Trade Secrets and Intellectual Property (IP) are the precious jewels of every business and include the key components of value comprising patents, trademarks, copyrights, and the products/services of our clients. Drill down to the financial success of any company and Trade Secrets/IP are the core commodities in almost every industry from – software (computer programs), to communications (patented technology), to sales/products (proprietary information), and even restaurants (recipes).
However, in surveying business, a major area requiring protection is often overlooked and is the subject of this article – trade secrets. This category constitutes the most critical assets of almost any business as it includes the proprietary and confidential information critical to operations and revenue. Trade Secrets refer to many of the following listed items:
- Company client lists.
- Processes and software.
- Company vendors and preferred contractors.
- Training materials for sales personnel.
- Competitor information and strategy.
- Product information.
- Sales forecasts and data.
- Company financial information and forecasts.
- Company payroll data and commissions.
Protection of this information is commonly overlooked and can cause enormous financial loss if it gets into the hands of a third party, particularly a competitor. So how do you safeguard this critical information? Here is a quick primer on what you need to know.
1. It’s all in the Employee Agreement.
Contrary to popular belief, trade secrets can be properly protected in the underlying employment contract. Whether your employee is in a key role/management position or in a less critical temporary or “at will” position, an agreement should always be prepared and executed to protect trade secrets and confidential information. An experienced intellectual property law firm will recommend the language critical to the preservation of confidential information and trade secrets which is binding on all employees regardless of their status in the company.
2. Non-competition Clauses are Enforceable.
Another misconception in Texas is that business owners cannot enforce non-competition clauses. This is absolutely incorrect but is a commonly misunderstood remedy. Non-competition clauses need to be drafted by an experienced employment attorney and with care, so they comply with legal precedent. Critically, these clauses must relate to the services of essential employees and include reasonable geographic restrictions, for example, a radius of less than 100 miles from the subject business. Many of these clauses are generically written and have no geographic bounds whatsoever. They are per se unenforceable. Another issue relates to what lawyers refer to as legal consideration for contract enforcement. What this means is that the non-compete clause must be based on something other than compensation paid to the employee which is in exchange for the service rendered. The courts require that separate consideration be supplied for the restriction not to compete which is typically the employee’s receipt of confidential information in the performance of his or her role. This is an easy requirement to meet but must be properly drafted and included in the employment agreement.
3. Need to get an Injunction.
The best way to enforce the violation of a non-compete clause or misappropriation of trade secrets is to get an injunction issued by the court. In the usual situation, an employee decides to compete against our client in violation of the non-compete agreement or illegally use confidential information or trade secrets. It happens all the time and can come up in any industry whether the product is software, car sales, or any product or service. The only way to stop the bad behavior is to get the bad employee immediately stopped through an injunction. In the absence of proper contract language in an employment agreement, it can be difficult and costly to get an injunction as the employer must demonstrate what lawyers refer to as “irreparable” or immediate harm and that the typical remedy of damages would not compensate for the injury caused. This means that something other than monetary loss must be involved in the potential loss to the injured client – for example, the transfer of confidential information or trade secrets to a competitor. Typically, the loss of money itself is insufficient to justify an injunction.
However, all of this is made easier if the language in the employment contract requires the employee to acknowledge and agree that the violation of the non-compete itself is enough to establish proof of irreparable harm and the inadequacy of the legal remedy. Although this may seem complex, it simply requires that if the employee agrees that a violation results in the grant of an injunction, further proof is unnecessary. Now, that is a great result for our clients!
4. Be “TUTSA” Ready to Go!
Finally, a relatively new law in Texas, the Texas Uniform Trade Secrets Act or TUTSA, now makes it easier to get injunctive and other relief when trade secrets are stolen or misappropriated. TUTSA provides a broad definition of what a trade secret includes and should be referenced and incorporated into any employment contract. Moreover, TUTSA allows for an injunction to issue even if the misappropriation is merely – threatened! You heard that correctly. Only a risk of misappropriation is necessary to get an injunction under TUTSA. Bottom Line – Trade Secrets and other IP can be protected by employers if the correct measures are implemented and anticipated in advance. If you wait too long – you lose!
We are here to protect your Trade Secrets and Intellectual Property at their first point of contact – your employees.
Please give us a call to discuss your legal needs. We are here to help.