Legal Affairs

Safeguarding trade secrets

By Arthur G. Sharp

It is devastating for employers to spend time and money to train employees, expose them to market research, pay them to develop new clients and products, and then see them leave to work for a competitor or start their own businesses in which they produce competing products based on information obtained from their former employer.

When that happens, it is often because employees misappropriate trade secrets, which can have an adverse impact on the employer’s competitive advantage and revenues and possibly lead to costly litigation. Those scenarios can be avoided if employers apply due diligence to safeguarding their trade secrets.

Smart Business talked with David Patterson, a partner with Godwin Pappas Langley Ronquillo LLP, to learn more about how business owners can safeguard their trade secrets and how doing so can benefit them.

Is there a clear definition of a trade secret?

Texas case law provides a definition, but it is very broad. Loosely defined, a trade secret is any proprietary information used in a business that gives a business owner a competitive advantage and that has been kept a secret.

Do trade secrets have to be registered to be protected?

No. There is no formal process or governmental agency for registering trade secrets. In some circumstances, a trade secret may also constitute a patentable invention, which can be prosecuted as a patent in the United States Patent and Trademark Office. But, in doing so, the applicant must disclose the entirety of the invention or patentable trade secret, so to speak. So the secret is out, and after 20 years anyone can use it. Otherwise revealing a trade secret without patent protection or a nondisclosure agreement defeats its very purpose.

What are the key issues when an employer gets involved in a trade secret dispute?

One key question in such cases is whether the information is truly a secret. Employers have to be able to prove that it is, for example, by keeping the information locked in a desk or a file cabinet, marking it confidential, and by letting employees know that such information is deemed confidential and proprietary. This factors into the definition of a trade secret in a court’s view.

Employers cannot leave information openly displayed for anyone to see and then claim that it is secret. They have to make reasonable efforts to protect it.

What else can be done to protect trade secrets?

Two of the more common safeguards can be found in the form of nondisclo-sure and noncompete agreements. Both are binding in Texas, if properly drafted. The two often are combined in the same document. In fact, the Texas Supreme Court breathed new life into previously unenforceable noncompete agreements when it held in a case this past fall that the transfer of confidential information to an employee was sufficient consideration to support the validity of a noncom-pete agreement, even if the information is not provided until a later date.

At minimum, then, employers should have their employees sign agreements stating that they recognize they will have access to confidential business information and that they will not disclose it to anyone or use it for their own benefit.

Does an employee who develops information that is integral to a company’s operations have to sign it over to the employer?

While common-law ownership rights may be asserted by an employer against an employee who develops such information, it is advisable to cover this issue in a written agreement. These agreements, sometimes called intellectual property assignments, cover ownership of information that is developed during employment.

This is another area in which employers and employees can get into disputes. The issue usually involves whether the employee developed information in the course and scope of his employment or on his own personal time.

Employers need to be vigilant in drafting agreements regarding ownership of what employees develop at work and outside of work. Sometimes that is a fine line to draw. Generally speaking, though, if information is developed on company time with company resources, the company owns it.

A broadly drafted agreement can help to expand as far as possible an employer’s rights in any intellectual property developed by the employee that relates to the employer’s business. In any case, employers should consult attorneys who are experienced in intellectual property and/or labor law to develop such agreements in an effort to protect their trade secrets.

DAVID PATTERSON is a partner with Godwin Pappas Langley Ronquillo LLP in its Dallas office. Reach him at (214) 939-4415 or dpatterson@godwinpappas.com.