Texas Non-Compete Law Blog : Texas Non-Compete Agreements Lawyer & Attorney : K&L Gates : Trade Secret Litigation : Serving Austin, Dallas, San Antonio

Recently, the Austin Court of Appeals showed the heavy burden on an employer who attempts to use pre-suit depositions to investigate possible misappropriation of trade secrets by former employees. In the case, the former employer sought to take pre-suit depositions of former employees based on suspicions that the former employees were misappropriating trade secrets for the benefit of a competitor that hired the former employees. The former employer had each of the former employees sign an employment agreement which limited their disclosure of confidential information during and after their employment.

At the hearing on the issue, the trial court granted the former employer’s request, based on a finding that the likely benefit of allowing the former employer to take the depositions to investigate potential claims outweighed the burden or expense of taking the depositions. The former employer argued that if there was a misappropriation of trade secrets, then the depositions were worth taking, and if it turned out that the depositions revealed a legitimate explanation, then there would have been no waste because it saved the time and energy of dealing with a lawsuit.

On appeal, the Austin Court of Appeals conditionally granted mandamus relief in order to stop the depositions. The court considered the burden to the deponent and stated that requiring an individual to sit for a deposition and disclose information to a former employer, under oath, as to why the person left their former employer, as well as what the person was doing for the competitor, was a substantial burden. The court also stated that allowing a company to conduct pre-suit depositions based solely on the possibility that a lawsuit might be avoided would allow companies to use pre-suit depositions to gain access to the trade secrets of competitors under the pretext of investigating suspected, but unknown, claims.

In addition, the court recognized that trade secrets receive heightened protection during discovery. The requesting party must establish that the information is necessary for a fair adjudication of its claims. Here, the former employer was unsure whether a valid claim even exists. By its very nature, a Rule 202 proceeding to investigate claims does not involve the adjudication of any claim or defense; it involves only the investigation of potential claims.

Observation:

When the issue of discovery of trade secrets arises in the context of a Rule 202 deposition request, it may be difficult for the petitioner to show the information is necessary for a fair adjudication of its claims. At any rate, based upon the holding in this case, getting the deposition will not be automatic.


In re Hewlett Packard, No. 03-06-00028-CV, 2006 WL 1295502, (Tex. App.—Austin, May 12, 2006).

• Email This
• Print
• Trackbacks

Even absent an enforceable noncompete agreement, a Texas employer may be able to prevent, or recover damages for, certain forms of unfair competition. For example, an employer may have a claim against a former employee for taking, using or disclosing and wrongfully using the employer's confidential or proprietary information.

In Texas, a claim for misappropriation of trade secrets involves the following elements:  (1) the existence of a trade secret; (2) a breach of a confidential relationship or improper discovery of the trade secret; and (3) use of the trade secret without authorization.  A trade secret is "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."  Although employers are entitled not to have their trade secrets misappropriated, former employees are allowed to use the general knowledge, skills, and experience acquired during employment to compete with a former employer.

Texas courts examine the following criteria in determining whether information is entitled to trade secret protection:  (1) the extent to which the information is known outside the employer's business; (2) the extent to which it is known by employees and others involved in the employer's business; (3) the measures taken by the employer to guard the secrecy of the information; (4) the value of the information to the employer and its competitors; (5) the amount of effort or money expended by the employer in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

A frequently-litigated issue involves whether a customer list, or information about a customer, is a trade secret. There is no easy answer to this question, and the particular facts of each case must be examined.  One thing Texas cases are clear about is that, for something to be treated as a trade secret, it must actually be secret. Texas cases routinely consider these factors when determining whether a customer list is a trade secret: (1) what steps, if any, an employer has taken to maintain the confidentiality of a customer list; (2) whether a departing employee acknowledges that the customer list is confidential; and (3) whether the content of the list is readily ascertainable.  The last factor is heavily litigated, as employees often contend that the identities of customers can be found in public sources, such as telephone books.

Regarding the second element-breach of a confidential relationship or improper discovery of the trade secret-a person is liable for disclosure or use of trade secrets if he either (1) discovers the secret by improper means or (2) after properly acquiring knowledge of the secret, he breaches a confidence reposed in him.

If an employer proves that its trade secrets have been misappropriated, it may seek damages and injunctive relief.  Obtaining injunctive relief requires proving that, absent the relief, irreparable harm will occur.  However, courts have held that the threatened disclosure of trade secrets constitutes irreparable injury as a matter of law.

• Email This
• Print
• Trackbacks