgical Indus., Inc. v. Fauntek, Inc., 790 F.2d 1195, 1208 (5th Cir. 1986). The reasonable royalty measure awards the plaintiff the price that would be set by a willing buyer and a willing seller for the use of the trade secret made by the defendant. Fourtek, 790 F.2d at 1208; See restatement (third) of unfair competition § 45, Comment g (1995). Indeed, the reasonable royalty method requires the jury to calculate what the parties would have agreed to as a fair price for licensing the defendant to put the trade secret to the use the defendant intended at the time the misappropriation took place. See University Computing Co., 505 F.2d 539. Reasonable Royalty is an appropriate measure of damages where the misappropriated trade secret has not been destroyed, the plaintiff is unable to prove specific injury, and the defendant has gained no actual profits by which to value secret’s worth to defendant. Alcatel USA, Inc. v. Cisco Sys., Inc., 239 F.Supp. 2d 660, 667-73 (E.D. Tex. 2002). In University Computing, the Fifth Circuit held that when determining reasonable royalty damages the jury may consider: (1) the development costs incurred by the plaintiff; (2) fees paid by customers of the plaintiff who utilized the system; (3) the prices at which the system was leased or sold by the plaintiff for restrictive use (4) the sales price placed on the system by defendants; and (5) expert testimony as to what would constitute a reasonable royalty for the rights to unrestricted use of the system, in determining what the parties would have agreed upon as a reasonable royalty. See id. at 539.

In calculating what a fair licensing price would have been had the parties agreed, the trier of fact should consider such factors as the resulting and foreseeable changes in the

parties’ competitive posture; the prices past purchasers or licensees may have paid; the total value of the secret to the plaintiff, including the plaintiff’s development costs and the importance of the secret to the plaintiff’s business; the nature and extent of the use the defendant intended for the secret; and finally whatever other unique factors in the particular case which might have affected the parties’ agreement, such as the ready availability of alternative processes.

Id.

Several cases have held that when the parties have engaged in prior negotiations for a licensing agreement, the proposed pricing for the license is a sufficient basis for establishing a fair price. See Sikes, 665 F.2d at 737; Vitro Corp. of Am. V. Hall Chem. Co., 292 F.2d 678, 682-83 (6th Cir. 1961). Of course, the “reasonable royalty” measure of damages is borrowed directly from patent law, which allows for the recovery of “…damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use of the invention by the infringer, together with interest and costs.” 35 U.S.C. § 284. As such, the familiar Georgia-Pacific factors are often used as a guideline for determining the amount of damages. This method relies on a hypothetical negotiation immediately prior to the actual misappropriation of the trade secret and attempts to identify the factors that the parties would have taken into consideration at the hypothetical negotiation date. The Georgia-Pacific factors follow:

1. Royalties received by the licensor; 2. Royalties paid by the licensee; 3. Nature and scope of the license; 4. Licensor’s policies regarding licensing; 5. Commercial relationship; 6. Duration of patent and term of license; 7. Effect of sales on other products; 8. Established profitability; 9. Utility and advantages of invention; 10. Benefit to the user; 11. Value of the invention to the infringer; 12. Customary royalty rate; 13. Profit creditable to the invention; 14. Hypothetical negotiation; and 15. Opinion of experts.

All of the Georgia-Pacific factors are not necessarily relevant and a plaintiff is not necessarily limited to the 15 Georgia-Pacific factors – rather the injury is fact-specific. Significantly, a federal court in California used the reasonable royalty approach [under the California


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Uniform Trade Secrets Act, Civil Code § 3426.3(b)] to award damages in the form of a significant lump sum payment, even though the trade secret turned out to be short-lived. The court found that the parties in their hypothetical negotiations would not have been able to predict such a development. See Micro Int’l Ltd. V. Monolithic Power Systems, Inc., 399 F.Supp. 2d 1064, 1077-78 (N.D.Cal. 2005). Specifically, the Court found as follows:

Thus, MPS argues that, because the trade secret became public six months after the hypothetical negotiation, it should only have to pay a fourth of the $900,000, which Mr. Meyer calculated based on a two-year benefit to MPS. But a paid-up royalty, unlike a running royalty, cannot be divided. Parties often enter into an agreement not knowing when the trade secret will become public; it is something the parties consider, and sometimes risk, during their negotiations. MPS provides no evidence that it would not have entered into this hypothetical agreement, or would have paid far less because it knew that the trade secret would soon become public. Nor does MPS cite a case holding that a paid-up reasonable royalty should not be imposed, or must be divided, if the trade secret becomes public shortly after the hypothetical negotiation. In sum, the $900,000 reasonable royalty does not require MPS to pay for longer than the period of time the use could have been prohibited; instead, it requires MPS to make a one-time payment while the use was prohibited. Therefore, the Court grants O2 Micro a reasonable royalty in the amount of $900,000.

4. Hybrid Measures. Courts have taken a flexible approach to damages in trade secret cases, mandating that “the plaintiff should be made whole” but with the limitation that “there should be no double recovery.” Telex Corp. v. IBM Corp., 510 F.2d 894 (10th Cir. 1975); Sikes v. McGraw-Edison Co. 665 F.2d 731, 736-37 (5th Cir. 1982) (A court may take into account both infringement harm and unjust enrichment in computing damages in trade secret cases). Often times, a single measure of damages for misappropriation of trade secrets will not adequately compensate the plaintiff for its losses. A hybrid damage model, such as a combination of a plaintiff’s losses/defendant’s unfair gain, might be appropriate. For example, in Sikes v. McGraw-Edison Co., the lower court was found to have properly charged the jury to compensate the prevailing plaintiff for his

“actual damages, if any, caused by the Defendant’s infringement and the amount of money by which the Defendant was unjustly enriched, if any, as a consequence of Defendant’s infringement.” 665 F.2d at 736 (emphasis added). Rejecting the contention that the award constituted double recovery, the Sikes court found the jury was properly instructed to “award [the plaintiff] for any actual losses suffered by him as a result of [the defendant’s] breach of faith plus a reasonable amount as compensation for the unauthorized use of his device.” See id. at 736-37 (upholding the jury charge and $900,000 award in a case of trade secret misappropriation). In the American Precision Vibrator case, the court upheld a $400,000 verdict reached upon asking the jury “what sum of money, if any, do you find from a preponderance of the evidence would compensate ][the plaintiff] considering the loss it sustained, if any, or the benefits received [by the defendant], if any…?” Am. Precision Vibrator Co. v. Nat’l Air Vibrator Co., 764 S.W.2d 274, 279 (Tex. App. – Houston [1st Dist.], as modified, 771 S.W.2d 562 (Tex. App. – Houston [1st Dist.] 1989, no writ); See also, University Computing, supra 504 F.2d at 539. VIII. POTENTIAL CRIMINAL IMPLICATIONS A. Texas Penal Code.

Texas explicitly provides state law criminal penalties for theft of trade secrets. See TEX. PEN. CODE § 31.05. The penalty depend on the value of the trade secret stolen but can be as high as a third degree felony, which carries a maximum fine of $10,000 and maximum jail sentence of 10 years. See TEX. PEN. CODE § 12.34. B. Federal Statute.

As mentioned in Section 1, the Economic Espionage Act of 1986 discusses trade secrets. See 18 U.S.C. § 1831. The Act provides for the imposition of up to 10 years of prison time and $5,000,000 in fines for knowingly acquiring trade secrets through improper means—even without using such information: § 1832. Theft of trade secrets. (a) Whoever, with intent to convert a trade secret, that

is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly– (1) steals, or without authorization appropriates,

takes, carries away, or conceals, or by fraud,


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artifice, or deception obtains such information;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriated, obtained or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1) through (3); or

(5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy, shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.

(b) Any organization that commits any offense

described in subsection (a) shall be fined not more than $5,000,000.

The threat of federal criminal action reiterates the level of protection that may be afforded to trade secret information. C. Criminal Penalties Imposed in the Foiled Coke

Heist. In 2006, an employee of the Coca-Cola Company attempted to sell the "most famous trade secret" to its owner's chief competitor, Pepsi. Pepsi informed Coca-Cola, and the would-be discloser took a plea bargain, accepting 8 years of jail time. But what if Pepsi had accepted the trade secret information? Under the Economic Espionage Act, the organization might have faced criminal penalties (not to mention potential litigation from Coke). Considering Pepsi's familiarity with the industry and knowledge of the measures employed by Coca-Cola to protect its formula as a trade secret, it would not have been particularly difficult to establish that the company "receive[d] … the information, knowing the same to have been stolen or appropriated, obtained or converted without authorization." 18 U.S.C. § 1831 (a)(3). Accordingly, the company might have faced criminal penalties up to $5,000,000. It is not surprising, then, that Pepsi declined to purchase its rival's famous trade secret. The speaker wishes to acknowledge the hard work of

his associate Carl Myers in working on this paper.

Documents

FUNDAMENTAL PRINCIPLES OF TRADE SECRET LAW AND LITIGATION